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

[white mende man]

This United States has become a nation of thieves and tele-marketers preying on the unsuspecting public that has lost their voices since their representatives couldn't care crap about their welfare or well being. The US Congress is no better than used car salesmen.

[Lanark]

Time for a reality check here folks....S­ome of the biggest receivers of political contributions from Wall Street and in particular Freddie and Fannie were no less than Barney Frank and Christopher Dodd. Both of these great Democrats kepy protecting Freddie and Fannie for the last several years when the administration wanted to pull in the reigns....

[DebbieKat]

No big surprise there. It's time to vote 3rd party. Time to clean house.

[TekBoss]

You nailed it Robert!

[DocSue]

So, what is to be done?

[DebbieKat]

Vote out our current elected officials. Don't give them another opportunity to screw us. Time to vote 3rd party. The only ones that should get re-elected are people like Kucinich, Waxman, Wexler and Feingold. Send most of the rest packing.

[ibsteve2u]

Socialism isn't even the correct word to bandy about - Paulson is simply the chief thief among many.

[BinBaldwin]

Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America.

[daisymom]

Has anyone considered a massive, class action lawsuit against CEOs as well as the corporations on behalf of the taxpayers who have had to bail them out and against legislators who fiddled while the thieves ransacked the cookie jar? This would be civiil court. I bet it wouldn't take one hour to raise the legal fees on YouTube either.

For God's sake, there HAS to be a remedy. Bitching and moaning won't generate recourse. Let's calm down and THINK! These guys are counting on a lot of moaning and no action - as usual - on the part of aggrieved parties...­......

And who really thinks Ken Lay is dead?

[rkrenke]

I couldn't agree with you more, daisymom. And, it's not just the housing crises, it's also people who are struggling to pay their credit card debt - they will never pay this debt off because of the fees, interest rates, etc. I have to believe people could get better rates from the mob than what they receive from "honest" institutions like JP Morgan and Bank of America.

I truly feel for anyone who's caught up in this collusion between our government and the private sector. Class action lawsuits against these corporations and our past and current Congressional leaders would be sweet justice and long overdue.

[DebbieKat]

I personally LOVE this idea.

[ehemingway]

I don't understand all the whining, all the finger pointing. Look in the mirror. The only time Americans pay attention to anything but their own needs and pleasures is when their comfortable way of life is threatened via their wallets. By then it's too late and they turn their anger on the "other" guy. There is no "other guy." Look in the mirror.

[DebbieKat]

Please speak for yourself. Many of us have been very alert as to what these corporate criminals and our government have been doing in collusion. And it's not only when our wallets are threatened. Some of us actually like to stand up against things when they are wrong.

[JerryinATL]

It would be wise to let the institutions fail. It was their greed and poor business choices that caused their vulnerability. If the government backed the loans, we should honor this, and transfer the loans to other banks if we are able, at a discount. We should allow the foreclosures to happen, and that will shake out the solvent loans, which can be distributed to the other solvent banks. The foreclosed properties should be put into local pools and under local control where they might be used for public good, or resold to qualified individuals.

In capitalism, the weak need to be left to fold, while the solvent can pick up the pieces and incorporate better business practices, or eventually suffer the same fate. I am not for Government regulations, but in cases of Government guarantees, the government should place strings on what the citizens are being forced to guarantee.

I think Bankruptcy and jail time are warranted for the banking execs if they willingly ignored better practices and advise.

[FOXYLADY]

JERRY....B­EST POST THAT I'VE READ YET!! I'M WITH YOU ALL OF THE WAY

[ProfessorRich]

Were Hayek,von Mises and Friedman alive, they would be screaming about the direction of the United States towards fascism, and the bailout of Fannie and Freddie would loom large in their analysis.
There is no Wall Street socialism, although the morons of the Street think they have fleeced the public and federal government in the Fannie, Freddie and Bear bailouts. The Street mis-reads the situation. Fascism is the correct interpretation of the current direction.
The government is now making massive equity investments in the financial sector, allied with narrow sectors of the capitalist classes. Given the scale of the Fed credit bubble, many more governmental takeovers are coming.
The idiots of the Street have not thought through the answer to the question that strategist Boyd always insisted on asking: given the consequences of someone’s actions, what must have been the intent?
Given that the Fed created a bubble so large in character as to defy belief that policy makers lacked awareness,given that the result was intervention on such a massive scale as to make the government the nation’s landlord, the intent was to destabilize the economy to create the conditions necessary for dictatorial control of the economy.
Combined with President Bush’s brazen lawlessness and clear intent to provoke more wars, it is obviously the case that the United States is about to become a fascist state, with fascism an alliance of narrow sectors of the capitalist classes with the military to wield socialism in the path of war.

[worldtraveller]

It does feel very much like that. I suggest similar and too many people say no way.

Remember that great Monty Python line "No one expects the Spanish Inquisition"

[FOXYLADY]

FASCIST STATE.....­..........­..RIGHT ON........­.........T­HAT'S WHAT IS HAPPENING. THAT IS WHY WE NEED CHANGE....­...SO MUCH HAS BEEN ALLOWED TO GO FORWARD IN THE LAST SO MANY DECADES AND WE REALLY NEED "CHANGE"!!!

[Dajo]

It is high time that the American People realize that since the begining of our nation we have been in a struggle betweenCapitalism and Democracy. For example; During the FDR,JFK, LBJ and to a lesser degree under Jimmy Carter and Bill Clinton it looked like Democracy was gaining the upper hand. Under Reagan, GWB, and to a lesser degree under Nixon an Bush 1, Capitalism had the upper hand.
It is clear that in order to progress as a civilized nation we must develop and embrace an economic system that supports and promotes Democracy. It should come as no suprise that Socialism is a far more Equatible, Just and Democratic.
It is high time that Americans end their infacuation with Faux "Rugged Individualism "and Predatory Capitalism.

[bassnman]

LMAO on your comment. You apparently really don't understand what a democracy is. In plain and simple terms it is mob rule!! I would hate to see what would happen to the minorities.

We are a "REPUBLIC" which is to be goverened by the rule of law. The sad thing about what is happening in our country is that laws are being twisted to the advantage of those that can afford to hire very shrewd laywers. Another problem with our gov't is that the people making the laws always have a tendency to write law in their favor or exclude themselves from what the write for the common people. (ex. in GA we have a seatbelt law that excludes Pickups and SUV's, why...all the legislators drive them.)

All of these problems are on both sides of the isle, be they dems or repubs. This is what happens when you elect peole who are rich and either don't understand or have forgotten what it was like to be in the middle class or lower. Not one of these people in Washington have to buy their own gas or pay their own way, it's all covered by you and I.

[Dajo]

bassman,

You regurgitate that tired old swill utilized by the Repugnants and Neo_cons, mixing apples and oranges ( Democracy and Republic). We are indeed a Republic that employs Democratic Principles to govern. Many Republics are Un-Democratic and are such because they aren not governed by a King, etc.
Our Founding Fathers were well aware of the potential for Mob Rule and the oppression of the Majority against the Minority, that is why they created a Constitutional and Representative Democracy with a Bill of Rights and Check & Balances.
I will grant that our Democracy is not perfect,it is a work in progress. In the 1950 & 1960 we made great gains for Political and Social Justice through both Democratic Legislation and Social Action. Our Democracy must evolve to embrace Economic Justice issues with the same level of Activism and Democratic action we employed during the Civil Rights Movement.
BTW, your other ploy of painting Democrats & Republicans with the same broad brush is another ploy used by the Repugnants and Neo-Cons.
There is no denying the fact that since FDR the Democratic Party has been the Party of the People in the USA.

[Choicelady]

Well said!

[Viper]

The stock market in real constant dollar terms is down more than 50% while EXECs compenastion has gone through the roof over the past 8 years..

In this new form of Laisez faire capitalism, not even the shareholders proift... just the Execs...

Regards

[rbspickles]

Yes, and the term is robber barons.

[Choicelady]

Berle and Means in 1934 prophesied that there had been a 'managerial revolution' in American corporations. They were actually wrong, but even after we'd been able to determine that most US firms were still (like Ford Motor) guided by founding families in the 1970s, quickly thereafter that because no longer true. The 1980s was the great 'Managerial Revolution' in which men and women with absolutely NO loyalty to the corporations they managed looked to line their pockets, and to hell with the stockholders, the taxpayers, and the American public.

REREGULATE. American capital can function best within reasonable bounds, and regulations make all the difference in preserving the NATION's self-sufficiency. Corporations that abandon us all do no one any good and should not be allowed to continue this wanton exploitation of the world.

[audiophileguy]

Welfare has always been a significant component of both parties' platforms. Democrats search for ways to use government funds to support the neediest, and Republicans search for ways to use government funds to feed their friends and campaign contributors. This is the way of government, and always has been. The dishonesty comes when right wing pundits and legislators claim that "welfare mothers" are draining all of our public funds----when support for the poorest has for many years been consistently the least significant part of any government spending. I support the use of certain limited funds to support the neediest, and I always will. I have come to abhor those on the right who continue to complain about taxes and government waste, while promoting the most dishonest types of public welfare for their cronies. If they would honestly acknowledge their greed and socialist goals, I would not mind. But the loudest and most offensive comments come from those who are benefitting the most from our welfare state.

[DoTheMath]

Bingo!

[davidpeace]

And, of course, where will the money come from to bail out Fanny and Freddy? We could just print more money, but that would drive down the value of the give away -- I mean "bailout" -- as well as all the other investments (like oil speculation) and we know that the "poor" wealthy won't stand for that. So we'll have to borrow more money. What is the limit of Uncle Sam's credit? When do the foreign governments, and wealthy individuals who buy the bonds, start to wonder if paying back more than nine trillion dollars ($ 9,000,000,000,000) is even possible? Are they starting to wonder now? And who gets first dibs, gets to be first in line, when the paybacks start to falter? Will it be the wealthy individuals who want to slowly bleed us to death or will it be, for example, the Chinese government with their million man repo company, aka the People's Liberation Army? Or when, for that matter, will investors such as these start demanding something more than the "good faith" of our wonderful government?

[Jeffin90019]

And what do the moronic Democratic leaders want to do? Send more rebate checks to pander to the voters, as if more borrowed money is the answer to the problems. I say if the government have to bail out these institutions, then the government ought to take ALL of the funds and assets - including executive compensation. Isn't it really time that the people in charge of these companies actually have to pay the cost for their inept management?

[indypete]

Good heavens, take money from the executives who drove the whole thing off the road? What are you, a commie?

[bassnman]

LOL.... even being a conservative I think that's funny. I also agree these people should not reap vast rewards for doing a poor job.

The problem is contracts. It is not only contracts with CEO's but contracts with big labor. CEO's are offered contracts that they probably shouldn't be and they have to be fullfilled, but it is no different than the unions who got a contract with a car company saying they can get paid for an 8 hour day after making say 10 cars. In the old days it may have been hard to achieve those ten cars, but now it takes say 2 hours to do it and you have to pay the employee for 8 and you can't force him to make more than the 10. Times have to change and contracts need to be reviewed and changed for the circumstances. It is time to have a contract that says if you can't do the job correctly you get no money or the company gets to keep it. As with the auto, due to tech, if you can make more cars in less time you should still have to work your 8 to get paid for it.