Wall Street Socialism

This weekend, Treasury Secretary Henry Paulson, former head of the Goldman Sachs investment house, provided us with a perfect demonstration of Wall Street socialism.

He announced that the Bush administration would seek congressional approval to bail out Fanny Mae and Freddy Mac, the government created, but privately owned, profit-making housing finance companies that hold or guarantee nearly half of the US mortgage market -- some $5 trillion in debt. Paulson seeks and will get an unlimited line of credit to guarantee their debt, as well as authority to purchase their shares to supplement their capital base. The Federal Reserve announced it was ready to provide lending while waiting for Congress to act. Paulson said the new subsidies were designed to sustain the two institutions in "their current form."

Perfect. The two institutions have always been more foul than fish. Created by the government in the 1930s to help lubricate the US mortgage market by buying mortgages from the banks so they would have the cash to make more mortgages, Fanny and Freddy were able to borrow money at a discount because of a widely shared assumption that the government would stand behind their debts if push came to shove. Their operations were regulated, limited by laws detailing what mortgages they could assume (They were essentially prohibited from diving directly into the subprime muck). But as they grew and profited, their executives pocketed lavish salaries and bonuses -- giving them an incentive to grow even more (and as we discovered earlier this decade, to cook the books). Last year, for example, the Chair of Freddie Mac took home a cool $18,289,575.
Fannie Mae CEO Daniel Mudd reaped a 7 percent rise in pay to $13.4 million in 2007 while the company lost $2/1 billion and its shared fell 33%. Nice work if you can get it.

Now with the bursting of the housing bubble, push surely has come to shove. Foreclosures are soaring, the two institutions have sustained billions in losses, their shares have plummeted, and, according to former St. Louis Federal Reserve President William Poole, one and possibly both would be bankrupt if their assets were marked down to their current market value.

So now the Bush administration proposes to make the federal guarantee explicit and even to offer taxpayer money to help recapitalize the two banks if needed. Everything has been nationalized -- except the profits and the pay scales of the bank's executives.

That's right. If the guarantees work, private speculators, having driven the stock down, will clean up on the upside. And the bank's CEO's will continue to pocket the multi-million dollar salaries that are de rigueur on Wall Street. Call it Wall Street socialism. Their losses are socialized; their profits are pocketed. You and I will pay for their failures. And if conservatives have their way, their families will pocket their successes, without even having to pay a tax for the transfer of the estates we've helped to create.

These enterprises are operating on our tab now -- completely. Why not just nationalize them, as even that font of economic convention, Sabastian Mallaby suggested yesterday in the Washington Post. Sure, we'd have to add the $5 trillion in debt to the federal balance sheet, but we could add the assets also. And after Paulson's announcement, global investors are already toting up their debts onto the federal balance sheet.

Why pay dividends to shareholders when they are essentially playing with our money? Why pay managers of public enterprises the bloated pay packages of Wall Street speculators? Why allow them to finance lobbyists to shield them from accountability? The fiction of their separate existence has been exploded; let's save the dough and run them efficiently.

Fannie Mae and Freddy Mac are only the most recent and extreme version of Wall Street socialism. The Bush administration has done essentially the same for private providers of college loans. The Federal Reserve has made taxpayers the guarantor not simply of the banks that it regulates, but the shadow banking system of hedge funds and investment houses that it doesn't regulate. After the bailout of Bear Sterns, they basically are gambling with our money. The Federal Reserve has now traded more than $500 billion in federal bonds for the toxic paper of private banks and investment houses, some $200 billion of it in mortgage backed securities, worth dimes on the dollar. This massive subsidy -- justified as necessary to keep the banking system afloat -- is not accompanied by limits on what gambles the speculators can make, how much debt they can take on, what rewards they can pocket. They are playing with house money -- not exactly an incentive for prudence.

Republicans seem ideologically committed to these kinds of arrangements. In Medicare for example, conservatives have demanded that the government subsidize private insurance companies to compete with public Medicare, even though Medicare provides healthcare much less expensively. When Bush and the DeLay Congress drove through the prescription drug bill, they included a provision that PROHIBITS Medicare from negotiating cheaper prices for drugs, effectively turning the bill from a benefit to Seniors to a multi-billion subsidy to private drug companies (not surprisingly, after Wall Street, the drug companies finance one of the most lavish and powerful lobbies in Washington).

Now it makes sense to me for the government to subsidize housing mortgages and college loans. Encouraging home ownership and higher education are central to sustaining the broad middle class that is America's triumph. But I can't imagine why we need to let bankers and investors pocket the upside, when they are playing with our money and we're covering their losses. Public enterprise may be staid and bureaucratic, but it's a lot cheaper and more efficient than the perils of Wall Street socialism.

Comments

[Choicelady]

David Cay Johnston's book, "Free Lunch" sets out the degree to which all of us subsidize all of 'them' - the super-rich. These two corporations MUST be taken out of their quasi-public/private status and made into taxpayer-accountable government operations.

Unfettered capitalism is a disaster, always has been, always will be. Oh sure, not for the guys (and a handful of gals) at the top, but it is for the taxpayer and the consumer.

When Bush II said he wanted to return us to the days before Roosevelt, who knew he meant TEDDY, not Franklin? (Bad enough; the 1890s were even worse.) William Greider nailed it in his article in the Nation some years back; the Trilaterlists (whose way was paved by Jimmy Carter) proffered these free-market outrages as the 'necessary' steps toward global capital back in their publication, "Crisis of Democracy" in 1975. WE are paying the price for a handful of corporate leaders living lives Andrew Carnegie could only dream of. It's time to take back our country. Capitalism can exist within a moral and responsible framework, but giving over our economy to free market fundamentalism has been a total and unmitigated disaster for most of us, even those of us who are still making it in America. We have not even begun to see the coming fallout.

[hosshoss777]

You also consider what the real purpose of Homeland Security is plus all that you read in this article and the comments and you have the whole picture. FEMA camps, arrest without charges, National ID cards, Passports, these people are taking it all and by God, locking it down.

Actually inflation is an asset rich persons friend. It is also the wage payers friend. These failures will indeed be covered by inflation-debt created-fiat Federal reserve money which is Wall streets friend and the fractional bankers main tool.

There are two classes of people in this world playing the carrot on a stick money game. There's most of us who are chasing the carrot, and there are those FEW who hold the stick.

[FOXYLADY]

BOROSAGE HIT THE "NAIL ON THE HEAD" REGARDING THIS ISSUE........AND MANY MANY MORE WHERE THE GOVERNMENT HAS "BAILED" OUT PRIVATE BUSINESS'S WHILE THE PLAIN OLD AMERICAN WORKING CITIZEN GETS IT IN THE NECK!!

[cwcrosby42]

What to do about it? I suggest a very high estate tax… Why? The entitlement mentality, of course. To say nothing of transfer of wealth.

Who, exactly, has an entitlement mentality, and where is the transfer of wealth? The Republicans (who claim the title, “conservative,” but do little to earn it) say it is the poor, who want to transfer the wealth of the rich to themselves.

I say it is the rich, who have transferred so much wealth to themselves that they cannot spend it. Then, they argue that their children are entitled to it. There is the transfer: from the poor to the children of the wealthy. And, there is the entitlement mentality.

And we do not question it, because if we do we are communists, or something equally bad, “liberals.” Well, I question it, and I urge all of you to do the same.

Ask yourself, “If the rich cannot spend all of their money, what on earth entitles their children to get it?” Why not use it for the benefit of society. I mean, society did contribute to their acquisition of wealth, by providing police, courts, transportation, communications, hospitals, firemen, and a host of other necessary items, and national infrastructure, without which they would be lost.

So… how do their children become entitled? Assuming that the wealthy are loving parents, they already provide superior schools, friendships, club memberships, and in many cases jobs as well. Isn’t that enough?

[antirepublocrat]

Those who today call themselves anti-statists or libertarians too often fail to understand that corporations are collectivist entities created by the state. They have charters granted by the state.

Similarly, the ability to exercise one's will after death is enforced by the state and it's laws. Ie, inheritance is not an "inalienable right".

In fact, the very concept of private property is a statist concept. Man has no inherent, natural right to lay claim to property he does not actively use. In stateless nature, a person can not leave property fallow, essentially abandoning it, allow another individual to mix his labor with the land by planting crops, then waltz in at harvest time and demand a share.

That doesn't mean I want to abolish all private property. On the contrary, I think it's a useful concept when kept in moderation. When I was in high school 45 years ago, we were taught that neither pure socialism nor laissez-faire capitalism were effective economic models, but that our Eisenhower-Kennedy mixed economy was best. Indeed, those were years of unparalleled economic growth we have not seen since. Fundamentalists (extremists) are idol worshipers whether they are Christian, Jewish, Muslim, capitalists or communists. For far too long, the US has been ruled by free-market fundies.

[StephenBarry]

Excellent post my friend !!

[jackwaddington]

Dimitri Orlov, a Russian national who lived through the fall of the Soviet Union predicted the fall of Western Capitalism and that it would be far more devastating than the collapse of the Soviet Union, socialist capitalism, since in they had lot of institutional safety nets for the populous, whereas Western capitalism does not and cannot.
The emphasis on cannot is what politicians in the west have neither looked at or considered. For all Obama's brilliant mind he is stuck on the American system that is now destructing and will fail with a mighty catastrophe for us the privileged. Capitalism's need to maintain privilege, is what is destructing and destructing fast.
I repeat, We are one species on one planet and until we are able to EQUALLY share it, we are doomed.

[dontshootme]

This pretty much spares Fanny and Freddy from having to make any hard choices (ie. GM) to get their corporate house in order.

If we do this bailout, we should at least get some bang for our buck. We should demand Iimits on corporate salaries, increased oversight in lending practices and we should require Fanny and Freddy to pay every penny back with interest.

[citipearl]

While we're at it, let's require that they convert their salaries, etc., to government grade-levels.

[Indubio]

Wall Street socialism it may be...but it's been going on for quite a long time. I'm for nationalizing quite a few industries and that includes banks (what a radical idea) but I'd also support turnin the energy industry into the equivalent of the public utility. All industry must be properly regulated and those that are the most important to the economic health of this country should be nationalized in thesense that their operations should governed by laws and rules established by Congress and all profits go into the treasury. The businesses can remain private but as long s they are backed and proped up with tax payer dollars they should be operated for the benefit of the public.

[LaColombe]

I like the term that was coined in the 1972 Canadian Election by David Lewis of the New Democratic Party (NDP): " CORPORATE WELFARE BUMS!" Lewis provided details, facts and analysis that Government and big business were holding hands in the citizens' pocket.

[rkrenke]

This isn't corporate socialism, it's fascism pure and simple. The extent of collusion between our government and corporations is unprecedented.

How long are the American people going to remain silent? I use to blame the Republicans for the mess our country's become, but now I realize that they couldn't have accomplished what they have without the Democrats' complicit consent.

The People need to clean house - almost every incumbent should be replaced by someone who understands what it means to be a public servant. As long as we continue to elect professional politicians, we'll continue to get the government we deserve.

[antirepublocrat]

I am particularly concerned with the apathy of rank and file Democrats. I don't see the grass-roots Democratic activists in my locale getting at all worked up over things that should be making them truly irate with their leadership -- FISA, a threatened blockade against Iran (S.Res.580 and H.Con.Res.362), continued funding of the Iraq Occupation, impeachment off the table, etc.

[DoTheMath]

This is what conservatives call "free market" economics. Fat cats are "free" to make as much money as they want through any means they can think of, regardless of how their tactics affect the rest of us. However, at the point when their shenanigans threaten to come back to bite THEM, the government insists that we must bail them out to prevent the collapse of the market.

Keep this in mind the next time somebody tells you the government shouldn't regulate industries that rob us blind (insurance, oil, credit) because the laws of supply and demand take care of the market. Yeah, right.

[antirepublocrat]

It's called socialism for the rich, free-enterprise for the poor, and "leftists" were complaining about it 50 years ago. AKA privatizing profits while socializing externalities and now even outright losses.

[gevan]

You may call it "Wall Street Socialism" but in Germany in the twenties it was called National Socialism.

[dkst]

Both sides are guilty so stop trying to say it is some ones fault, what happened to the buck stops here? Basically, the standards for loans were lowered so people who shouldn't have been getting loans were given loans, now they can 't pay for them. Gov. should not bail anyone out, let the market correct what the market needs to correct.

Socialism isn't the answer, stop asking the gov. to feed you, provide you with housing and educate you. Stop looking at the gov to bail you out, PERIOD. We have allowed the gov to slip into our lives through social programs and now you are going to have a problem with them bailing businesses out?

[beingrepubwontmakeurich]

GEEZ i am so sick of the conservative diatribe that assumes social programs are about nothing but a handout.
Believe it or not, there are millions of people who are perfectly happy to work for a living, and pay their taxes because paying taxes used to mean decent public schools for their kids, and roads to drive on, and social services that keep people healthy and happy, and allow them to retire at a decent age and spend time with family and perhaps enjoy a nice hobby.
Those days are over for a huge percentage of the population, even those with decent retirement plans that haven't been hijacked by the wall street socialists (not yet anyway).
and yes i do have a problem with business getting bailed out when there is zero accountability for the people at the top who CAUSED THEM TO FAIL. If those CEOs were putting their own wealth at any risk whatsoever, I would be among the first to say they deserved a 7 figure bonus for a job well done. But for those people to run out the back door with their 12-figure bonuses, and bitch about the rest of us "whining" at the fact that our tax dollars are tied up bailing out the very business they have run into the ground instead of providing the things our tax dollars are supposed to provide - well yeah. I have a BIG problem with that.

[3dtrix]

dkst - "let the market correct"...

What has "the market" ever "corrected"? Is there some means whereby "the market" will correct the floating sub-continent of plastic trash in the middle of the Pacific Ocean, which spins off thousands of tons of toxic compounds as the plastic deteriorates. Will "the market" "correct" the extinction of species? A dead ocean? A dead planet?

Has "the market" ever "corrected" structural economic inequities? Bigotry? Sexism? Homophobia? Slavery? Under-performing schools? Any other societal problem? Even one?

It is my experience, dkst, that those who pepper their speech or writings with worshipful references to "the market" are in the grip of a dangerous and destructive dogma. Allow me to impertinently suggest that religious ecstasy is no substitute for either pragmatism or sound policy.

There are hundreds of millions of people who are happier with their lives and their governments than are the citizens of the US, whose societies could be described as "socialist". Their standards of living are higher than ours, their literacy rates are higher, their life expectancies are longer, their educational performances are better. All they seem to lack is the foam finger proclaiming them to be number one.

Worshiping "the market" has brought us to the precipice of irreversible disaster.

Bring in the iconoclasts.

[swkidder]

I agree. Let's nationalize them, and let's hire Catherine Austin Fitts as CEO. The two gentlemen who have presided over the current meltdown in their respective institutions do not deserve to keep their jobs. Nor do they deserve any elements of their "compensation package, " the entitlement to which could even be construed to rest on performance.
Catherine did a fabulous job of cleaning up HUD's loan portfolio - actually too fabulous a job which is why the government went after her with a bogus whistleblower lawsuit that she eventually won. Even the FBI agents assigned to harrass her were ashamed of what they were doing ... and we all know that the FBI doesn't readily feel shame.
Let's take this opportunity ... say in January ... and give ourselves one federal institution of which we could be proud, and which could be used to help restructure a functional economy in this country?

[ChasG]

Borosage is dangerously misleading, manipulating fact into fiction. He makes a huge leap from Fed "loans" (which do not benefit stockholders) to the term "subsidies" and calling it "Wall Street Socialism." This is factually false.
Questionable lending practices have nothing to do with Fannie Mae and Freddie Mac-- they do not originate any loans. When housing prices began falling, it became impossible for many homeowners to sell their homes for more than what they owed on their mortgages. This they either had to sell their homes for a loss and pay the bank more than they would receive on the sale, to to walk away and stick the banks with the loan loss (which is what is happening most of the time).
These loan losses hitting banks are beginning to cause bank failures, which is why the Federal Reserve wants authority to lend money to Fannie Mae and Freddie Mac, so that they may continue to provide mortgages to half the buyers out there and prevent the total collapse of the real estate market and banking institutions in this country, which could set this country on the fast track to a deep and protracted economic depression.
Thanks to the reckless Bush administration US banks are for sale to foreign investors buying America at fire-sale prices. We cannot afford to replace the Bush fiasco with a radical anti-business left-wing fiasco which proposes to allow the US banking system to fail.

[DebbieKat]

They may not originate loans, but they are still overpaying their executives while they lose money. They are still cooking the books. They need to be reined in. I'm sick of all these bailouts with my tax dollars. And, yes, it IS corporate welfare when our tax money goes to overpay executives.

[RobertLBorosage]

You got this wrong.

The Treasury moves do benefit the stockholders. When the Treasury says it wants authority to back the loans of Freddy and Fannie, and the authority to purchase stock, it of course has an effect the stock prices and benefits the private shareholders. The two institutions would likely be bankrupt and the stockholders would have been wiped out without this intervention.

Second Fannie and Freddy did contribute supporting questionable lending practices. When housing prices soared above trend lines, departed from normal ratios to rental prices, the housing bubble was apparent. If Fannie and Freddy had refused to purchase loans made by lenders in such banks, it would have dramatically limited the bubble. Instead there activities contributed to the bubble.

I agree that with the bubble collapsing, many homes are under water, even prime mortgages with adequate downpayments and homeowners with the ability to pay. And I agree, as I said, that bailing out Fannie and Freddy is important to prevent collapse banking institutions and real estate markets.

But it is simply inconscionable that taxpayers money is going to be used to sustain the private profits of stockholders who invested in institutoins that would otherwise fail and the bloated pay packages of executives who lead them into this fiasco. If they are going to be sustained by taxpayers, there is no reason whatsoever that they shouldn't be public institutions.

[ilovemydoggy]

Whatever happened to integrity? We should study the Amish people more. They do NOT pay Social Security -- they take care of their elderly themselves. Novel idea. The concept of the "Commonwealth" where we care about others - not just ourselves.

There is a post about the Amish today at
http://www.Vaboomer.com