Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse

[one...two...tree 2,762]

Joshua Holland, Alternet

The immediate cause of our financial meltdown is unchecked, unbridled greed. Mainstream newspapers and the business press are doing a fairly good job of explaining how the lack of regulatory oversight led us into this nightmare.

But you have to dig down one layer to find the cause of that situation. Under cover of the ideological euphemism known as the "free market" and with enormous cash investments over the past four decades, business elites have captured the regulatory organs of powerful democratic states -- nowhere more so than the United States -- and promoted their own narrow economic agendas for short-term gain.

There's an enormous amount of discussion about that in the independent media. But to drill down a layer deeper, to the bedrock of the crisis, you have to go to some deep thinkers who don't get much play in our mainstream economic discourse.

As foreign policy analyst Mark Engler notes in his new book, How to Rule the World, declining returns on traditional investments in manufacturing and industry since the 1970s go a long way toward explaining today's highly speculative economy -- pushing capital into developing countries and into bubble after speculative bubble in search of a better profit margin.

It's important to understand what's going on at all three levels, because we may have come to a fork in the road, a point at which the decisions made now may determine the future of the global economy.

We may or may not also be on the verge of another Great Depression.

The Bush Bailout: Privatizing Gains and Socializing Risk

On Saturday, hoping to stave off that dark possibility, the Bush administration proposed an unprecedented bailout for investors, a scheme that would authorize the Treasury Department to spend as much as $700 billion in tax dollars over the next two years to buy up bad securities, with little Congressional oversight save for a semiannual report on the process.

The move came after the federal government had already sunk a total of $900 billion into America's financial institutions this year, potentially bringing the total value of the Fed's tinkering to $1.6 trillion over three years.

The White House, Congressional leaders and Treasury officials are haggling over the details. Things are moving quickly, with a mammoth intervention that was unspeakable in economic circles a month ago now looking more and more inevitable.

The structure of the proposed bailout may change during those negotiations -- Democrats in Congress are pushing to save more homeowners and tie the package to some sort of limits on CEO pay for institutions that get a lifesaver -- but the deal outlined in the brief document released on Sept. 20 epitomizes the principle of privatizing gains while socializing risk. In other words, we're splitting an oil well with the Big Boys on Wall Street: They get the oil, we get the shaft.

It is, in short, a draft of what could be one of the greatest rip-offs in history. Bush, on the way out of power, is trying to create a publicly financed honeypot for the private sector on a scale never before imagined.

Those who played fast and loose with newer, ever shakier investment instruments in order to squeeze a few more bucks out of the markets' "irrational exuberance" about the housing sector would get a payday that would save their bacon. According to the New York Times, this huge pile of taxpayers' cash may even be available to foreign investors.

Home prices would continue to tank, though, as banks shed their bad loans at discounted prices to the government. Those subsidized assets would then be liquidated -- on the cheap because they're so overvalued -- to resuscitate the financial system. Rick Sharga, a senior officer with RealtyTrac, which monitors the housing market, told Reuters, "We've seen fewer and fewer properties go through the auction process because there's either little equity in them or even negative equity. So there's no incentive for people to buy them at the auctions."

Sharga added that "bank repossessions continue to grow at a pretty rapid clip," but an analyst told me recently that he knew of banks that simply weren't taking possession of foreclosed properties because they didn't want them on their balance sheets.

As those assets are disposed of, the value of all Americans' homes will continue to fall, because sales of comparable properties determine their worth. That would, in turn, leave a greater number of Americans with mortgages worth more than the amount of equity in their homes, and the cycle would continue. Things are already bleak on that front; the rate of U.S. foreclosures increased 75 percent in 2007 and 55 percent in the year ending this June. The Associated Press reported, "More than four million American homeowners with a mortgage, a record nine per cent, were either behind on their payments or in foreclosure at the end of June."

Many more will lose their homes, and all of us will get the tab: higher taxes, swelling deficits, higher interest rates and a moribund economy.

The plan doesn't specify what, if anything, U.S. taxpayers will get in return for their largesse. The government isn't spending more than a trillion dollars to nationalize failed institutions in order to protect stakeholders and liquidate those overvalued assets in an orderly manner. That might make a lot of sense, and it would essentially make Joe and Jane taxpayer owners of something that might rebound in value down the road.

Instead, Bush's proposal would take bad paper off the books of institutions that are ailing but haven't yet gone belly-up, and we wouldn't necessarily get a stake in those institutions; they'd only become "financial agents of the government," according to the draft released Saturday.

As Paul Krugman notes, "historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets."

The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the (Resolution Trust Corporation, founded in the wake of that crisis). The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system -- that is, convince creditors of troubled institutions that everything's OK -- simply by buying assets off these institutions.

Making matters even worse is the fact that it's almost impossible to put a fair market value on this massive pile of bad debt. As Peter Goodman of the New York Times notes, "no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday."

There will be a fight in Washington, and much debate, about which ideological direction the bailout should lean, and the version offered up by the Bush administration is -- no surprise here -- tilted heavily in favor of those at the top of the economic pile.

What's clear is that there is going to be a massive transfer of public wealth to the private sector, and at least the lion's share of that cash, if not all of it, will end up in the hands of an investor class whose recklessness got us into this mess in the first place.

http://www.alternet.org/workplace/99703/me...ge_of_collapse/

[spookyturtle 9,466]

Whoever becomes our next president has his hands full, that's for sure. It will take years to undo the mess that the Bush Adm. has created, no just here at home, but abroad as well. We are looking for a savior in the upcoming election and I'm not conviced that there is an easy fix to the mess.

[ready4ONE 5,400]

Precisely!

[one...two...tree 2,762]

Whoever becomes our next president has his hands full, that's for sure. It will take years to undo the mess that the Bush Adm. has created, no just here at home, but abroad as well. We are looking for a savior in the upcoming election and I'm not conviced that there is an easy fix to the mess.

I agree, but certainly continuing down the same road in terms of economic policies is not what will get us out.

[spookyturtle 9,466]

]

I agree, but certainly continuing down the same road in terms of economic policies is not what will get us out.

That's for damn sure!

[EstebanTrabajos 7]

WWIII, I predict

We are already fighting in 3 different fronts; Afghanistan, Iraq and Pakistan, why not add a few more?

Problem here is who is going to rescue us since it was us who rescued Europe the last 2 times...

It's like watching Episodes I, II and III from the Star Wars saga.

Edited September 22, 2008 by GueraYTavo

[one...two...tree 2,762]

]

I agree, but certainly continuing down the same road in terms of economic policies is not what will get us out.

That's for damn sure!

So for those who intend on voting for McCain, are they hoping that he'll do an about face change once he's elected, on issues like the tax cuts for the rich, or do they believe that the current economic policies are sound and we're just going to get through this rough period?

[spookyturtle 9,466]

Funny how nobody is interested in this thread or the price of oil, but if someone posted that one of Palin's high school classmates said she swallowed, there'd be 100 replies by now.