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Welfare Reform for Wall Street

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Are we becoming a nation of hypocrites?

We force very low income single moms to jump through hoops to get their welfare checks. We resent them living off our tax payer dollars. We want them out working hard to support themselves even if there are no suitable jobs available, no day care for their children, nor decent transportation to get them there. We see it as a matter of personal responsibility: they are poor because they let themselves stay that way. If that's not mean spirited enough, our politicians thrive on chastising the fictitious welfare queens who supposedly turn our hard-earned tax dollars into Cadillacs.

But when it comes to Wall Street we let the welfare kings walk all over us. Let us count the ways:

We deregulated the financial sector, starting in the mid-1970s, removing many of the New Deal era controls that constrained speculation. Then, in the early 1980s we changed the tax code so that more money could rise to the top fraction of the income distribution in order to spur investment.

Predictably, the two "reforms" spurred a series of speculative bubbles -- the savings and loan meltdown, the dot.com crash, and the housing explosion and meltdown. The driving force, especially in the latest bubble, was Wall Street's "innovative" products -- CDOs, synthetic CDOs, CDO squared and cubed -- which Warren Buffet called "financial weapons of mass destruction" (all of which are still unregulated.)

About a year ago the mass destruction did indeed hit us, but not before Wall Street "earned" more than $300 billion of which at least half went to fat compensation packages. When housing prices failed to continue their improbable rise, the assets that were layered upon them like a house of cards, collapsed in value threatening the entire financial system. The $300 billion previously earned melted away. But no one gave back their phony profits.

Meanwhile, Fannie, Feddie, AIG, and CitiGroup basically were nationalized. Bear Sterns, and Merrill Lynch were merged away. To prove that we were not going to bail out everyone, Lehman Brothers was left to fail, and the global markets panicked, froze and then nearly sent us back into the Great Depression. That's when we learned that the major financial institutions really were too big and too interconnected to fail. So we put them all on welfare.

Just like there are many forms of welfare for the poor -- food stamps, workfare, SSI, Medicaid -- there are many forms of Wall Street welfare as well. There is TARP, of course. But also there are more subtle kinds. When we bailed out A.I.G., for example, we allowed it to pay up in full on its failed bets -- something the government had no legal obligation to do. Goldman Sachs got $13 billion. Had we not bailed out A.I.G., Goldman Sachs would have received pennies on the dollar. If that's not welfare, nothing is.

Meanwhile, the government also provides low interest loans. It is allows the big banks to float bonds guaranteed by the FDIC. And on top if it all, the government guarantees a variety of toxic assets. (That is, assets that were totally speculative -- the bankers' equivalent of a crap shoot -- and would now be pretty much worthless if it weren't for the government's guarantees.) The total Wall Street welfare bill according to Nomi Prins, the author and former Morgan Stanley managing director, comes to more than $13 trillion, . (That's about 37 years worth of total welfare transfers to low-income Americans.)

Now we're witnessing the transformation of Wall Street welfare into bonuses -- the dons will soon be driving taxpayer-funded Ferraris to the marina so they can sail on taxpayer-funded yachts to visit their off-shore accounts filled with taxpayer dollars. Lo and behold, the big boys are making money again, hand over fist. In fact their profits and bonuses are expected to exceed the highest years of the bubble. Some commentators gush about the true genius of these financial gurus. Call it what you will, taxpayer welfare is making it happen.

Meanwhile, our "lagging indicators" -- more than 29 million people -- are unemployed or stuck in part time work because they can't find fulltime jobs. The U6 jobless rate, reported by the BLS, is now 17.0 percent. And we're still going to allow the welfare kings to walk away with their record profits and bonuses? What's wrong with our elected representatives -- and with acquiescent citizens who aren't holding Wall Street's feet to the fire?

President Obama's advisors spent the weekend bemoaning Wall Street's new found wealth. David Axelrod, perhaps President Obama's closest adviser, said the the bonuses were "offensive." So do something about it!

Here's a simple set of solutions that could "end welfare as we know it" for rich and poor alike:

1. The President Wage Cap: No one on welfare (in inner city Detroit or lower Manhattan alike) shall have an income more than the President of the United States ($400,000) until the unemployment rate drops below 5 percent. (Can't live on $400,000? Try $20,000 for a year and let us know how it compares.)

2. Windfall Profits Tax: A tax of 90 percent should be placed on all financial sector profits until the unemployment rate dips below 5 percent. This will help repatriate some of our Wall Street welfare payments.

3. Breakup the Big Banks: All financial institutions that are too big and too interconnected to fail should be immediately broken into smaller entities that are small enough to fail.

Is that fair or what?

We bail them out. They get filthy rich. They have to pay back their windfall profits and welfare-induced bonuses. They're too big to fail? We make them smaller.

I am fairly certain that a majority of Americans would agree, assuming credible leaders fought for it. And there's the rub: most politicians are in awe of the welfare kings. They see all that money and they quickly forget where it comes from. They quake when they think of regulating the fantasy finance casinos, even though they have no trouble putting the screws to low-income welfare moms.

They don't have the guts of Teddy Roosevelt who busted the trusts, or of Ike who presided over a 91 percent progressive income tax rate on those earning more than $3 million a year (in today's dollars.).

The lack of backbone is sickening. And yes, we could easily throw up our hands and say it's hopeless -- they have all the money -- they buy the media -- they buy politicians -- their charitable contributions buy dissent. All true.

Yet we Americans, from time to time, can surprise ourselves by demanding and insisting upon true courage from our weak-kneed political leadership. Even the tea-baggers must be gagging on their anti-government rhetoric as Wall Street pockets all that welfare.

Quite clearly we need a movement and bold political leadership with the guts to end this blatant hypocrisy. We need leadership that can tap into our egalitarian and communitarian traditions that place the common good before rapacious personal gain.

Somehow, somewhere, someone is going to stand up and blow the whistle on our burgeoning billionaire bailout society.

Come on America, shock the big boys.

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.