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Who Does The Bail-Out Help

Posted Tuesday, September 30, 2008

The bail-out is a big victory for those who want to redistribute income upward. It takes money from school teachers and cab drivers and gives it to incredibly rich Wall Street bankers. These bankers have in turn distinguished themselves by their incompetence, having driven their banks into the ground.

This upward redistribution was done under the cover of crisis, just like the war in Iraq. But there is no serious crisis story. Yes the economy is in a recession that is getting worse, but the bail-out will not get us out of the recession, or even be much help in alleviating it.

The best argument that the bail-out proponents had was that the failure to do the bail-out could lead to a collapse of the financial system, leaving us unable to use credit cards or ATMs, or otherwise conduct normal financial transactions. This would indeed be scary, since it would imply a complete economic collapse. (I had actually accepted this line.)

Actually this was entirely an idle threat. In the event the banking system really did freeze up, then the Federal Reserve would step in and take over the major banks. (It had contingency plans for such a takeover in the 1980s, when the money centre banks were saddled with billions of dollars of bad developing country debt.)

The banks would not be happy about a Fed takeover. The top executives would be out of their jobs, and the shareholders would likely lose their full investment. However, the rest of us would be able to carry on with our lives as we did before. After maybe a few hours of disruption, we would be able to cash checks and use credit cards and ATMs just as we did before the crisis.

In effect, the big banks had a gun pointed at their heads. The banks told Congress that if they didn't get $700bn, then they would pull the trigger. Given this choice, Congress coughed up the cash.

While the final version is an improvement over the original request, there is little by way of hard commitments on the key points. Which executives will see their pay limited and by how much? How much equity does the government get for buying the banks' bad debts? How many mortgages will be renegotiated? If this were a serious bill, there would be specific wording on these points.

Henry Paulson did not sign a contract when he was CEO with Goldman Sachs that gave him "fair compensation". He signed a contract that specified that he would get tens of millions of dollars in salary and bonuses. Similarly, when Warren Buffet invested $5bn in Goldman, he got a 10% stake in the bank, not a generic promise of "equity". That is the way business is usually done when people are serious.

The bill also does not change the bankruptcy rules to allow people to stay in their homes. Nor does it provide for any real stimulus. Undoubtedly, the spending on the bail-out will be used in future months as an argument against real stimulus.

Wall Street may have won this one, but this is the battle not the war. The whole country now knows that these millionaire and billionaire high-flyers are the biggest bunch of welfare cheats around. The folks with the yachts, private jets and personal servants lack the skills and diligence to make it on their own. They need the tax dollars from the rest of us to make ends meet.
By Dean Baker