On the fateful evening of September 18th, when Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke pulled together a closed-door meeting on Capitol Hill to discuss the rapidly deteriorating state of the U.S. financial system, congressional leaders feigned shock and horror at its severity. As Senator Charles Schumer, Democrat of New York, relayed his reaction to reporters after Paulson’s doomsday scenario, “When you listened to him describe it you gulped.”
But surely this group of veteran Washington insiders already had an inkling that all was not well on Wall Street. Schumer arrived in Washington in 1980 to serve in the House and was elected to the Senate in 1999. He sits on the Senate Banking Committee and its subcommittee on Securities, Insurance and Investment. Also in attendance at the meeting was Christopher Dodd, the senior senator from Connecticut, who first entered Washington politics in 1975 in the House of Representatives and joined the Senate in 1981. He currently chairs the Senate Banking Committee. Another present Democrat was Massachusetts Rep. Barney Frank, who has served in the House since 1981 and is chairman of the House Financial Services Committee.
These Democratic Party powerbrokers have certainly been privy to the inner workings of the financial feeding frenzy that has unfolded on Wall Street over the last two decades and are as complicit as any Republican in enabling the same firms now being bailed out with taxpayer dollars. It could also be argued that their liberal rhetoric is a key component of the selling job now needed to contain a popular revolt against the unbridled greed that has brought the U.S. financial system to the brink of collapse.
Indeed, their campaign coffers are overflowing with Wall St. dollars. Frank’s top contributors in the current election cycle include Brown Brothers Harriman & Life, Manulife Financial, the American Bankers Association and the American Society of Appraisers, according to the Center for Responsive Politics. Back in 2003, Frank opposed the Bush administration plan to increase regulation of Fannie and Freddie. At the time, Frank argued, “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
As recently as July 11th, Dodd concurred. “This is not a time to be panicking about [Fannie May and Freddie Mac],” Dodd argued in a press conference. “These are viable, strong institutions.” Dodd’s main contributors from 2003-2008 included Citigroup, SAC Capital Partners, United Technologies and the American International Group (the now infamous AIG).
Schumer’s top five campaign contributors from 2001 to 2006 were Goldman Sachs, JP Morgan Chase & Co, Merrill Lynch, Bear Stearns and Citigroup. Earlier this year, he went on record supporting a federal bailout for mortgage lenders modeled on the federal government’s savings and loan bailout of the early 1990s—which offloaded the debts incurred by insolvent S & Ls onto the backs of taxpayers while the investors (among them Neil Bush, son of George H. W.) who recklessly created the savings and loan crisis walked away with their profits.
These same congressional foxes have once again been guarding the chicken coop, with a predictable outcome. Much like addicted gamblers on a winning streak in a Vegas casino, they ignored the crippling losses that inevitably follow as long as the good times rolled. Now they must reconcile the excesses of their Wall Street patrons with as little retribution as possible.
“What you heard last evening is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly,” Dodd told ABC’s Good Morning America the morning after the closed-door meeting—as if Democrats and Republicans have been involved in an intractable war in recent decades. In reality, the two parties have been equal partners in enforcing punishing neoliberal policies on the world working class. And after three decades of neoliberal rule, U.S. workers are no strangers to federal intervention.
Federally orchestrated bailouts, always justified by the slogan “They’re too big to fail” over the last 30 years have typically signaled a steep drop deeper down the economic ladder for those who actually work for their income. Congress has played an active role in forcing down working-class living standards since the Carter administration intervened to rescue Chrysler from bankruptcy in 1979. At the time, Congress refused to give Chrysler its $1.2 billion loan guarantee unless workers gave concessions totaling $462 million. This included a wage freeze and giving up seventeen vacation days. By the next contract, Chrysler chairman Lee Iacocca demanded more concessions, including a pay cut of $1.15 per hour. In 1985, Chrysler had been restored to profitability, and Iacocca was the second-highest paid U.S. corporate executive—but Chrysler had already cut 50,000 jobs and successfully demanded yet more wage concessions from its workers.
The Chrysler bailout set the wheels in motion for the downward spiral in working-class wages, coupled with skyrocketing corporate profits, now reaching the breaking point. The neoliberal agenda forced the U.S. working class into competition with the world’s poorest workers, and as a result, U.S. workers went from the highest paid in the world in the 1960s to among the lowest of advanced industrial societies today.
In 1982, Congress deregulated the savings and loan industry, removing all limits on interest rates, having already raised the level of federal insurance for all S&L deposits to $100,000 in 1980. This allowed wealthy corporations and individuals to divide up their fortunes into $100,000 deposits at exorbitantly high interest rates, all of it completely insured with taxpayers’ money. Generous campaign contributions—estimated at between $11 and $22 million—kept both houses of congress from blowing the whistle, even as one after another S&L became insolvent. Sen. John McCain was one of five senators accused of fronting for the notorious Charles Keating, head of American Continental and Lincoln Savings before it went under, losing $200 million for its 17,000 bondholders, most of them elderly depositors thrown into poverty. The final cost of the S&L bailout to taxpayers was an estimated $300 billion.
The next government-orchestrated bailout offered a clear view of the risks engendered by the high-powered gamblers on Wall Street, beginning in the mid-1990s and culminating in the current financial crisis. The executives at the Long-Term Capital Management hedge fund claimed to have discovered a fool proof computer based model for betting on bond prices. Wealthy investors, including the government of China and the Bank of Italy, lined up to invest the $10 million minimum demanded by Long-Term Capital, while Merrill Lynch, J.P. Morgan and Goldman Sachs loaned freely to the hedge fund. Investors doubled their money between 1994 and 1996. But the computer model was flawed. Between August 1 and September 21, 1998, 90 percent of Long Term Capital’s equity was wiped out. Then-Federal Reserve Chairman Alan Greenspan stepped in, explaining that if Long-Term Capital went bankrupt, it would lead to a “fire sale” of its portfolio, devastating the world economy. The New York Federal Reserve orchestrated a $3.5 billion bailout, involving an array of international lenders—along with Goldman Sachs and Merrill Lynch.
Ironically, in a December 1996 speech to the American Enterprise Institute, Greenspan warned against the market’s lust for easy money, arguing, “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” He nevertheless proceeded to flood the market with liquidity while lowering interest rates, spurring the borrowing phenomenon that characterized the recovery after the 2000 recession. Homeowners facing falling incomes took out second and third mortgages to make ends meet, while Wall Street players raked in astronomical profits using borrowed money.
At the behest of credit companies, Congress meanwhile passed the punitive personal bankruptcy law in 2005 that remains in place today. Although the vast majority of personal bankruptcies are due to medical bills, job loss and divorce, Congress refused to make exceptions for active duty soldiers or Hurricane Katrina survivors. And no one in Congress is now proposing to rescind this draconian legislation.
In a note of bitter irony, during this week’s congressional hearings, Bernanke refuted proposals to cap the proposed payout to failed executives taking advantage of the federal bailout as unnecessarily “punitive”.
Congressional leaders Dodd, Schumer and Frank all embraced the $700 billion federal bailout from the beginning and remain its biggest champions. Alas, the only principled opposition to the federal bailout has come from the most crackpot wing of the Republican Party. As Jim Bunning, one of that wing’s spokesmen, protested, “This massive bailout is not the solution, it is financial socialism. It is un-American.” (These knee-jerk conservatives seem not to understand that the basic tenet of socialism requires the redistribution of wealth downward, not upward, as this bailout will accomplish.)
As such, Democratic Party powerbrokers have rallied to pass the bailout. Senate Majority leader Harry Reid exhorted Republicans to “start producing some votes for us” on September 23rd. To be sure, there has been much huffing and puffing from the Democratic side of the aisle, including from Dodd, who exclaimed that the Treasury proposal is “not acceptable” during the September 23rd Senate hearings. But should the bailout pass in some form, as is likely, it should be remembered that Dodd was one of its first champions, and is protests have been orchestrated to make it palatable to ordinary taxpayers.
The proposals being floated by Democrats to soften the blow of the bailout will provide no relief from rising gas, food, housing and healthcare costs crippling those who rely on their own labor to earn tangible income—nor will it protect the thousands of workers who lose their jobs in the coming months. The notion that homeowners should expect relief if, as Dodd suggests, bankruptcy judges are empowered to refinance their mortgages, assumes that those behind in their mortgages will end up in bankruptcy court and depend on (typically not sympathetic) judges to right the wrong they face. How about proposing a moratorium on foreclosures? Health care costs are expected to rise more than 10 percent next year, according to a survey of insurers by Aon Consulting Worldwide released in August. Perhaps a cap on healthcare costs is in order, since Congress can find the hundreds of billions to finance a corporate bailout without spending a penny to alleviate ordinary Americans’ skyrocketing healthcare costs.
Whatever the final form the bailout takes (and there is no viable counter-proposal on offer coming from Washington), its goal will be salvaging the extraordinary fortunes of those who have used fictional capital to bet on fleeting schemes, few of which represent anything of material value. Obama and McCain are both awash in Wall Street donations, and neither should be expected to halt the federal rescue of these morally bankrupt firms now receiving a lifeline from the federal government. As the likely next president, Obama has already thrown promises for “change” overboard, blaming the bailout. “I am not a Democrat who believes that we can or should defend every government program just because it’s there,” Obama, stated, borrowing from Bill Clinton’s playbook, at a Green Bay rally on September 22nd. “We will fire government managers who aren’t getting results, we will cut funding for programs that are wasting your money and we will use technology and lessons from the private sector to improve efficiency across every level of government.” Clinton’s neoliberal agenda survived the 1990s boom, but it cannot begin to address the problems of ordinary Americans in the severe recession now on the horizon.
Last weekend, the Federal Reserve rushed through emergency requests by Goldman Sachs and Morgan Stanley to suddenly change their status from investment banks to bank holding companies—bypassing the legal five-day antitrust waiting period (after all, what’s a few days difference among golfing partners?) And two days later Warren Buffet of insurance conglomerate Berkshire Hathaway invested $5 billion in Goldman Sachs Group. Happy days are here again, signaling the continuity of Wall Street greed for the foreseeable future, unless the victims of this obscene bailout demand it, with pressure.
A Zogby Interactive poll released on September 21st showed that 84 percent of voters believe that more investment banks and corporations will fail in the coming months; nearly two-thirds said they blame government entities, led by the White House, for causing the crisis. Meanwhile, 58 percent of respondents said they have little or no confidence in government leaders to resolve the crisis, while 83 percent of likely voters want those responsible for the crisis to be held criminally responsible.
Don’t expect any significant re-ordering of the balance of class forces without a fight against the insatiable greed of financial institutions and the entrenched politicians who front for them, whichever party wins the White House on November 4th.