James s. Henry: Socialism for Bankers, Savage Capitalism for Everyone Else?

Socialism for Bankers, Savage Capitalism for Everyone Else?
By James S. Henry
The Nation

Ladies and gentlemen: pardon my intemperance, but it is time for some moral outrage and perhaps a little good old-fashioned class warfare as well--in the sense of a return to seriously progressive taxation and equity returns for public investments. After all, as this week's proposed record-setting Wall Street bailout with taxpayer money demonstrates once again, those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us--the middle classes, workers and the poor--whenever it suits their interests.

At a time when millions of Americans are facing bankruptcy and the risk of losing their homes without any help whatsoever from Washington, DC; the CEOs and speculators who created this mess; and the top 1 percent of households that owns at least 34 percent of financial stocks, along with the next 9 percent that owns 51 percent of them, have teamed up with their "bipartisan" cronies in Congress, the US Treasury and the White House to stick us with this huge bill for this bailout, plus all of the risk, plus none of the upside.

Upon close inspection, the Treasury's proposal appears to be nothing more than a bum's rush for unlimited power over hundreds of billions, to be distributed at Secretary Paulson's discretion behind closed doors and without adequate Congressional oversight.

This time they have gone too far.

Some kind of bailout may indeed be needed from the standpoint of managing the so-called "systemic risk" to our financial system. However, as discussed below, the Paulson does not really tackle the true problem head on. This is the fact that many financial institutions, including hundreds of banks, are under-capitalized, and need more liquidity (net worth), not just fewer bad assets. To provide that, the plan needs to work both sides of the balance sheet, providing more capital. If private markets can't deliver and we need to inject public capital into the financial services industry, fine. But it should only be in return for equity rewards that compensate the public for the huge risks it is bearing.

Call that "socialism," if you wish--I think we are already well beyond that point. To me, in combination with increased progressive taxation, it should really be viewed only the right way to provide fair compensation, and participation in any "upside," if there is one.

Absent such measures, progressives certainly have much less reason to support this plan. After all, the increased public debt burdens that it would impose are so huge that they could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens (across both major parties) have been demanding.

From this angle, the Paulson program, in effect, is a cleverly designed program to "nationalize" hundreds of billions of dollars in risky, lousy assets of private financial institutions, without acquiring any public stake in the private institutions themselves, and without raising any tax revenue from the class of people who not only created this mess but would now be bailed out.

Any mega-bailout should come at a high price for those who made it necessary. We must make sure that most of the butcher's bill is paid by the tiny elite that was responsible for creating this mess in the first place.

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