Welfare Reform for Wall Street
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.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
Difficult times need wise men to tell difficult truths. And, for many years, Buffett has done just that. So it was deeply distressing to listen to him last week joining in the economic victory lap the Obama administration is taking.
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Now this article I understood. I guess I was just out in left field with the Barfo article. I hope the above poster is wrong and this Barfo guy isn't replacing Elizabeth Warren. I think instead of firing Elizabeth Warren (has she been hired by Obama?) they should give her a raise and send Barfo to a "speaking with comprehension" school.
There is, obviously, a complete lack of ethics reigning openly and flagrantly in finance today. Anyone rationalizing this pay system with various excuses, such as we will lose good people to others, or, whatever reasoning, has lost sight of the real moral issue. A system that rewards running their company and investors into the ground for short term profit — blinded by greed, self-deceived if that, and now continuing obstinately — shows not only an unethical standard, but leads the way to our ruin. How long can you abuse the economic system before breaking it?
Now with the big companies surviving with government money, we have a right to demand common sense and that their bonuses be curtailed and conform to long-term performance not short term gain.
This is perverting the meaning free enterprise even before socializing their losses. The financial giants are in essence claiming that free enterprise means fraud — to be able to do with our money what they desire, damn the long term consequences, any responsibility, and what good sense dictates — for short term profit. Then dress it up in gimmicks like collateralized debt obligations, credit default swaps, quant funds, as a disguise to fool the public. And for this they were rewarded? Then, to add insult to injury, they are propped up by taxpayer money, while continuing their perverse incentive system, for succeeding due to welfare-like help. What's wrong with this picture? For more, see my blog, http://www.wrathofmcgrath.com
Highlight this article. This one is much better than the one about Barofsky. BTW, isn't Barofsky doing what Elizabeth Warren is supposed to be doing (overseeing TARP). Fire Warren and keep Barofsky!
Excellent article -- better than the one HP chose to highlight on the front page.
We need to get health care passed so we can move onto this debate -- which is going to be even more of a challenge. Trying to take money away from corporations and their CEO's is like trying to take raw meat away from a fat lion. It's going to take a lot of teamwork, careful planning, and probably a few tranquilizer guns.
Obama complaining about bank bonuses is like the mob complaining about crime. He is the greatest facilitator of it. Endless transfers of taxpayer wealth transferred with him grinning and complaining about banks while delivering bags of money to them through their parasites Geithner, Paulson and Bernanke. At least Bush was honest. He made no bones about being a rich man's president. Obama gets elected promising to help the little guy and look what he does.
Unfortunately the people who should be reading this are listening to talk radio and reading The Drudge Report.
One thing Obama people like me never expected, is for Obama to give so much ammunition and ground to the radical opposition.
TARP is a Bush program.
Bank reform, on the other hand, is an item from President Obama's agenda. This article is strong support for that agenda item. Let's hope health care passes soon so we can get onto the other important problems facing this country.
nonsense, if bank reform was an Obama aggenda item the reform would have taken place along with the money hand out.
How about adjusting the tax schedule to the cost of living
0% Tax at 0- 16800
10% Tax at 16800 to 40000
20% Tax at 40000 to 100000
30% Tax at 100,000 to 200,000
40% Tax at 200,000 to 400,000
50% Tax at 400,00 to 800,000
60% Tax at 800,000 and above
Seems fair to me
Wow! Outstanding!
It's good to see a well written article about corporate welfare.
If the CEOs running these companies weren't so greedy and irresponsible, they could create well-paying jobs to employ those in our country who are out-of-work or otherwise in need of "legitimate welfare". We need to stop being so afraid of the government and encourage it to regulate these thugs.
For poor people receiving "welfare", there are income limits - this should hold true for corporate officers at any company being bailed out. There is no excuse or justification for allowing these CEOs to earn more than our president! If they want a "handout", they should be forced to play by the rules of the traditional "welfare system".
Hey Les,
Great article but you missed one...
Bonuses will be taxed as income not capital gains!
Most of use get a bonus at work and it's taxed like income at the full rate. Not only are they getting bailed out but they don't have to pay their 'fair share' of taxes.
Kind of makes me wonder what tax rate congress has set for themselves.
or phase out reduced rates for capital gains tax above a certain income threshold
Here's a variation on your tax proposal: let's call it Quantitative American Dreaming.
Instead of linking the windfall profit tax on the financial sector to unemployment flat, as you propose, why not make the whole tax regime depend on the multi-year, multi-generational migration matrix between tax-brackets?
In other words: quantify social mobility as embodied in the income tax paid over a (working-)lifetime and then adjust the tax code accordingly, such as to make the income disparity a function of de facto social mobility.
Isn't that a beacon of hope with a turbo?
In the mid-seventies, it was decided to undo the protections of the New Deal that saved the fractional reserve banking system with its fiat money. That was back in Carter's time. Look at who backed him and you will understand. Clinton also contributed mightily, just so we are clear that this was a bipartisan effort.
The formation of an anti-bank political party as a single issue is necessary to save the country.
No backbone? When almost all of your political contributions come from the financial MONEY INDUSTRY why would anyobe expect backbone. The fix is in. I see a class war down the road when working people in both parties stop worrying about social issues as such and focus on economic issues, especially monetary reform. Pigs cannot and will not reform themselves. The free market manipulates politics, too. Greed is greed and lack of regulation contributes. The structure of the entire banking system is the problem, a problem that makes slaves out of most people.
This is the real reson for our Revolution against British banking system with its frational reserve sytem and fiat money. Imperialism goes hand-in-hand with that particular form of banking. The Founders understood this. The traitors came in the back door , as Jefferson and Madison understood they would. Here they are. Not a pretty sight.
Thank you for pointing out the only area where healthy bipartisan action is happening in this country.
http://www.salon.com/opinion/greenwald/2009/04/04/summers/index.html
http://www.pbs.org/moyers/journal/04032009/watch.html
The only disciplined policy response (from either party) to this financial crisis has been the attempts to lay the blame at each others feet, in the hope of obfuscating their culpability. When the truth is BOTH parties played their part in creating this fiasco.
President Obama appointing Geithner, Rubin and Summers was the proverbial writing on the wall, let alone the fact that his #1 campaign contributer was Goldman Sachs.
Not that the alternative (McCain) was any better, considering his economic guru would have been Phil Gramm.
Sure glad I voted for Ron Paul.
"The lack of backbone is sickening."
It truly is.
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