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Will the Democrats Take the Fall for Wall Street?

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Please, dear fingers, don't let me type a blog that knocks the Democrats -- at least not now, with so much at stake. We can flail away after next Tuesday. This is the time to type the obvious: No matter how bad the Democrats are, the Republicans are worse, far worse. If the GOP gains control of either chamber they'll gridlock every liberal proposal, slice away at social spending, cater to corporate elites and gut our modest attempt at health insurance reform. Think of the many decent Democrats who are in danger. Think of all those wing-nut Tea Partiers who might win office. Think of what's really good for the country.

There, I've done my duty. I should stop here...but I can't.

I've just got to ask this question: Why is the Democratic Party losing support from the people who are usually its most ardent supporters -- everyday working people who are deeply anxious about their economic well-being? Blaming Citizens United, the Koch brothers and Fox News doesn't disguise our dirty little secret: The Democratic Party has ceased to be the Party of Jobs.

In truth, we've seen it coming for years. The political and financial elites are enthralled with each other. They see in each other's eyes the same fascination with our power-driven world. They can't help but respect each other's ability for landing on top. (Gordon Gekko is always back.) But in 2008, this romance between Wall Street and Washington had an air of desperation: Wall Street needed an enormous infusion of cash and trillions in asset guarantees to avoid total collapse. If AIG went down after Lehman Brothers it was goodbye Goldman Sachs -- and JP Morgan Chase and Morgan Stanley and Bank of America. And goodbye to the thousands of hedge funds that moved their money through those institutions. The best and the brightest of finance would be no more.

As for Washington, Obama and the Democratic leadership felt a different kind of desperation. If Wall Street imploded, the real economy would slide into the Great Depression II. They had to strike a deal and fast.

Or so they believed. Those who weren't so enamored with the Wall Street titans thought no deal was necessary. The government could nationalize the banking system, give investors a hair cut, clean out the toxic assets and then resell the "good" banks to private investors. And at the same time institute a badly needed financial overhaul. That was the time to shrink the Wall Street monster, end "too big to fail" banks, and close down the casino games that had brought the system down. And to pay for the mess Wall Street had created, place steep windfall profits taxes on future profits and bonuses and discourage them from making such a mess again. With Wall Street's big boys on their knees all this was achievable, and more.

But no. The Democrats refused to press their advantage -- even though their failure to act alienated not just liberal bloggers, but their core working class constituents. What accounts for this colossal failure?

1. The economic rescue program didn't rescue regular Americans. Obama's advisory team, whose ties to Wall Street were obvious, came up with a straightforward plan: a) bail out the banking system; b) bolster investor confidence; and c) prime the pump with a sizable stimulus program. Regardless what the spin doctors are now saying, this plan was designed not just to prevent the Great Depression II. It also was sold as a way to dramatically reduce unemployment to below 8 percent just in time for the mid-term elections. (So much for that!)

The plan certainly worked for Wall Street, reassuring investors that the system was functioning again. The stock market is up and Wall Street is again making record profits and bonuses. Tragically, though, it didn't work for the more than 30 million Americans who now are without jobs or forced into part-time work -- a post Depression record.

Obama had supposedly hired the best economists in the world. Why did they so misread the unemployment situation? Paul Krugman argues that the stimulus package the Obama crew concocted was too small and relied too much on tax cuts that were intended to prime the pump with consumption, but didn't (since Americans banked most of that money instead of spending it). So why didn't Summers, Geithner and Bernanke see this coming? After all, they had access to the very best econometric models. Shouldn't they have noticed that a $770 billion stimulus package would not make up for a multi-trillion dollar economic crater?

2. Our political leaders won't admit that Wall Street siphons wealth from the real economy. For decades, leaders of both parties have been downing the free-market Kool Aid, getting high on the idea that Wall Street's financial games create real value for the real economy. They enabled Wall Street to deploy fantasy finance instruments to gain a larger and larger share of our economy -- financial industry profits constituted almost 40 percent of all U.S. profits just before the crash. The politicians seemed unconcerned that most of this financial wealth came from bubbles.

And then the bubbles burst. After the crash, we all see the enormous hole Wall Street's reckless gambling created in the real economy. We all see how the bankers made billions off fantasy financial instruments that had little or no value. It should be clear to all that Wall Street's most profitable products - subprime mortgage securities and derivatives based upon them -- had sucked value out of the real economy. (Please see The Looting of America for the details of this sad story.) So it should have been obvious that rescuing Wall Street would not resuscitate the real economy.

But American political leaders just didn't -- or wouldn't -- get it. They stuck to the myth that if we could just get Wall Street back to business as usual, the recovery would soon trickle down to the rest of us. Geithner, Summers and Bernanke were convinced that their trillion-dollar bailouts would jolt the economy back to life. For them, the health of the new American economy is inextricably entwined with the health of the financial sector. They believe that the financial industry will assume the role manufacturing once played in our economy, generating good jobs and real wealth. What they seem incapable of believing, or even considering, is that maybe, just maybe, much of the financial sector produces no value at all.

3. Washington fell into the "investor confidence" trap. Once you decide that building investor confidence is the centerpiece of your economic strategy, you've given Wall Street the keys to the castle. The administration hoped that reassured investors would pump up the stock market, restoring some of the vast sums middle-income Americans had lost in their pensions, 401ks, and mutual funds. But middle-class Americans are not the main beneficiaries of the "investor confidence" strategy. Mainly you're catering to the most powerful investors -- the super-rich who use hedge funds and proprietary trading desks to extract super-returns, often at the expense of small investors. Even worse, to win and maintain the "confidence" of these big boys, you've got to be a deficit hawk. They want you to reduce social spending and pare down those pesky "entitlements." God forbid you should raise taxes on the super-rich! And if these policies translate into sky-high unemployment for years to come (which they do), so be it.

4. Tragically, the Democrats forgot how to be the Party of Jobs. During the decades following the New Deal, the Democratic Party largely stuck to its unwritten compact with working people by pressing for full employment. But that started to change in the 1970s, when America's financial industry began outpacing our once almighty industrial sector. Party leaders, in particular, fell in love with money and easy Wall Street wealth. They bought into the idea that tax cuts for the super-rich would bring prosperity to all. They joined the deregulation crusade designed to unleash "financial innovation." The party's leading lights got rich themselves. They drifted from Congress to industry lobbying firms and Wall Street banks and hedge funds, trailing cash in their wake. Money was everywhere if you were connected. It was only human to want a piece of the action -- especially when you saw those Wall Street 30-somethings making tens of millions simply by moving other people's money around. It was smart, and not unusual, to be an esteemed Democratic financier. And, the rationalizing came easy: If we help the rich guys generate more wealth, they'll create new jobs, won't they?

If the quest for full employment was still in the Democrats' genetic code, we would have seen the signs by now. Clearly many Democratic leaders have already turned into financial mutants. They no longer twitch with a sense of urgency about jobs. Instead, they vibrate over deficits. They're not calling for a massive jobs program paid for by taxes on Wall Street billionaires. In fact, they're not proposing anything that working people really can get excited about.

Instead of helping the unemployed, a lot of Democrats are joining Republicans in blaming them. Troubled that the Wall Street bailout and stimulus hasn't shortened unemployment lines, Tim Geithner actually trotted out this old theory: Unemployment is high because workers don't have "the skills to adequately compete in the 21st century." How convenient! The only trouble is that there's no evidence that high unemployment stems from low educational levels. Working people aren't too stupid to find jobs. The jobs aren't there. And the reason they aren't there is because Geithner and his pals on Wall Street eliminated them.

What a sorry mess. American working people (and especially the hard-strapped unemployed) need a political party that will fight for decent, sustainable jobs. Right now we need 22 million new jobs to get close to full employment (5 percent or below). That's the equivalent of creating 650 Apple Corporations all at once. There is absolutely no way that the private sector can work this miracle on its own -- no matter what the conservative charlatans proclaim. It will take massive public job creation paid for by steeply higher taxes on Wall Street billionaires -- or it won't happen at all.

The party of Roosevelt knew how to fight this fight (as do some stand-up Democrats in the House and the Senate-think Russ Feingold). FDR didn't worry about offending the super-rich or building "investor confidence." He was too busy responding to real pressure from the left and from below -- including Huey Long's "Share the Wealth" program, Upton Sinclair's "End Poverty in California" campaign, and the new CIO labor movement, which was mobilizing workers all over the country. That pressure forced the Democratic Party to push through everything from tough financial regulations and steep progressive taxes to Social Security, wage and hour laws, and the right to organize. And without question, that's how we built the largest middle-class in history.

You have to feel for the tens of thousands of party faithful who at this very minute are staffing the phone banks and knocking on doors. There was a time when they could count on enthusiastic rank and file support for their Party of Jobs. Now they have to resort to a different message we hope will save us from catastrophe: Vote for the Party of Not-as-Bad-as-the-Disatrous-Republicans.

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 New Class War, (hopefully to be published in 2011).

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