Ah, now I get it! The “ownership society” means that We the People get to own the distressed and worthless investments that Wall Street suddenly needs to unload. Imagine if all our Social Security funds had been privatized, as the Bush Administration sought in 2005.
“Free to choose,” in Milton Friedman’s timeless formulation, actually means the freedom of investors to profit on the upside of the market while coercing taxpayers into providing socialized protection from reckless investor risk-taking and greed. After years of inconclusive polemics on this issue (“free market” propagandists are fairly relentlesss, you know), it is refreshing, finally, to have a little clarity on this score. Capitalist freedom, it is now evident, means frenzied bursts of profit-driven recklessness punctuated by inevitable interludes of financial socialism. (Shhh….)
Several months ago we taxpayers bailed out Bears Stearns for $29 billion. Now we see the federal government reaching into our pocket’s again (or more accurately, our children’s pockets) to take another $200 billion to bail out Fannie Mae and Freddie Mac, the two giant mortgage companies. It is hard to oppose the bailout because the consequences of not providing a financial guarantee to their troubled loans would be even more devastating to the economy that we all depend upon. But the point is that this expenditure should not have been necessary in the first place. We commoners face a lose-lose situation (forced bailouts or financial collapse).
And now that the damage is done, it sure would’ve been nice to know what we taxpayers actually bought. As Gretchen Morgenson reports in the New York Times, we taxpayers don’t really get anything specific in return, such as valuable assets or even structural reforms of Fannie Mae and Freddie Mac. Just a lot of IOUs that are likely to be worthless. Our bailout did not even buy us full disclosure of the specific mortgages that were purchased. Such disclosures would have allowed us to see “how deep into the subprime loan swamp Fannie and Freddie waded during the lending spree,” as Morgenson writes. This, in turn, could have been invaluable in crafting new regulatory protections to prevent future speculative busts.
Today was the day that the political failures leading up to this crisis came home to roost. Merrill Lynch sold itself to Bank of America for $50 billion, Lehman Brothers has filed for bankruptcy, and the insurance giant AIG is teetering on the brink, borrowing from its subsidiaries in order to buy time. When forced to choose between further bailouts and an economic meltdown, Treasury Secretary Henry Paulson declined to provide further government capital this time (and only for now). But he also took the risk that the financial crisis may spread and grow worse — a “game of chicken” with Wall Street, as one reporter put it.
Not a good way to manage a national economy. And a backhanded way of admitting past regulatory failures that are unacceptably dangerous for a debtor nation. If China or other foreign owners of our financial institutions want to call in debts, or refuse to provide more capital, our government has few choices but to knuckle under.
The political failure that brought us to today’s near-meltdown stems from the loosening of public oversight years ago. And the failure continues. Can you find any political leaders standing up for the commoners? In The Nation magazine last week, William Greider wrote:
Candidates Obama and McCain are wagging their fingers at the governing system in Washington, both warning they intend to make big changes if elected. Meanwhile, business-as-usual doesn’t wait for the next president. The financial system needs capital right now, and so Treasury Secretary Henry Paulson has opened up the spigot. Obama and McCain meekly bless the deal. This sequence of events makes them look the political goats, their grand talk of change pushed aside by what Wall Street demands. The 2008 election may be close, but it looks like the status quo has already won.
The status quo won because it scored key political victories years ago, when the industry was allowed to make subprime mortgages backed up by federal guarantees; when it was allowed to merge commercial and investment banking; and when its lobbyists were given a free hand in revamping the regulatory system as they wished. (Fannie Mae and Freddie Mac reportedly spent $150 million on lobbyists.) Democratic deliberation was virtually nil.
So the bilking of the American people is no surprise. It was just a matter of time. Secretary Paulson is now claiming that he is merely playing the hand he’s been dealt, and in a narrow sense, he’s right. But the deck was shuffled years ago to yield an outcome that would shield investors from their bad choices and force taxpayers to subsidize their risk-taking. (For some players, pace the economists, there is indeed such a thing as a free lunch.)
The commoners are likely to be victimized again, and in worse ways, until our interests are forcefully presented by our elected legislators and the president. Apart from emergency aid, however, few voices are proposing structural reform.