The Great Switch: Banks Rob People

Published on September 27, 2008

In the Bear Stearns rescue, the Fed in effect bought $29 billion worth of devalued securities from the failing investment bank. The collapse of Fannie May and Freddie Mac, two firms that own or insure almost $5 trillion in mortgages (and made their top executives fabulously rich by investing in shaky mortgage-backed securities in the boom) led to their nationalization; the taxpayer is now liable for their losses, which could hit $100 billion. The US government, which the Lords of Finance told us should stay out of financial markets, now owns the largest financial companies in the world.
The Fed then effectively nationalized AIG, one of the largest insurance companies and biggest financial speculators in the world, at a cost of $85 billion, even it does not regulate and has no responsibility for, insurance companies. The rout was on.

Finally, in mid September, when even these unprecedented interventions proved unable to calm financial markets, Fed Chair Ben Bernanke and Secretary of the Treasury Henry Paulson, former CEO of the top investment bank Goldman Sachs, proposed that the government put up an additional $700 billion of taxpayer money to buy most of the bad assets held by financial corporations. This would be the largest bailout in history. At the same time, the government announced a blanket guarantee of the $3.5 trillion money market mutual fund industry.

By this time, Paulson (or Goldman?) seemed to be in control of the bailout process. His initial proposal stated that all decision-making power over the dispersal of this enormous amount of money was to be in his own hands. Neither the courts nor other government bodies would be able to exercise oversight of Paulson’s handling of the money. Since the proposal said nothing about which securities would be purchased, or what firms would receive payouts, or how the prices of securities would be valued, Paulson (or Goldman?) was actually proposing that the president and Congress simply give him up to $700 billion to distribute to his cronies as he saw fit. As economist and New York Times columnist Paul Krugman put it: “Mr. Paulson is demanding dictatorial authority, plus immunity from review ‘by any court of law or any administrative agency.’”

Adding insult to injury, Paulson planned to privatize the bailout process. Wall Street firms hired by Paulson would decide how much to value the bad securities the public had to buy from … Wall Street firms. These firms would, of course, be paid lots of public money to provide this service. Moreover, Paulson and Bernanke tried to panic the Congress into accepting their Trojan Horse by arguing that if Paulson’s proposal was not accepted without revision within a few days, global financial markets would collapse. Congress was to be stampeded by fear into rubber-stamping legislation that would complete the process of a virtual government takeover of a huge share of the country’s financial system by one man. This was reminiscent of President Bush’s successful effort to get Congress to quickly authorize his war in Iraq. There were no penalties for financial firms or their rainmakers in the proposal, and no new regulation to prevent this fiasco from recurring a few years down the road.

This is, literally, unbelievable. As recently as spring 2007, Paulson argued that excessive regulation was crippling American finance in its battle for global financial supremacy: the government should stay out of financial markets. And Goldman Sachs, along with other large investment banks, played a key role in packaging and selling the mortgage-backed securities that led to the crisis – the same securities they now want to pawn off on the taxpayer. Paulson is a representative and charter member of the Lords of Finance who foisted this corrupt and absurd system of deregulated financial markets on the American public – a system that created financial instability and rising inequality, pressured the public time and again for money to clean up the messes they made, and used their ill-gotten money and power to corrupt the political process. Having done this, the Lords of Finance now want total control of $700 billion in public money to allocate to themselves.
New York Times liberal columnist Bob Herbert put it nicely. “Does anyone think it’s just a little weird to be stampeded into a $700 billion solution by the very same people who brought us the worst financial crisis since the Great Depression?” The American people should revolt against business as usual and rule by the Lords of Finance by inundating Congress with the demand to stop the insanity now. (Truthout/posted by Bulatlat)

Jim Crotty is a Professor of Economics at the University of Massachusetts, Amherst, who specializes in financial markets.

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