Wall Street Wins Big in Deficit Battle

02/18/2011 09:06 am ET | Updated May 25, 2011
  • Les Leopold Author, "Runaway Inequality: An Activist's Guide to Economic Justice"

Maybe it's something in the water. Some potent little parasite has wormed its way into Washington, and now everyone's coming down with the disease: certifiable deficit hysteria. Politicians and pundits are all marching in lockstep chanting "Cut, Cut, Cut," fearing that if they don't they'll be assaulted by the right-wing budget police.

They rationalize the madness with the slogan "equality of sacrifice," a platitude that is supposed to make us feel better about destroying our public sector. For all the pompous pontifications, the real argument politicians are having is over which group of working Americans they should screw first. No one's asking Wall Street to sacrifice. The bankers and hedge fund gamblers are getting a free ride -- again.

You'd think this would be a good moment to mention that we wouldn't even be having these budget deficit hysterics right now if Wall Street hadn't just destroyed over $13 trillion dollars in wealth as well as wiping out several hundred billion dollars in yearly government tax revenues. Do we even remember that the reason 30 million Americans can't find full-time jobs is that Wall Street's reckless gambling crashed the economy? (If you still have any doubt about this, please see The Looting of America for the sad tale of how we got here.)

Instead, even NPR reporters (who may soon feel the sharp edge of the budget-cutting guillotine themselves) command us again and again to "Text, Twitter or Facebook us about what you think ought to be cut." PBS News Hour's Gwen Ifill seems to be on a righteous mission as she presses White House budget director Jack Lew over and over: "What about the entitlements, Mr. Lew? What about the entitlements, Mr. Lew?"

Yes, Serious People everywhere know that Social Security and Medicare cuts are inevitable and that their job is to nail those slippery pols down: How much? When? But suggesting that perhaps Wall Street should sacrifice something is too ludicrous even to mention. Serious People don't bring up issues that have been quarantined by deficit hysteria.

New Taxes on Wall Street to Help Reduce the Deficit?
But hold on, deep in the bowels of the president's budget you can actually find new Wall Street taxes. If you look real hard you'll see a category called "Total Reform Treatment of Financial Institutions and Products." Hmm, looks promising. Maybe they're proposing to finally tax the hell out of the derivative products that destroyed our economy a couple of years ago.

So, let's see. It says the total tax increases in 2012 come to ... $159 million? Million, not billion? Is that a typo? Is the decimal point in the wrong place? Or is this the new definition of "equality of sacrifice"?

Let's do the math: John Paulson, the hedge fund manager who earned $2.4 million an HOUR in 2010, could pay off the proposed tax increases for the entire financial industry personally -- by working less than two weeks.

But not to worry, Mr. P. You and your fellow hedge fund elites have been saved yet again by the deficit fanatics' exclusive focus on squeezing middle- and low-income Americans instead of you. No one's talking about closing the shameless tax loophole that allows hedge fund managers to pay only a 15 percent "capital gains" tax on their enormous incomes instead of the top income tax rate of 35 percent. Closing that tax loophole on just the 25 top hedge fund managers -- just 25 individuals! -- would pull in twice the revenue compared to freezing the wages of 2 million federal employees. Apparently the new math of "equality of sacrifice" means that 25 people equals 2 million.

To be fair, the president's budget does propose gradually raising financial taxes by a total of $33 billion over the next decade. Unfortunately that only amounts to 3.3 percent of the trillion dollars he's proposing to cut -- more Orwellian equality.

The nauseating ironies abound. The hedge fund managers are likely to pay a lower income tax rate than the families who find out they can't send their kid to college because Congress cut their Pell tuition grant.

It's one thing to have an in-depth debate over steeper taxes on financial billionaires and lose. It's quite another to see the entire debate buried by Democrats, Republicans, the media and just about every other force in society. Buried under great heaping mounds of deficit drivel.

Wall Street owes the American people.
And the American people, I am sure, would love Wall Street to make restitution for the damage it has done.

In a saner world, we'd be considering a wider menu of real financial industry tax increases. Taken together these would raise more money than all of Obama's proposed budget cuts combined:

  • Close the hedge fund loophole so that hedge fund managers have to pay the top income tax rate.
  • Enact a 50 percent surcharge on financial sector profits and bonuses until the unemployment rate drops below 5 percent.
  • Impose a small financial transaction tax on all short-term financial transactions. This would both raise revenue and tap the brakes on reckless financial gambling.

Together these taxes could raise federal revenues by $100 to $200 billion a year. In the process they would: a) reduce the size of Wall Street's dangerous casino economy; b) reduce the outsized pay packages of financiers, whose "innovations" contribute next to nothing to the real economy; and c) make our economy more stable by reining in the reckless gambling. (This would be a return to the post WWII practice of keeping Wall Street salaries in line with salaries of those in other fields with similar educational levels.)

But instead of looking for constructive solutions to our budget challenges, politicians are using deficit hysteria as an excuse to gut and privatize the public sector, invade the few remaining union strongholds, and turn working people against each other.

The budget axes are flying, but on Wall Street all is peaceful and calm. The new financial oligarchs are quietly collecting the happy returns from all the taxpayer dollars we gave them. They're back to flying high on their financial trapeze, making reckless bets in the hopes of outrageous returns. But no worries: Now more than ever, they've got a net. It comes in the form of an enormous implicit federal guarantee: If you fall, we will catch you (or actually, the taxpayers will). Because the institutions that were too big to fail in the last round are now way too big to fail. Remember, there now are even fewer of them and they are much bigger.

The obsessive focus on budget cuts keeps us from noticing that we, the people, now own billions of dollars of toxic assets (via the Federal Reserve) that once were rotting on the books of our largest financial institutions. We're the ones who are paying off the largest Ponzi scheme ever created. (If you want to really get a rage on, read the Financial Crisis Inquiry Report's account of how banks traded the most toxic slices of CDOs back and forth to create a make-believe market in toxic assets. You'll either want to free Bernie -- the sacrificial lamb -- or throw the whole bunch of them in jail with him.)

"Equality of sacrifice?" There ought to be a law against any politician uttering that phrase. But despite it all, something good is percolating. Financial billionaires are whining more and more about the criticism they are receiving for bankrupting our economy. One plutocrat even waved legal action at me for suggesting that maybe his financial "genius" involved some fraudulent activities. Think about it. If our financial titans are coming after lowly bloggers, maybe they're just a tiny bit worried. Maybe events in Tahrir Square or Madison have them spooked. Maybe they fear the sparks could ignite into a massive conflagration of demands for financial billionaires finally to pay up for the damage they have done.

Let's blow harder on those sparks.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn $900,000 an Hour: The Rise of Wall Street Billionaires and the One-sided Class War, (hopefully to be published in 2011).