270908 - Democracy Now - The financial crisis gripping the U.S. has the largest banks and
insurance companies begging for massive government bailouts. The banking,
investment, finance and insurance industries, long the foes of taxation,
now need money from working-class taxpayers to stay alive. Taxpayers
should be in the driver’s seat now. Instead, decisions that will cost
people for decades are being made behind closed doors, by the wealthy,
by the regulators and by those they have failed to regulate.
Tuesday, the Federal Reserve and the U.S. Treasury Department agreed to
a massive, $85-billion bailout of AIG, the insurance giant. This follows
the abrupt bankruptcy of Lehman Brothers, the 158-year-old investment
bank; the distressed sale of Merrill Lynch to Bank of America; the
bailout of both Fannie Mae and Freddie Mac; the collapse of retail bank
IndyMac; and the federally guaranteed buyout of Bear Stearns by JPMorgan
Chase. AIG was deemed “too big to fail,” with 103,000 employees and more
than $1 trillion in assets. According to regulators, an unruly collapse
could cause global financial turmoil. U.S. taxpayers now own close to 80
percent of AIG, so the orderly sale of AIG will allow the taxpayers to
recoup their money, the theory goes.
It’s not so easy.
The financial crisis will most likely deepen. More banks and giant
financial institutions could collapse. Millions of people bought houses
with shady subprime mortgages and have already lost or will soon lose
their homes. The financiers packaged these mortgages into complex
“mortgage-backed securities” and other derivative investment schemes.
Investors went hog-wild, buying these derivatives with more and more
Civilization: An Idea Whose Time Has Come
Nomi Prins used to run the European analytics group at Bear Stearns and
also worked at Lehman Brothers. “AIG was acting not simply as an
insurance company,” she told me. “It was acting as a speculative
investment bank/hedge fund, as was Bear Stearns, as was Lehman Brothers,
as is what will become Bank of America/Merrill Lynch. So you have a
situation where it’s [the U.S. government] … taking on the risk of items
it cannot even begin to understand.”
She went on: “It’s about taking on too much leverage and borrowing to
take on the risk and borrowing again and borrowing again, 25 to 30 times
the amount of capital. … They had to basically back the borrowing that
they were doing. … There was no transparency to the Fed, to the SEC, to
the Treasury, to anyone who would have even bothered to look as to how
much of a catastrophe was being created, so that when anything fell,
whether it was the subprime mortgage or whether it was a credit complex
security, it was all below a pile of immense interlocked, incestuous
borrowing, and that’s what is bringing down the entire banking system.”
As these high-rolling gamblers are losing all their banks’ money, it
comes to the taxpayer to bail them out. A better use of the money, says
Michael Hudson, professor of economics at the University of Missouri,
Kansas City, and an economic adviser to Rep. Dennis Kucinich, would be
to “save these 4 million homeowners from defaulting and being kicked out
of their houses. Now they’re going to be kicked out of the houses. The
houses will be vacant. The cities are going to [lose] property taxes,
they’re going to have to cut back local expenditures, local
infrastructure. The economy is being sacrificed to pay the gamblers.”
From oil wards to water wards
Prins elaborated: “You’re nationalizing the worst portion of the banking
system. … You’re taking on risk you won’t be able to understand. So it’s
even more dangerous.” I asked Prins, in light of all this
nationalization, to comment on the prospect of nationalizing health care
into a single-payer system. She responded, “You could actually put some
money into something that pre-empts a problem happening and helps people
get health care.”
The meltdown is a bipartisan affair. Presidential contenders John McCain
and Barack Obama each have received millions of dollars from these very
companies that are collapsing and are receiving the corporate welfare.
President Clinton and his treasury secretary, Robert Rubin (now an Obama
economic adviser), presided over the repeal in 1999 of the
Glass-Steagall Act, passed after the 1929 start of the Great Depression
to curb speculation that caused that calamity. The repeal was pushed
through by former Republican Sen. Phil Gramm, one of McCain’s former top
advisers. Politicians are too dependent on Wall Street to do anything.
The people who vote for them, and whose taxes are being handed over to
these failed financiers, need to show their outrage and demand that
their leaders truly put “country first” and bring about “change.”
Denis Moynihan contributed to this column.
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