The Role of Government: Keeping the Wealthy Rich

For some reason most of the discussion in Washington and the media of the bank bailouts is overlooking their central feature: taxpayer dollars are being used to sustain the income of incredibly rich bankers. The public should be furious over this upward redistribution of income.

The basic story here is very simple. If we got the government out and left things to the market, virtually the entire banking sector would be bankrupt. Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and almost all the other big banks, and thousands of smaller ones, would be out of business. (My bet is that even "healthy" banks like Wells Fargo would be in bankruptcy before too long. They hold plenty of bad debts, too.)

Most of the top executives of these banks would likely be sent packing, while those remaining would have their compensation (including "golden parachutes" and bonuses) set by bankruptcy judges who would be running the companies in the interest of the creditors, not the shareholders. The shareholders themselves would be out of luck for the most part. Many bank stocks have already lost 80-90 percent of their value over the last 18 months. Bankruptcy would likely eliminate what little remains.

However the banks are not in bankruptcy because the confused state of affairs and potential lost of creditors' wealth created by large-scale bankruptcies in the financial sector would be a devastating hit to the economy. This is the rationale for the TARP, the various special lending facilities created by the Fed, and other measures to ensure the survival of the banking system.

The government has intervened in a huge way to keep the market from taking its course. But the key issue that has been buried in the debate in the media and political circles is the separation of the interest of the public in a functional financial system and the interests of bank executives in high salaries and shareholders in getting returns on their capital.

At this point, the banks are desperate -- they would be dead without government handouts. This means that the government can set whatever terms it wants. And, for both economic and moral reasons, it has an obligation to set terms that do not reward the bank executives and shareholders.

The bank executives and shareholders took big risks that went bad. If they are rewarded with taxpayer handouts, then the message this sends to the financial sector is to keep taking irresponsible risks. The game becomes heads they win, tails we lose. If the bets pay off, then they are incredibly rich. When the bets go bad, the taxpayer gets the tab.

The moral reason for not rewarding executives and shareholders is that these rewards require the taxation of middle income people, like truck drivers and nurses, to transfer money to some of the richest people in country.

This sort of upward redistribution is difficult to justify. Usually people in the United States like to believe that the market determines the distribution of income. Many get outraged over the idea that a mother on TANF can get a check for a few hundred dollars a month from the government. In this case, the government is effectively handing checks of millions of dollars to bank executives who would be out of work if the market was left to run its course.

We have to keep the financial system functioning, but we can do this without transferring hundreds of billions of dollars from middle class taxpayers to the wealthiest people in the country. If the bailout conditions imposed by the Obama administration and Congress don't effectively eliminate shareholder wealth in the bankrupt banks and bring compensation (in whatever form) of bank executives back down to main street levels then it is can only be explained by corruption. There is no excuse for this massive intervention to redistribute income upward.

Comments

[cayuse]

Excellent

"we can do this without transferring hundreds of billions of dollars from middle class taxpayers to the wealthiest people in the country". "There is no excuse for this massive intervention to redistribute income upward".

This is only 1/2 of the equation. DIVIDENDS are paid to stock traders (secondary market) qualified as owners of a companies stock. The stock trader does not pay cash to the corporation (primary market). This is one time event for a IPO or New Issue. 60% of Corporate Profit after tax ($788 Billion in 2007) were paid in DIVIDENDS.

BAILOUT (8500) + DIVIDENDS (788) = 9.1 Trillion paid by the US citizens. Lets all work for free and sing KUMBYA and call it Public Service. I call it SLAVERY

[dfwcarpentry]

From the eyes of the Carpenter.

They ‘The Few’ have to be counting their blessings one million at a time thanks to the bailouts handed to them by the elected officials supposedly saving our country from the brink of disaster, financial that is.

How much blessings can one get for 350 billion?

Let’s start by not letting any paychecks change, or bonuses be rebuked, but altogether cheer for the establishment allowing such to continue. But of course, this outcome was foreseen by those agreeing to let status quo of the “Economy” to continue barreling over all the middle class paying taxes and interest incomes to those who sit and collect those paychecks from sources where by standards are only worth what they can be sold for.

Well, no sale made was worth making without a profit, or in those days, a fictitious profit to include payments as income for the people dealing in raising the appraised value of things to include the paychecks taken.

This ghost hidden accounting measure has been used to sanctify, or realize, the money those people did not earn but stole from the accounts of the masses.

Where did the money go?
It went to purchase for ‘The Few’ the hard luxury assets now sitting in their portfolios which they can sell to extort the final exchange of wealth.

How can these assets not be held as collateral for the loaning of the bailout money?

DFW

[DuganS1]

I don't understand the premise of the article, about keeping executives rich. The financial system is still teetering on the verge of collapse. And if it collapses, unemployment may rise to Great Depression levels quickly, which is why the government needs to keep the financial system intact. I don't understand what keeping wealthy people wealthy has to do with anything. Most executives, if they keep their jobs, will make much less money than in years past. The comment about the bailout money coming from taxation of middle income people like truck drivers and nurses doesn't make much sense either, as most truck drivers and nurses don't pay any federal income tax anyway, particularly those with mortgages and dependents, as it's the top 5% of income earners that pay over 65% of the federal income taxes.

[jhNY]

And yet, despite shoveling all that money in the direction of our social betters, soon it will be obvious even to the slowest among us that the system has collapsed regardless. And your statement about executive pay is a hope, not a fact. So far, in the financial sector, nearly nobody in the corporate offices has been asked to take a cut, nor have they volunteered. And if you thing truck drivers don't pay any federal income tax, you've never driven a truck unless it's a U-Haul.

[dfwcarpentry]

Good, then let's double their tax, relieve all housing debt, and start over. People will want to spend money, so let them use the house as collateral, secure a loan for that collateral, and begin the interest income flow that sustains the ecomomy and the paychecks of those in the banking system.

[DiogenesOfAlaska]

citi has paid more in salaries in 2008 than its market capitalisation.

Many banks have received more tarp money than their market capitalisation but still are not owned by the government.

Executives making 'much less' isn't the standard here. What you need to realize is that the reason they are not restricted to meal vouchers for the remainder of their precious lives is because, as you say, the government must keep the financial system intact.

You need a little recalibration of your cognitive landscape, brother.

[DuganS1]

That's good that Citi is paying their employees well. And the metric of employee pay to market capitalization is meaningless. Many companies don't make a profit and have low market capitalizations and still pay their employees (although they do cut them or cut hours). Look at GM, which is had $66 billion in debt and hasn't made money by selling cars for over five years now. Second, the govt should not own banks. What does govt know about the banking business? For many companies, if they don't continue to pay their executives, they will leave.

[mikekopac]

most nurses and truck drivers don't pay any any federal income tax....some proof please

[truthforme]

Don't bother asking DuganS1 for proof. He spouts similar BS in every post. He has no proof because it's NOT TRUE.

[ouroborous]

But, Mr. Baker, you forget.

The first half of TARP was under Bush admin control and thus was used for boiling puppies, abusing nuns, funding financiers, and general evil.

The second half of TARP is under Obama control and thus, despite being the same amount of money under the control of mostly the same people and designated for mostly the same ends, will be used for sugar and spice and everything nice, and will fix the economy.

Isn't this Manichean stuff fun?

[tjfxh]

We are at the inflection point. The Bush administration was manifestly corrupt. Will the Obama administration and Democratic congress succumb, too. So far, the donations pouring in from Wall Street don't augur any good.

There is an old Vietnamese proverb. "The dungheap stays the same, only the flies change."

[DiogenesOfAlaska]

It's nice of you to bring up the proverb.

Pondering it reveals all the better that there really is change.

It just seems that you're not exactly taking into account what the situation and the prospects would be like if there would be no change of ruling party now.

[RPLinNYC]

Great post. Thank you for spelling this out.
I'm no economist, but it certainly looked to me like this was the case.
Obama must realize he is playing with fire here. If he fails to contain
the raging economic inequality in this country, we're heading for the kind of civic instability
we haven't yet seen in our lifetimes.

[OkieMon]

with 75% of the economy dependent upon middle class consumer spending you would have thought that the role of govt would be to keep the middle class comfortable so they could spend.....but instead govt has always looked after the rich....maybe obama can replace trickle down economics with consumerno­mics......­.

[Truby]

Reform is needed in financing political campaigns. Of course policy will favor those with money if they are the ones funding the policy makers campaigns. We the people need to draft a new amendment requiring that contributions be made only to a central fund from which all campaigns will draw. It should be run as a non profit private entity with very strict guidelines on disbursements or maybe someone will have a better idea. If we do not even the field, then our system will remain what it is now....government of the affluent, by the affluent and for the affluent.

[jhNY]

And yet, what you propose will never come to pass. There is no level playing field, and we can't create one by wishing. Money is power, and power exercises itself in the direction of self-preservation and the accumulation of more power.

[wcs55]

"We have to keep the financial system functioning, but we can do this without transferring hundreds of billions of dollars from middle class taxpayers to the wealthiest people in the country."

Where have you been? This has already been done.

[renatam]

Thank you.

[LeftRight]

Which is what I was saying at the beginning of the TARP discussion! BUY THE BANKS OUT, then fire all the upper management with pennies on the dollar for the golden parachute, bring in new people at reasonable salaries (maybe even bureaucrats!) to turn things around, then sell the banks back to the public sector!

[overd0g1]

Funny. Hire government workers to turn around a private sector business. Ha! This must be some kind of bad joke.

[LeftRight]

Yeah, because the leaders at those businesses have been doing such a GREAT job!!! Not to mention the fact that before raygun came in with his idea that the govt was bad (and then PROVED it by hiring the WORST people he could think of!!!) the govt was actually doing a pretty darn good job!

[ouroborous]

Ah, you are rehashing the old, tired saw that private business is always more efficient than government, yes? Even with numerous studies showing that government is often *more efficient* than private business?

How these old canards stick around!

[swift goat pet for truth]

Private businesses gets to do the EASY jobs like running a bank or an airline or a car company.

The Fed Government gets to do the HARD jobs, like running the economy, or national security, or national transportation.

And lets consider how the giants of private industry have done over the last few decades. Huge private Dow -type companies like Polaroid, Xerox, GM and Lehman Brothers.