The Economic Chickens Come Home to Roost

Henry Srebrnik, [Summerside, PEI] Journal-Pioneer

U.S. President George Bush last week appealed to the nation to support a US$700 billion rescue for the nation’s financial system in order to avert a credit market collapse.

After much wrangling, Congress has acceded to his demand, lest the economy fail.

The bill authorizes government intervention to buy distressed debt – mortgage-based securities and other assets – from private firms currently stuck with them, with the tab picked up mainly by the taxpayers.

Legislators did put in place some safeguards, including close supervision of the program by an oversight board and the creation of a privately funded insurance program for mortgage-backed securities. They also limited compensation to executives of corporations that would be covered by the rescue plan and allowed for more help to homeowners facing foreclosure.

A part of me hoped the U.S. Congress would refuse to bail out the fat cats on Wall Street and let them go under. I realize that, unfortunately, many innocent victims of their greed would go down with them, but it’s the price Americans would have to pay for allowing their leaders to condone such legalized robbery.

To use an expression beloved by some, “short term pain for long term gain.”

America has been living beyond its means for years. George Bush went to war and – incredibly – lowered taxes on the rich. He told Americans they could show their patriotism by “going shopping.”

Don’t blame only Bush. The Clinton administration was just as culpable.

Since the late 1990s, the personal savings rate in the U.S. has plunged to almost zero from 3 per cent of income, according to research by Innovest Strategic Value Advisors Inc. Credit card debt is up 80 per cent.

In 1999, mortgage giant Fannie Mae came under increasing pressure from Bill Clinton to expand mortgage loans among low and moderate income people, and felt pressure from stock holders to maintain its phenomenal growth in profits. And so the so-called sub-prime mortgage market, now at the root of the financial crisis, grew until it became a giant house of cards.

The current crisis was not caused by greedy executives breaking laws.

What they did was perfectly legal. It resulted from increasingly lax government regulation.

In 2004, for instance, the U.S. Securities and Exchange Commission (SEC), the agency with primary responsibility for regulating the securities industry and stock market, loosened the rules governing the amount of debt major investment banks could assume in their trading activities.

The Wall Street financiers have been allowed to in effect “print” money at a pace counterfeiters can only dream of. Read this and weep:

*In 2007, the CEO of a Standard & Poor’s 500 company received, on average, $14.2 million in total compensation, according to the Corporate Library, a corporate governance research firm.

*Lehman Brothers chairman Richard Fuld Jr. made $34 million in 2007; the firm went bankrupt a few weeks ago.

*Insurance giant American International Group’s Martin Sullivan got a $14 million compensation package in 2007; the insolvent company has now received $85 billion in a federal bailout.

*Stock brokerage Merrill Lynch CEO John Thain was paid $17 million in salary, bonuses and stock options in 2007; his company too has ceased to exist.

*Washington Mutual, the country’s largest savings and loan bank, nearing collapse, was seized by federal regulators last week. Its new chief executive, Alan H. Fishman, who has been on the job for less than three weeks, is eligible for $11.6 million in cash severance and will get to keep his $7.5 million signing bonus, according to an analysis by James F. Reda and Associates.

There are many more such stories; these figures come from the filings made by these companies to the SEC. No one could possibly be worth the obscene amounts paid to these people – even if they hadn’t run their companies into the ground.

Since there really is a finite national economic pie, this left less on the plate for others, including minimum wage workers who can’t afford a doctor for their sick children.

And more than a million people have lost their homes through foreclosure in the last two years, among the other consequences of this debacle.

A financial crash, like a lost war would have provided a salutary lesson, a form of “tough love.” Now, within a few years we’ll just be back to business as usual as people forget the lessons learned from this mess.

Americans failed to elect the kind of politicians who might have prevented this. They will now have to learn to live with the consequences

Crisis in the American Financial System

Henry Srebrnik, [Charlottetown, PEI] Guardian

Since the Reagan years of the 1980s, the American financial system has been allowed to operate virtually unchecked by elected officials.

“Government” and “bureaucrats” became the objects of derision, especially on the part of Republicans, while the “Masters of the Universe,” Wall Street investment bankers and financiers, went about their business: the business, not of producing things, but of making money, and tons of it.

During the same period, the economic condition of middle and working class Americans deteriorated, under both Democratic and Republican administrations. Unions were weakened, more and more full-time manufacturing jobs were “outsourced” to low-wage countries overseas, and replaced by minimum-wage service jobs.

The gap between the very rich and everyone else grew. Three decades ago, notes New York Times columnist Nicholas Kristof, heads of major American corporations typically earned between 30 and 40 times the income of ordinary workers. Last year such CEOs averaged 344 times the average pay of workers.

The now disgraced head of Lehman Brothers, the venerable 158-year-old Wall Street firm that went bankrupt last week, took home nearly half a billion dollars in total compensation between 1993 and 2007. That’s not a typo – half a billion!

Both political parties allowed, indeed even encouraged this. You think Bill Clinton provided more oversight than George W. Bush has? Think again. His daughter Chelsea works, not for a company that produces something with use value – say, cars, or paper clips, or shoes – but for a hedge fund.

(Here’s Wikipedia’s very simple definition of a hedge fund: “a private investment fund, having a largely unregulated pool of capital, whose managers can buy or sell any assets, make speculative trades on falling as well as rising assets, and participate substantially in profits from money invested.”) Because a hedge fund markets to accredited investors only, it is free from direct regulation. These are, so to speak, exclusive clubs.

So the fact that Chelsea Clinton was hired as an “analyst” at Avenue Capital Group, a US$12 billion hedge fund, rather than as an executive at, say, Acme Widget or the Jones Shoe Manufacturing Corp., should tell you something. In fact, Wall Street traders were among the biggest donors to Bill Clinton’s campaigns, and to his wife Hillary’s, as well.

Don’t place all the blame on Bush.

Hedge funds, derivatives, leveraged buying and selling, sub-prime mortgages – all forms of financial sleight of hand, really – grew by leaps and bounds, until they all became part of a giant house of cards, in effect pyramid schemes destined, as sure as down follows up, to eventually collapse.

Now has come the reckoning. The U.S. Treasury and the Federal Reserve are now pumping hundreds of billions of dollars into the financial system to rescue companies such as insurance giant AIG from insolvency.

Many more dominoes may fall. The administration is preparing a massive intervention to revive the financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers. It involves using hundreds of billions of dollars in government funding to buy up bad loans.

And who will, in the end pay for all this? Not the CEOs who walked away with billions of dollars. It’ll be the taxpayers, including people making US$16,000 a year at gas stations or supermarkets, who typically don’t even have any health insurance. They will in effect be bailing out the multi-millionaires.

This has been “Hurricane Wall Street,” and it will have as detrimental an effect on John McCain’s presidential campaign as Hurricane Katrina did in 2005 on George Bush’s legacy, which has never recovered from the disaster in New Orleans.

These economic woes should certainly help Barack Obama to victory in November. Rightly or otherwise, the Wall Street mess is blamed squarely on the Republicans.

And since this economic crisis isn’t going away anytime soon, no one wants the 72 year old McCain in office lest he moves on to the hereafter and Americans wake up to find themselves governed by the former mayor of Wasilla, Alaska, Sarah Palin – who got her first passport in 2006 and had never been overseas until last year.

Obama and the Clintons: A Convention Hijacking

Henry Srebrnik, [Charlottetown, PEI] Guardian

The Democratic Party's Denver convention is over - and it was hijacked by the Clintons. So if you want to know why Barack Obama might, against all logic, lose the November presidential election to John McCain, look no further than the former "first couple."

Two of the convention's four evenings were ceded to Bill and Hillary - each gave a speech on prime-time television. Talk of appeasement - Neville Chamberlain couldn't have choreographed it better. Never before have the losers in a primary contest had such exposure.

Of course Hillary Clinton in her speech to the assembled delegates said all the right things: Obama is the party's candidate and everyone should unite around him. That's a dog bites man story.

However, she made sure to remind them that "18 million people voted for me, 18 million people, give or take, voted for Barack." According to New York Times columnist Maureen Dowd, "She keeps acting as if her delegates are out of her control, when she's been privately egging on people to keep her dream alive as long as possible, no matter what the cost to Obama."

Remarked Dowd, "Hillary looked as if she were straining at the bit to announce her 2012 exploratory committee."

While Hillary Clinton is in the midst of a "catharsis," according to her confidantes, her husband remains bitter about Obama's portrayal of his political tactics as having been tinged by racism.

"He was particularly upset about the race card deal," contended historian Taylor Branch, who has written a number of books about the American civil rights movement.

"There is still work to do on the Bill Clinton front," stated Howard Wolfson, Ms. Clinton's former communications director. "He feels like the Obama campaign ran against and systematically dismissed his administration's accomplishments."

Earlier this summer, Obama was blindsided from an unexpected direction - the liberal New Yorker magazine. Its July 21 cover featured Obama in Muslim garb, alongside wife Michelle sporting a large Afro and carrying an AK-47 machine gun - clearly meant to portray her as a Black Panther style radical terrorist.

The New Yorker claimed it was satirizing rumours about Obama, such as that he's a Muslim and anti-American. But if this cartoon was meant to ridicule such misconceptions it fell flat, and could only hurt Obama.

One has to wonder: Given the Clintons' clout with the New York literati, could they have had a hand in this? The New Yorker, after all, is not part of that famous "vast right wing conspiracy" they used to talk about, but rather a magazine one would have expected to be in Obama's camp. And it was strange to see the magazine playing upon Americans' fears of Islam.

A recent Washington Post-ABC News poll showed that only 42 per cent of former Clinton voters classify themselves as "solidly behind" Obama, and 20 per cent plan to vote for McCain.

Many of these voters are women, and now that McCain has picked Alaska Governor Sarah Palin as his running mate, that number is sure to grow.

The Clintons would love to see Obama lose this election, so they could have another shot at the White House in 2012. They will do "whatever it takes" to achieve that - behind the scenes, of course.

Obama has come a long way, but as long as he remains in the Clintons' shadow, he may yet not make it to the finish line.