OurFuture.org Blogs: Robert Borosage

The Real Economy Strikes Back

Robert Borosage — Tue, 07 Oct 2008 10:44:24 -0400

So much for the $700 billion bailout of Wall Street. Stocks are tanking across the world. Clearly, once the bailout passed, investors took a good look at the real economy and dove for the mattresses. We’re headed into a great reckoning. And at the heart of that, as argued in our new op-ad in the New York Times, is this country’s unsustainable global economic strategy.

What we’re seeing, as Joseph Stiglitz has argued, is the failure of an economic model, an implosion of free market fundamentalism – the notion “that markets are self-correcting, allocate resources efficiently and serve the public interest well,” and governments should just get out of the way.

We’ve gone down this path for 30 years. Abroad, global corporations and banks essentially wrote the constitution of the new global economy, protecting property rights but not workers, consumers or the environment. Banks and currencies were deregulated without protection against destabilizing speculation.

At home, President Reagan launched the war on unions and the rollback of government and regulation. The minimum wage was frozen for a decade. Undocumented workers were exploited to undermine wages and standards. Companies used globalization as a club against workers. Pensions and health care benefits were cut. Over the last eight years, productivity and profits rose, but wages lost ground. We lost one in five manufacturing jobs. Now some 15 million service jobs are at risk of being offshored.

Yet the global economy depended on American consumers as the buyers of last resort. Sustaining a low-wage, high-consumption economy is no mean trick. The gulf was bridged by growing debt built on successive asset bubbles. Household debt soared to unprecedented levels as Americans loaded up on credit cards and cashed out their homes. And the U.S. is now the world’s largest debtor, having added over $4.4 trillion in foreign debt since 2001. We must borrow or sell off assets with $2 billion a day simply to cover our trade deficits. We now run a high-tech trade deficit with China. Mexico exports 50 percent more cars to the U.S. than the U.S. exports to the rest of the world.

What can’t go on indefinitely, won’t. And with the bursting of the housing bubble, the reckoning is here.

Clearly we need to change course. We need a national economic strategy for a global economy, a strategy for the nation, not for the multinationals that have very different interests. First, we need to work with other nations to rewrite the global rules, protecting the rights of workers to organize, creating the global environmental accords vital to dealing with global warming, raising consumer protection standards, and most important, regulating banking and currency speculation, with far greater transparency.

At home, we have to decide if America will remain a center of innovative manufacturing. A central initiative should be a concerted drive for energy independence, investing in conservation, renewable energy and the next generation of energy-efficient technologies. By doing this, we would be putting people to work while capturing the lead in the green markets of the future. This will dramatically reduce the half of our trade deficits that come from oil.

We need to create the basis for a high-income economy by empowering workers to organize and developing a public social contract to replace the private one shredded by corporations, with national health care, a national pension system, mandated paid vacations and sick leave.

Then we’ll need to make the investments vital to competing as a high-wage economy – in education and lifelong learning, in research and development, in the most efficient infrastructure.

Finally, we have to shed the fantasy that the U.S. and mercantilist nations like China are playing by the same set of rules. Clearly we have to bring our trade with China into balance. Dealing with our leading creditor won’t be easy. But we will have to either force an adjustment of the currencies, manage our trade, or slap on import surcharges or regulatory hurdles to counter their strategic trade practices.

This will cost significant sums. In the short term, as we seek to get out of the recession and get the global economy, we’ll be able to borrow the money. In the longer run, we’ll need to return to a progressive tax system that will finance the needed public investment.

What’s clear now is we deserve a serious public debate about what’s gone wrong – and about what our strategy should be going forward. Enough about Bill Ayers or Palin’s husband's flirtation with Alaskan separatism. We deserve a debate worthy of a great nation in trouble.

This Bailout Is Still A Bad Deal

Robert Borosage — Thu, 02 Oct 2008 10:29:53 -0400

The Senate voted overwhelmingly to pass a bad bailout bill last night. Nothing to kick-start the real economy, except tax breaks for business. No help for homeowners.. No mandate for taxpayers to get shares in the banks that are bailed out. Virtual unchecked discretion for the Treasury Secretary to dispense $700 billion. It’s a good morning to be one of Hank Paulson’s friends on Wall Street.

Faced with an angry revolt of Americans opposed to bailing out the folks who got us in this mess, Congress decided to call in reinforcements—the banking and business lobby. Add in business tax credits, increase FDIC guarantees to appeal to small business and small banks, and call out the contributors.

And, of course, fan hysteria to frighten the public: “We must act to keep the banks working or mortgages will dry up, credit cards will be shut down, small businesses won’t be able to operate.”

There are two major problems with this argument.

First, the need to pass something does not require passing something lousy. Backed by most sensible economists, George Soros called for legislation that would provide sound banks with capital, give taxpayers a preferred equity position and sort out the banks that can be saved from those that should be closed. Paulson’s stated plan of purchasing some of the toxic trash from the banks is likely to be more costly and less effective.

Second, while keeping finance going is necessary to a growing economy, it is not sufficient. We’re headed into a severe downturn. Consumers, no longer able to tap the value of their homes to add to stagnant wages, are tightening their belts. States and localities face sharp cuts. The coming recession will weaken the banks further with rising defaults on credit cards, auto and consumer loans. You can’t save a ship by bailing out the master’s quarters when the hull is taking on water.

Now the business and banking lobbies turns their attention to House members, needing a dozen more Republican votes to support the bad plan of a failed administration in its final days. Americans have one day to let Congress know that while action is needed, this bailout is unacceptable.

But unless there is an unprecedented public uprising, this lemon is likely to pass. And the real work of getting our economy back on track will be left to the next president and the next Congress.

Prisoners of War

Robert Borosage — Tue, 30 Sep 2008 11:27:34 -0400

On September 29, Congress revolted against the $700 billion price tag of the proposed bailout of Wall Street. The day before, that same Congress passed without murmur—unanimously in the Senate—a $700 billion budget for the Pentagon in 2009. The worst financial crisis since the Great Depression has shattered the conservative illusions about deregulation and market fundamentalism. But the equally costly illusions about America’s role as an “indispensable nation” policing the globe go without challenge. We remain prisoners of war.

Most Americans have no sense of the cost and scope of America’s role as globocop. We sustain what Chalmers Johnson calls an “empire of bases” across the globe – over 700 active bases in more than 30 countries. Our navy polices the world’s oceans. We task our military to maintain “dominance” not only in our own hemisphere, but in Europe, the Persian Gulf and Asia. Our intelligence “plumbing in place” engages in covert activities throughout the globe. We are the only nation with the capacity to airlift expeditionary forces rapidly and in large numbers across the globe. We are now devoting some $12 billion a month to wars in Afghanistan and Iraq. President Bush has declared a “Global War on Terror,” a so-called “long war,” without limits or exits. Our Defense Secretary complains that the military is displacing the desiccated State Department as America’s representatives across the world.

The cost of sustaining this commitment is staggering. The Pentagon’s budget itself represents more than half of all discretionary spending—everything the government does, outside of entitlements like Social Security and Medicare, and interest on the national debt. At $700 billion, it is about equal to that spent by the rest of the world combined on the military. But the actual cost of our military is strewn throughout the budget. Add in the cost of our veterans, the arms aid in the State Department budget, Homeland Security, and more—and actual spending climbs over $1 trillion a year.

Our military has no rival, but we grow ever less secure. There are three fundamental reasons for this.

As carpenters know, if you only carry a hammer, lots of things start looking like a nail. Maintain a global military constantly engaged across the world, and it will find things to do. As one conservative Southern Senator once said, “the greater ability we have to go places and do things, the more likely we are to go there and do them.” Neo-conservatives dream of the military remaking the Middle East. Humanitarians demand that it act to stop genocide or atrocities from Rwanda to Darfur. Global corporations insist that it challenge pirates and rogue states that are posing an increasing nuisance to shipping.

Thus, the fanatics that launched the airplanes against the World Trade Towers are turned into warriors; the very real threat they pose transformed into a Global War on Terror. This not only helps justify the “war of choice” against Iraq, surely the most costly national security debacle since Vietnam. It also distracts us from a sensible strategy against al Qaeda and its allies. As http://www.rand.org/pubs/occasional_papers/2007/RAND_OP168.pdf “>the Pentagon’s own think tank, the Rand Corporation concluded in a recent study

, the very concept of a “war on terror” isn’t only a distraction; it is detraction from a sensible strategy. By elevating al Qaeda into global warriors, it inflates their importance, and aids their ability to recruit. At the same time, it scorns the real measures needed to counter al Qaeda—intelligence cooperation, financial constraints, and alert and aggressive policing. Worse, it undermines the broad challenge that must be made to engage Islam, to rally the forces of moderation, and to isolate the extremists.

The second problem is the obverse: things that don’t look like nails get ignored. America’s priorities are badly distorted. Abroad, as Defense Secretary Gates acknowledged, generals and admirals displace our diplomats. Arms sales dominate our foreign assistance programs. At home, our country is literally falling apart from lack of investment in a modern, energy efficient infrastructure. We spend tens of billions each year to project our military power into the Persian Gulf, but fail to invest in the renewable energy and conservation at home that could reduce our dependence on foreign oil, generate jobs here in the U.S., and help capture the green markets that will be the growth markets of the future. We are a wealthy country, so in fact, we probably could afford to sustain military spending at current levels. But we can’t do so, and slash taxes on the wealthy and the corporations, without starving basic investments here at home, even as we rack up record deficits.

Worse, the military has no answer to the major threats to our security: a growing global indebtedness that can’t be sustained, the rise of India and China as economic powerhouses, catastrophic climate change and the growing resource struggles that will be far more destabilizing than Islamic terrorists, an integrated global economy of ever greater instability. Worse, the attention devoted to military misadventures like Iraq gets in the way of addressing these looming threats.

The third problem is the contrast between the Republic we are trying to secure and the national security state that has been built to police the globe. War augments the power of the executive. War and military threat justify secrecy, covert operations, disdain for constitutional limits and checks and balances. President Bush claims the right to launch preventive war on any nation in the world, to wiretap Americans without warrant, to designate them an enemy combatant and arrest them without reasonable cause, to hold them without review. Abu Ghraib, Guantanamo, rendition and torture have shamed America during the Bush years. But the lawlessness of the national security state – and the trampling of our own liberties in the name of security – did not begin in 2000. Bush has merely taken to the extreme prerogatives claimed by presidents over the last decades.

But the myths that sustain our military—and the lobbies that promote military spending—are politically unassailable. Both major party presidential candidates pledge to increase the size of the military and project higher military spending in the future. Both support an increased military occupation in Afghanistan, ignoring the history of fierce Afghani resistance to foreign occupation that confounded Britain at the height of its empire, and the Soviet Union right off its borders. The financial crisis and coming recession is forcing a great reckoning in America. But to date, there is no serious challenge to our priorities, or to America’s commitment to policing the globe. The presidential debate on foreign policy featured disputes about Iraq, about Georgia, about Afghanistan, about the economic crisis. But our basic global strategy, our spending priorities went without question or comment.

Economic crisis, like hanging, has a way of concentrating the mind. The financial crisis and the harsh recession likely to follow will spark a fundamental debate about America’s economy. But the debacle in Iraq has not had the same effect on the foreign policy debate. A challenge to America’s global strategy will not come from Washington. It won’t come from the national security managers of either party. It can only come if citizens build a democratic movement willing and able to demand the debate that we need.

After the Revolt

Robert Borosage — Mon, 29 Sep 2008 19:11:04 -0400

The fix was in. The leadership of both parties in Congress, both major presidential candidates, media poobahs, financial statesmen from Warren Buffett to Bob Rubin, all weighing in to support giving Treasury Secretary Henry Paulson a $700 billion revolving fund to bail out Wall Street.

And then Americans said, “stuff it.” The bill was incredibly unpopular. Calls against were running as high as 200 to 1, with venom. With Americans struggling—their salaries not keeping up with the cost of gas and health care, their homes losing value, their savings exhausted, their credit cards maxed out, foreclosures and bankruptcies on the rise—giving the Treasury Secretary, the former head of Goldman Sachs, $700 billion to try to bail out his friends on Wall Street was a very hard sell.

Congress can’t walk away. Something must be done. We need a real plan:
• to get the economy going
• for financial reconstruction
• to staunch the housing hemorrhaging.

So in the House, the vote counters went to work. In both parties, to the extent possible, members in contested districts were to be given permission to vote against the bill. Those in safe districts were expected to vote for it. Leadership labored to assemble a bare bipartisan majority to pass it. But that increased the influence of progressives on the left and conservatives on the right who had relatively safe seats. Members of the Progressive Caucus split 50-50, but Speaker Nancy Pelosi produced the 150 votes she promised. Conservatives, eager to distance themselves from Bush, revolting against House Minority Leader John Boehner’s leadership and hoping to blame Democrats for the mess, bailed out on the bailout in large numbers. Pelosi wisely decided not to try to force it through with Democratic votes only.

But Congress can’t walk away. Something must be done. The markets were already indicating the Paulson plan was inadequate. Conservatives are truly out to lunch. Their plan featured suspending capital gains taxes (as if investors would then rush to put their money in the banks’ toxic paper), and further deregulation, letting banks hide the current value of their assets by suspending mark-to-market rules. That actually made it into the final bill, but it hardly would increase confidence in Wall Street. Rather than making further compromises with the conservatives who simply don’t get it, Democrats should put forth a plan that is far bolder and that deals with the real problems.

1. We need a real plan to get the economy going.

The Paulson plan had a big price tag, but wasn’t likely to work. It was, as Nobel Prize winner Joseph Stiglitz noted, essentially a version of the trickle-down economics that got us into this mess. Bail out the guys at the top and the benefits will trickle down to the rest of us.

The financial crisis comes from the collapse of an $8 trillion housing bubble. Banks—and many homeowners—made a lot of bad bets on the assumption that housing prices would always go up. The shadow banking system—including the off-balance sheet entities set up by the commercial banks—borrowed massively to make those bets. They invented exotic securities and over the counter, unregulated credit swaps and the like to add layers and layers to the house of cards.

Now it’s collapsed. The real economy is in trouble. Consumers have lost trillions in home equity and are tightening their belts. We are headed into what is likely to be a long and severe downturn. Defaults on mortgages, credit cards, auto loans and other consumer debt are rising. Banks and investment houses have no idea what the value of the paper they own is, much less the condition of other banks. Financial markets are close to freezing up.

So Paulson asked for the authority to bail them out—to buy some of the toxic paper, not all of it by any means—to “restore confidence” and create a market price for the stuff. Good luck with that.

In fact, the downturn in the real economy is more likely to send the pain upward. We already have rising unemployment; declining consumption; collapsed construction and decimated manufacturing sectors; sinking retail; and financially strapped states and localities about to make deep cuts in health care and construction, and lay off police, teachers and other public workers.

So what does the administration do? The president says it is “premature” to have a serious stimulus plan to get the real economy going. The Democratic leadership offers up a token, $50 billion stimulus. The Republicans in the Senate wage a filibuster to kill it.

Worse, by authorizing $700 billion for the bank bailout, Congress would set up those who will argue that we have no money left to stimulate the real economy.

Instead progressives should demand a real—$200 billion or more—stimulus that invests in new energy, extends unemployment benefits, aids states and localities to avoid debilitating cuts, rebuilds our crumbling infrastructure and puts people to work.

2. We need a plan for financial reconstruction.

Second, the Paulson plan itself simply does not go far enough to deal with the reality that Wall Street needs to be purged of insolvent firms, excess capacity, and that imprudent lenders and investors have to take their losses. Paulson is looking to restore confidence by buying some of the banks’ toxic paper. He could well end up with a Halloween plan, pumping blood into the living dead.

What we need, as Alex Pollock and John Makin, both of the conservative American Enterprise Institute, argue, is a Reconstruction Finance Corporation that has the power to take over financial firms, sort out the solvent from the insolvent, close down some, merge others, and back those that are solvent. Sweden provides, as many have shown, a good example of how this can be done—with remarkably little cost to the taxpayer.

3. We must staunch the housing hemorrhaging.

Finally, more direct steps should be made to help forestall foreclosures and insure that housing prices don’t simply collapse. The Paulson bill did instruct the Treasury Department to take steps to renegotiate mortgages on the paper that the government purchases. But with many of the mortgages sliced and diced into securities, Treasury will still have difficulty getting much done. And the bill, in a testament to Wall Street’s clout, omits the fairest way to sort out the victims from the bounders: empowering bankruptcy courts to renegotiate mortgages to keep deserving homeowners in their homes and reduce the flood of foreclosures across the country.

The turmoil in Europe and the decline in the markets are being read as warning signs that delay will be costly. And Congress is likely to try to pass a version of the defeated bailout bill with cosmetic changes once more, lipstick on pigs being in vogue. But, in fact, the Paulson plan deserved to fail. It exemplifies the philosophy that got us in this mess—the assumption, as Sen. Barack Obama noted, “ if we give more and more to those with the most, prosperity will trickle down to everyone else,” while ignoring the reality that the pain is shooting up.

We need real investment to kick-start the economy. We need an independent agency with greater power to take over and sort out the financial community. And we need greater focus on staunching the hemorrhaging of housing values on Main Street, not the value of securitized exotica in Wall Street’s basements. Let’s start with a bold plan that can work and negotiate from there.

The Deal That Blew Up

Robert Borosage — Fri, 26 Sep 2008 10:49:45 -0400

The following is the text of the "agreement on principles" that blew up yesterday at the White House, as House Republican leader John Boehner blindsided negotiators by saying Republicans wouldn't support the deal. Sen. John McCain who had arranged the photo op refused to state where he stood.

The text —like Treasury Secretary Paulson's original proposal — is breathtaking in its brevity. They are talking, after all, about authorization to spend $700 billion (or more since it is a revolving fund).

Meanwhile the financial crisis grows worse: failure of Washington Mutual was largest bank failure in history.

The annotations are mine. For more discussion, go here

September 25, 2008, 4:26 pm

Text of Lawmakers' Agreement on Principles

Congressional Republicans and Democrats came to an agreement on principles for the Treasury's Troubled Asset Relief Program that they will take into final negotiations with the White House. It includes sections on taxpayer protections, oversight and transparency, homeownership preservation and funding authority. -Phil Izzo

The full text follows:

Agreement on Principles

1. Taxpayer Protection

a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

This is basically a sop for public outrage, designed to insure Wall Street nabobs don't pay themselves millions in bonuses after running their firms into the ditch. Frankly, they'd be smart to volunteer to work for a dollar for the first year; there will be infinite ways to pocket big rewards if their firms are rescued from their follies.

b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing

This is vital addition to Paulson plan. It would give taxpayers an equity stake in the banks that are saved, so that if they prosper, taxpayers, who have taken on their toxic paper that now has no market, have a chance at sharing in the upside. .

c. Requires most profits to be used to reduce the national debt

This is sop to the conservative Republicans and Blue Dog Democrats who are posturing on the rising deficit. Fact is Congress should be spending a lot more money getting the economy going - investing in new energy and conservation, rebuilding roads and sewers, modernizing our electric grid and transport system to put people to work. If the recession continues to deepen, the cost of bailing out the banks will soar.

2. Oversight and Transparency

a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

A sharp contrast to Paulson's plan which called for total discretion, with no judicial review

b. Establishes strong oversight board with cease and desist authority

This is vital - particularly if the board includes not simply financial gray beards, but independent representatives of workers and consumers. They can keep Paulson from being too generous with taxpayer money to his former colleagues on Wall Street.

c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary's authority

d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary's authority

e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse

3. Homeownership Preservation

a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

b. Requires loan modifications for mortgages owned or controlled by the Federal Government

c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America's housing needs

This "requires" modifications on mortgages that are picked up in the bailout. What is missing is the logical authority to allow bankruptcy courts to work out mortgages. It is bizarre that Paulson, Wall Street and Republicans have decided to oppose what would be the most logical way to work out bad mortgages - a hearing officer on a case by case basis deciding the best way to proceed.

4. Funding Authority

a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

b. final $350 billion is subject to a Congressional joint resolution of disapproval

This is designed a bit to limit the initial price of the package, and a bit to keep Paulson from spending it all in the few months before Democrats hope they have their own Treasury Secretary.

What's missing here:

1. Sensible Regulation: There are no requirements for re-regulating the banking system, no listing of no-brainer reforms, like extending limits on capital and leverage to the shadow banking system. A bailout that rescues Wall Street without re-regulation is a fool's errand. If the bankers think their losses are covered and no limits are put on their gambles, they will soon be taking even greater risks. Paulson wants bailout now and regulation later. But when Wall Street is back on its feet, its lobby will fight relentlessly against regulation.

2. Help for the Real Economy: It is simply perverse that the president argues we need $700 billion tomorrow to save the banks but that it is "pre-mature" to have another stimulus program for the real economy. Layoffs are accelerating. States and localities are about to cut back on police, health care, schools, construction projects. We should be investing major sums -- $250 billion or more - now in the real economy, to put people back to work. If the recession worsens, the balance sheet of banks will worsen, as more people default on credit card, auto and consumer loans.

3. Power for bankruptcy courts to work out mortgages (as noted above)

Get Ready For The Streamroller

Robert Borosage — Thu, 25 Sep 2008 10:33:02 -0400

Get ready for the steamroller on the $700 billion bailout of Wall Street.

Tuesday was the time for throat clearing. It started to get out of hand. Opposition to the plan grew through Wednesday morning.

Then...

1. Warren Buffett, the Oracle of Omaha and the biggest billionaire of them all, bought into Goldman Sachs, betting on the upside of the bailout. Today, Buffett is praising Paulson, "talking his book."

2. The President announced he'd speak to the nation at 9 p.m. last night, undoubtedly to scare the devil out of us.

3. Sen. John McCain announced a "time out" from campaigning (when the going gets tough, the tough call time out) to come to Washington.

4. The campaign of Sen. Barack Obama announced that he and McCain had agreed to meet and work out a joint position on the bailout.

Look out folks, the fix may well be in. Here's what it might look like:

President issues grave alarm: "Major sectors of America's financial system are at risk of shutting down."
Leaders of both parties of both Houses of Congress meet at the White House today and promise a bill by the weekend.
Obama and McCain issue a statement (previously checked with Federal Reserve Chairman Ben Bernanke or Treasury Secretary Henry Paulson?) with conditions for the bailout.
Buffett's move rallies investors and Wall Street lobbies organize a full-court press.
We get steamrolled.

The smartest sage on all of this, William Greider of The Nation, has the best possible fallback position. "We should make one simple demand: If taxpayer money is used, we want the same deal Buffett got."

Buffett's deal was preferred stock with 10 percent annual return and the right to convert to stock if the stock takes off after the bailout. Taxpayers should get the same deal.

This article was updated from an earlier post on The Huffington Post.

Gut Check Time: Will Congress Stand Up To Wall Street?

Robert Borosage — Wed, 24 Sep 2008 11:42:22 -0400

It's gut check time.

The attempt by Treasury Secretary Paulson to put a gun to the head of Congress and terrify them into forking over a $700 billion blank check to the Bush administration in 48 hours has failed. Now what?

Most Americans would just as soon the Masters of the Universe were allowed to sink in their own folly. They had the party; let them clean up the mess. But, looking at sinking housing values and shaken retirement accounts, most Americans know something has to get done.

Banks and investment houses carry weapons of financial mass destruction. Last week, they looked into the abyss. If nothing is done, the chances for a deep and long depression are very great. So stocks skied around the world when Paulson announced his support for a massive bailout of Wall Street. And stocks and the dollar plummeted, and oil and gold soared when it became clear on Monday that the Congress wouldn't simply salute and go along. Doing nothing is not an option.

Leaders from unions, consumer and citizen groups have weighed in, demanding strict conditions on any bailout. On Monday, Sen. Chris Dodd put forth a draft bill that called for an independent board to run the bailout, required that taxpayers get partial ownership in any firm bailed out, and mandated steps to forestall foreclosures and work out mortgages, helping to keep people in their homes. House Speaker Nancy Pelosi demands a kickstart for the real economy - extension of unemployment benefits, aid to states and localities, investment in green jobs and basic infrastructure. (But at only $50 billion, a relative pittance for the real economy compared to the sums demanded to rescue Wall Street). Rep. Barney Frank insists on limits on the compensation of executives of any firm that gets bailed out. Together, these conditions begin to make some sense out of a bad fix.

Initially, Bush and Paulson, backed by the slavish Republican leadership in Congress, resisted, calling for the bill to remain "simple and clear." Republican leaders denounced help for homeowners and Main Street as "political" and "partisan" as opposed to bailing out the Master's of the Universe which somehow is an emergency above politics.

But Paulson is a deal maker. As his testimony indicated today, he'll trade nominal oversight and a few bridges for the $700 billion. As someone who made half a billion on Wall Street, however, he's been unbending on limits on pay for his friends, on providing taxpayers with an equity stake in the firms that are helped, and on measures to force work outs of mortgages and a freeze on foreclosures. And he'll resist any detailed measures to regulate Wall Street to insure this doesn't happen again. For all the talk of bipartisan accord, this will be a face off. Democrats will have to stare him down.

With the financial markets reeling, who will blink first? Will the Democratic leadership insist on common sense? Will Paulson be able to panic Congress into folding? Will the financial firm lobbyists now swarming the Capitol like a plague of locusts be able to rent the votes they need?

The decisions will be made over the next few days. If you want to make your voice heard, go here to contact your legislator, or to get more information.

But this staggering bailout - as perilous and costly as it will be -is only a stop gap. Broader lessons need to be drawn; larger and more permanent reforms are needed. One thing should be clear: the conservative era is over. The theology of market fundamentalism has proven to be a false idol once more. As Joseph Stiglitz has argued, the collapse of Wall Street is to the market fundamentalists what the fall of the Berlin Wall was to communism. It's over. The right has proved once more that it cannot be trusted to run the government it scorns. A trillion dollar debacle in Iraq. A trillion dollar bust on Wall Street. Hundreds of billions pocketed by Big Pharma and Big Oil. It is time for a reckoning.

Behind The Financial Debacle: Conservative Misrule

Robert Borosage — Mon, 22 Sep 2008 12:00:52 -0400

How did it come to this? The banksters issue a threat: Hand over $700 billion in taxpayers’ money–on top of the $600 billion already forked over–or we’ll take down the global economy.

There will be a lot of obfuscation—fingers pointing every which way—but the story is very clear.

The immediate cause is the inflating and busting of the housing bubble. Federal Reserve chairman Alan Greenspan will be remembered for stoking a bubble economy. Coming out of bursting of the dot.com bubble, Greenspan lowered interest rates and kept them there. With his war and tax cuts, President Bush racked up record deficits. Struggling with stagnant incomes, Americans took on record debts. Foreign creditors, like Chinese central bankers happy to loan us money to buy their goods, flooded the U.S. with dough. With mortgage rates low, housing prices rose. An unregulated shadow banking system began marketing exotic mortgage-backed securities across the globe. As the housing bubble grew, brokers hawked shakier and shakier Alt-A and subprime mortgages. Ninja loans—no income, no jobs, no assets—became the rage.

Since the brokers sold off the mortgages immediately, they had a stake in making the loan, not whether the loan would be repaid. The banks and investment houses sliced and diced the loans into ever more exotic securities, which got prime ratings, although no one really knew what was in them. European banks and others bought more and more of the stuff. To escape capital limits, they invented credit default swaps in which companies like AIG guaranteed the loans in case of default. That totally unregulated over-the-counter market soared to $60 trillion. Banks set up off-balance-sheet entities to evade capital limits. Investment houses like Bear Sterns and Lehman Brothers borrowed at 30 times their capital to speculate in these markets. Wall Street’s executives were pocketing tens of millions from the take.

The regulators turned their heads. Greenspan not only fueled the cheap money; he cheered on the exotic mortgages, even while refusing to acknowledge, much less limit, the housing bubble. The Securities and Exchange Commission exempted five major investment houses from their normal capital requirements. Fannie Mae and Freddie Mac’s executives profited personally as their enterprises started buying Alt-A mortgages.

Everything was great so long as housing prices went up. When they topped out, the bottom fell out. Defaults and foreclosures soared. Suddenly, no one knew what the value of the securities they held was, much less what was in the balance sheets of other banks. Much of the exotic paper turned toxic; no one wanted to buy it. As the banks slowly were forced to write down its value, they had to raise capital. With everyone trying to sell at the same time, the values went through the floor. Bear Sterns, Lehman Brothers, and Merrill Lynch collapsed into bankruptcy or fire-sale mergers. The insurance giant AIG and Fannie and Freddie were taken over by the federal government.
And now, Washington is gearing up for the largest bailout in history, throwing an estimated $700 billion more to buy up the toxic paper from the banks to keep the entire financial system from collapsing.

This catastrophe was the direct result of conservative misrule. In the Great Depression, our grandfathers learned a simple lesson: Finance is too important to be left to bankers. So President Franklin D. Roosevelt saved the banks, but in exchange put them in a regulatory straitjacket. Currencies, interest rates, capital requirements, limits on leverage and on financial instruments—all were regulated to create a banking system that could provide financing needed by businesses and homeowners without debilitating speculative excesses.

In the 1970s, with the country experiencing stagflation, oil shocks and the Vietnam War, and with President Nixon moving to floating currencies, banks started pushing hard for deregulation. Wall Street money in Washington paved the way. With the election of Ronald Reagan, true believers—those whom George Soros calls “market fundamentalists”—took over Washington. Government was the problem, not the solution. Deregulation was the order of the day.

Conservatives argue now that the problem was poor regulation, not unbridled markets. But conservatives trumpeted that markets were self-correcting, and so systematically set out to weaken the regulatory agencies—not simply repealing laws, but appointing regulators who scorned the very responsibilities they were given.

Republicans led this charge, naturally, but Democrats also imbibed the conservative Kool-Aid. Deregulation became a bipartisan enterprise; Democrats began trumpeting their dedication to markets, and pocketing contributions from Wall Street. The deregulation of the savings and loans in the first months of the Reagan administration was a bipartisan effort. That disaster, which allowed S&Ls essentially to gamble with government guarantees, ending up costing taxpayers about $150 billion. We didn’t learn the lesson.

Led by such zealots as Republican Phil Gramm, Congress freed the banking system from its New Deal restraints. With the support of Bill Clinton and his Treasury Secretary Robert Rubin, the Glass-Steagall Act was repealed, ending the divide between commercial and investment banks. Commodity exchanges were exempted from regulation, leading to the over-the-counter credit swap trading that Warren Buffett warns is a financial weapon of mass destruction. The SEC exempted five investment houses—Goldman Sachs, Bear Sterns, Merrill Lynch, JPMorgan and Lehman Brothers—from capital requirements. Three of them are now gone. Questions about the survival of the other two triggered the current frenzied bailout. With the cop on the financial beat disarmed, the casino opened for business.

So once more we pay dearly to learn the lesson. Finance cannot be left to bankers. Banks can get too big to fail; unregulated financial systems tend to speculative frenzies because the speculators can profit greatly by taking very large bets—and now have good reason to believe that the government may cover their losses.

We need new and strict regulation on the entire financial system—no more shadow entities operating on the side. That regulation should include strict capital requirements, limits on leverage, transparency, and policing of instruments allowed and compensation schemes. We’ve got to rearm the cop on the financial beat—and elect leaders and appoint regulators who do not scorn the government they lead.

This won’t be easy. The bailout is designed to forestall a global depression. A depression would be destructive, but in the destruction the most irresponsible firms would be liquidated, the wastrels would be ruined, and the public would demand that government crack down on Wall Street.

With the bailout, getting Wall Street back under control won’t be easy. Wall Street is using the crisis that they’ve created to demand immediate action. Regulation, their lobbyists argue, can come later. Forget about a stimulus for the economy. Don’t complicate the bailout with requirements for renegotiating the mortgages or keeping people in their homes.

Wall Street wants the rescue without the regulation. The wastrels will have their losses covered. Wall Street money will bribe Congress to leave them alone. The public may be more relieved than angry. The market fundamentalists are already blaming the crisis on government, not on the banksters on the make.

The reality, however, is clear. Finance cannot be left to bankers. Citizens have to get into this argument. We’ve got to demand conditions on any bailout. (See the conditions we’re seeking here.) And we’ve got to reject the market fundamentalism, the scorn for government and cynicism about the common good that has led us directly into this debacle.

Shock Doctrine: Will We Get Fleeced In This Crisis?

Robert Borosage — Sun, 21 Sep 2008 20:02:46 -0400

Call it extortion. Every American is told to ante up $2,000—an estimated $700 billion in all—to bail out the banks from their bad bets, or they’ll bring down the entire economy.

In a speculative frenzy that allowed the Masters of the Universe to pocket millions personally, the banks filled their coffers with toxic paper that no one wants to buy. Now they sensibly don’t want to lend money to each other, since no one knows if the other is solvent. So they go on strike, and threaten to trigger a global depression, if they don’t get rescued.

The bailout will happen simply to avoid that depression. But depressions have some salutary effects – the scoundrels go belly up, the weakest get purged, and in the wake of the disaster, people demand strict regulation of the money lenders to keep their greed and predatory behavior in check, and government spends money on the real economy to put people back to work.

So if we’re going to ask Americans to pay to avoid the depression, we better demand the accounting that would otherwise take place.

No bailout should go forward—at whatever cost—without the following minimal conditions:

Taxpayer money; taxpayer accountability. The Treasury wants unlimited authority to spend $700 billion in a revolving fund with no rules beyond its own discretion. We can't trust the most spectacularly corrupt administration in memory to decide how they'll cut the deals with the banks. We’d get fleeced. Instead, the law must require an independent entity, with consumers and workers having a majority of the seats on a board with authority to create rules that will prohibit gaming of the bailout. And the Congress—itself sadly compromised by Wall Street money—should be empowered to name independent monitors and to approve all board members.

Taxpayers share in the upside. Under what's being proposed, the Treasury would buy the bad paper of firms without taking any equity in the firm. That's an invitation to larceny. If a firm decides to auction off its toxic paper to the U.S agency, taxpayers should get equity in that firm, in proportion to the assets we buy. That will deter profitable firms from using the agency as a dump for their toxic paper. And it will insure that if the bailout works and the firms become profitable, taxpayers, not simply bankers, benefit from the upside.

Shut down the casino. No bailout of the predators can go forward without new regulation for the entire financial system—capital requirements, leverage limits, bans on exotic instruments, transparency, limits on compensation schemes. The shadow banking system—hedge funds, private equity firms—must be brought under the glare of regulators. Some details should be written into the law; the Treasury can be mandated to issue regulations on the rest by a date certain. Any promise to do the bailout now and the regulation later is simply a lie. If the banks are too big to fail, they are too big to play on the Street alone.

Curb excessive CEO pay. Wall Street fat cats shouldn't be pocketing millions taxpayers are forced to bail them out. Any firm that applies for relief must agree to limit the compensation of any executive—pay, bonuses and perks—to no more than the highest pay offered a senior federal official. Future compensation should be linked to profitability.

Invest in the real economy. Ending the bankers strike is not sufficient to avoid a serious recession, as consumers tighten their belts. A major public investment agenda–$250 billion or more–for launching new energy and conservation projects, rebuilding schools and infrastructure, extending unemployment and food stamps, and helping states avoid crippling cuts in police and health services, is vital to getting the real economy moving and putting people back to work. If we don’t do this, the coming recession will raise the cost of the Wall Street bailout dramatically, as credit card, auto and home loan defaults rise.

Aid the victims, not just the predators. No bailout of the banks can take place without a freeze on foreclosures and a renegotiation of bad mortgages. Bankers as well as homeowners both made foolish bets that home prices would keep rising. Many homeowners were misled by predatory lenders to taking mortgages that they didn’t understand and couldn’t afford. It would be simply obscene to help the predators and not those that they preyed on.

Curb the political corruption. Paid lobbyists of Wall Street firms should be banned from the Beltway. Any meeting with representatives of Wall Street–and many will be needed to understand what is happening–should be posted immediately by legislators in a central place on the Internet. Senators and representatives on the relevant oversight committees should forswear any contributions from Wall Street employees. All those employed over the past five years by troubled firms seeking relief should be prohibited from profiting from the bailout. Without this ban, legions of executives from Bear Sterns or Lehman Brothers will create consulting firms to profit from cleaning up the mess that they made.

These demands will be met with howls of outrage, a renting of pinstripes. It will require a Congress, lathered with Wall Street contributions, to stare down the doomsayers and demand a deal that makes sense. This won’t be easy, with Republicans apparently lining up like lemmings to turn the keys of the Treasury over to the Bush administration. Already the terminally inane Republican Senate Leader Mitch McConnell has thrown his support behind anything the administration says, arguing that “the proposal is, and should be kept, simple and clear.” “Simple and clear” is a euphemism for trusting that the banks and the administration will serve the public interest. Good luck with that.

These banksters have brought the global economy to the brink of ruin. Counting the money already spent, more than a trillion dollars will be spent bailing them out of the mess that they have made. Before agreeing to that, Congress has to try to limit the fleecing of the taxpayers, curb the speculative excesses, and insure that the Masters of the Universe are brought down to earth. If they fail in that, they’ll just be throwing good money after bad.

Make your voice heard. Add your comments below. Write Senate Majority Leader Harry Reid, House Speaker Nancy Pelosi and demand that they stand up. Write Senate Republican Leader Mike McConnell and House Minority Leader John Boehner and tell them that saluting the Bush administration is not sufficient. Tell the committee chairs Sen. Chris Dodd and Rep. Barney Frank that the Treasury proposal is unacceptable. Finance is too important to be left to the bankers. And the bailout is too costly to be left to the Bush administration.

It's time for citizens to demand common sense.

This article first appeared in The Huffington Post.

How Do We Seize The Obama Moment?

Robert Borosage — Sun, 17 Aug 2008 19:11:28 -0400

When Sen. Barack Obama receives the Democratic presidential nomination before 75,000 people in Denver's Mile High Stadium on the 45th anniversary of Martin Luther King Jr.'s "I Have a Dream" speech, new possibilities will be born.

Obama may not be a "movement" progressive in the way that Reagan was a "movement" conservative, and he may have disappointed activists with his recent compromises, but make no mistake: His election will open a new era of reform, the scope of which will depend—as Obama often says—on independent progressive mobilization to keep the pressure on and overcome entrenched interests.

Keys to seizing the moment

Prepare to get allies into strategic positions in an Obama administration
Mobilize the peace movement to press for Iraq withdrawal
Continue independent mobilization on other key issues
Monitor the opposition aggressively
Challenge obstacles to reform in both political parties
Embrace bold, smart ideas that expand the limits of the policy debate

What do you think? Click the "Discuss" link and respond.

» Read the full article in The Nation.

While focusing on what is certain to be a difficult campaign, progressives should start thinking now about a strategy for an Obama presidency.

The inside-outside strategy

For Obama to achieve his core promises, he will have to push significant reforms early. Periods of significant change in American politics are rare, but they feature spasms of furious activity: Roosevelt's first 100 days, Johnson's push in 1964-65, Reagan's reaction in 1981-82. Inevitably, these spasms don't last long before reaction sets in. So it is vital to move rapidly and boldly and across many areas to have any chance at success.

Progressives should be pursuing an inside-outside strategy. For example, during the transition, we should push to place allies in strategic positions, particularly in the areas of economic policy and national security. The AFL-CIO and other groups are preparing lists of potential candidates. These inside efforts should be complemented by watchdog monitoring and reporting on potential nominees. No free pass should be given to those who drove the financial and trade policies that led to the current economic debacles or supported the invasion of Iraq, the worst foreign policy fiasco in recent history.

Obama's first decision—to be made, no doubt, during the transition—will be the most telling. He has pledged that he will instruct the Joint Chiefs of Staff to prepare a sensible plan for ending the Iraq occupation. Already, Democratic security advisers who initially supported the war are calling for "conditional engagement," arguing that the United States can't afford simply to set a timetable to get out. Thus it is vital that the peace movement organize aggressively during the campaign, and mobilize independently and visibly immediately after the election. The Obama White House must have no doubt about the firestorm in Congress, in the streets and within the Democratic Party that would be caused by a retreat from this pledge.

If the Iraq promise is kept, progressives will sensibly work to help define Obama's agenda from the inside and support key parts from the outside.

He will lay out a major initiative on jobs and energy. He has said that he'll try to push through health care reform quickly—although that is likely to trigger trench warfare in Congress (and progressives will have to overcome deep internal divisions to ensure that fundamental reform succeeds). Obama will reverse many of the reactionary Bush executive orders, from the global gag rule to secrecy excesses stemming from the "war on terror." His first budget decisions most likely will have to deal directly with a broader stimulus plan to get the economy going. He has pledged to support passage of the Employee Free Choice Act, enabling workers to organize unions without employer harassment.

Overcoming obstacles

But Obama will encounter formidable obstacles. He'll face a business lobby girded for battle. Corporations have already begun moving more of their money to Democratic incumbents and are snapping up former Democratic legislators and staffers for their lobbies. They will do everything they can to stall health care and drug-pricing reform, empowerment of workers and re-regulation of Wall Street. Moreover, while Democrats are likely to enjoy larger majorities in both houses, their caucuses are likely to be less progressive as they pick up seats in very conservative, formerly Republican districts.

Progressives will enjoy their greatest strength mobilizing independently to support Obama's promises. We can organize constituent pressure on politicians who are blocking the way, something even a president with Obama's activist network would be loath to do. We can expose the lobbies and interests and backstage maneuvers designed to limit reforms. Now that newspapers increasingly lack the resources for investigation, progressive media, online and off, and the independent progressive media infrastructure—from The Nation to Media Matters to Brave New Films to The Huffington Post—must assume a greater role in monitoring the opposition, even as we mobilize activists in targeted districts across the country.

In doing this, we can help give backbone to the Obama agenda, even as we supply muscle and energy to help pass it. The best way to achieve this is to generate large-scale independent-issue campaigns. A clear example is the Health Care for America Now Coalition, which is ready to take on the insurance companies and support the White House's commitment to universal health care.

Acting in support of Obama will require challenging legislators in both parties who stand in the way, a task progressives should undertake aggressively. Democrats should be on notice from their own constituents that they will be expected to help move reform, not stand in its way.

Expanding the limits of the debate

The great challenge for progressives is whether the energy and idealism unleashed by the Obama candidacy—and the collapse of conservatism—can expand the limits of the current debate. McCain promises merely more of the same bankrupt policies, but Obama's reform agenda is itself limited by a very constricted establishment consensus that is an obstacle to real change.

This corrosive consensus reflects the entrenched power of the established order. It is enforced by aggressive lobbies—the military-industrial complex, Wall Street, corporate interests—-and rationalized by well-upholstered house scholars. The establishment's strength is its ability to simply exclude alternatives from serious consideration.

An Obama administration may well realize that the dire condition of the country demands a far bolder agenda than what is now on the table. Progressives should recognize that an Obama administration would have no alternative but to be one of constant experimentation. We should embrace the best of the public-policy proposals that scholars are developing in our universities and think tanks. These ideas challenge limited assumptions about government and call for everything from dismantling our empire of military bases to curbing the imperial presidency, from passing progressive tax reforms to strengthening the public commons. Again, independent campaigning—particularly regarding concerns not high on the national agenda—will help lift issues into the mainstream.

As a former community organizer, Obama has taught that "real change comes from the bottom up." It comes about by "imagining and then fighting for and then working for—struggling for—what did not seem possible before." As president, he will face conflicting pressures, and undoubtedly he will carefully pick his fights. The movement that he has called into being will have little choice but to embrace his charge and mobilize across the country to achieve what "did not seem possible before."

This is excerpted from "Progressives in the Obama Moment," in the September 1 issue of The Nation, co-authored with The Nation editor Katrina vanden Heuvel.