10 days That Changed Capitalism

[marmar]

from OurFuture.org:



10 days That Changed Capitalism
By Robert Borosage
March 28th, 2008 - 12:31pm ET


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By Rob Johnson and Robert Borosage

The world has changed. The market fundamentalism that has dominated our economics over last three decades has been unmasked as a sham, deemed useless by the guardian of the integrity of finance itself, the Federal Reserve.

Without a vote of the Congress or a public debate, the Bush administration and the Federal Reserve have made government the guarantor of the shadow banking system – the unregulated, unhinged hedge funds and investment houses whose compulsive excesses now threaten the global economy. They say necessity is the mother of invention, but we seen only a part of the new machine, not surprisingly, the part that buttresses Wall Street. They have scrambled to put this together in an emergency, behind closed doors, without a hint of the necessary regulatory changes that must rationally accompany such guarantees. That is what the fight in the coming months will surely be about.

As the article below by David Wessel of the Wall Street Journal summarizes, the intervention puts at risk hundreds of billions of taxpayer dollars.

It also transforms the economic debate. It is inconceivable that taxpayers should be asked to bail out private buccaneer speculators without enforcing limits on their speculation – capital reserves, limits on what gambles they can take, oversight, transparency, new restrictions on their pay packages to remove the current multi-million dollar personal incentives to invent new Penza schemes and scams.

The shadow banking system now must be brought out of the shadows. After all we are constantly told that finance serves the economy, and the market system is the best means to solve our social goals. It feels very uncomfortable when our servant's servant becomes our master's master as Wall Street has been permitted to become in America in recent years by contribution- hungry elected officials.

As Barack Obama noted in his speech yesterday, the deregulation that fostered this folly was supported by both parties. It began under Jimmy Carter, accelerated under Ronald Reagan, went into hyper speed under Bill Clinton, and spiraled into catastrophe under George Bush. The freedom to gamble with other peoples’ money has been protected by lavish campaign contributions and powerful lobbies. These financial buccaneers have treated the laws and rules that govern our financial markets like just one more asset to be bought and sold. They have been unabashed in their arrogant abuse of power, rigging the rules and daring the world to stop them. A particularly audacious example occurred only last year when a concerted lobby campaign convinced the Democratic majority in the Senate to sustain the tax dodge that enables billionaire hedge fund operators to pay a lower tax rate than their secretaries. ......(more)

The complete piece is at: http://www.ourfuture.org/blog-entry/10-days-changed-capitalism

[xchrom]

1. socializing loss and privatizing profit.

using the the taxpayers as an ever renewing goldmine.

it's not THIS federal reserve that is to blame.

it's reagan -- supply side economics -- it's the war on taxes hysterically waged by the republick party.

the article is right as far as recent history is concerned but the groundwork for all of this was the eighties and reagan presidency.

[DCKit]

2. Were the Fed's bailout and forced sale legal?

The word "unprecedented" comes to mind.

Unless the people who created this mess are set back on the heels HARD, they will have learned nothing of value and another variation of this scheme will resurface in another 20-30 years.

Very little was repaid from the S&L scandals of the 1980's and very few were prosecuted for their theft of billions. Unless people in their 30's and 40's want to reach retirement age just in time to see their savings and investments evaporate in yet another cycle of fraud and legalized theft, regulation of the banking and investment industries must become a priority.

[xchrom]

4. indeed -- the s&l bailout is the blueprint for

the current bailout -- although the magnitude is considerably different.

combine the ineptitude of the greenspan years -- the reagan assault on the middle class -- the corrupt inaction of the office of the comptroller of the united states{that's the office that is SUPPOSED to watch over banks and credit card companies, etc} -- and you have the storm we see ourselves in now.

[speedoo]

3. K&R, and bookmarked.

[Orwellian_Ghost]

5. K&R n/t

[unblock]

6. if you're going to bail them out when they lose, you have to tax them when they win

the main reason they lose -- or more precisely, they conditions under which they lose when we feel compelled to bail them out -- are when they got greedy and leveraged themselves to the hilt in order to make maximum gains when times are good. then they nosedive as soon as the winds change.

it only makes sense, therefore, to have a windfall profits tax on outsized gains in the good years, to pay for the bailouts in the bad years. it makes it less that the average joe is bailing out the big wheels and more that the big wheels are buying insurance for themselves.

as a bonus, a windfall profits tax would itself encourage companies and investors to try to make good money more steadily, instead of going for the quick kill.

[Selatius]

9. I never thought of it that way, but I can imagine what you said won't go over well on Wall Street.

As a side note, if I gave you a million dollars and you could turn it into 100 million dollars but that you could only keep 50 million with the rest going to taxes, you'd be insane to refuse the offer even at 50%. Now, if you were being taxed at 90% or something exorbitant, yeah. The risks could be too high with the pay-off too low in proportion.

[unblock]

10. well you have to balance it against the downside

if, when you lose, you get bailed out, then the upsize is worth going for even at high tax rates.

they real key is that those who make the irresponsible and/or stupid economic decisions must feel the pain on some level. capitalism doesn't work otherwise. hell, it's not even capitalism otherwise!

as long as it's paid for and looks more like insurance than charity, i'm fine with the government or fed backstopping the losses as long as the people who caused it are in the first loss position. they must feel some pain. letting them get completely wiped out may arguably be too harsh, but letting them escape with little more than egg on their faces turns capitalism into a joke.

[Amonester]

7. "The shadow banking system now must be brought out of the shadows"

Yes. Of course!! That's the LOGICAL solution.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x3077647

So? (in the sense of "What do the dummya gang of thugs "propose" to do? Yup: the exact opposite... like they always do... Nancy? Where the f**k R you hidding?)

[moondust]

8. But mostly under Bush.

The others were subject to at least some degree of checks and balances. But when both the executive branch and the legislative branch fell under the control of Republicans, oversight and regulatory responsibility flew right out the window. The resultant excesses are now wreaking havoc.

[Selatius]

11. I dunno. Reaganomic deregulation has been a theme since 1980.

In 1999, the FDR-era Glass-Steagall Act was repealed under Clinton and a Repub Congress, and that law prevented commercial and investment banks from consolidating. The reason this act was passed was to prevent conflicts of interest. Investment banks can buy and sell mortgages people pay just as they can buy and sell stocks and bonds. The same is true with sub-prime mortgages. The rule is to buy low and sell high. Well, the problem with allowing commercial banks to consolidate with investment banks is investment banks want commercial banks to give more loans so that they can be bought low and sold high to generate even more profit.

Economist Robert Kuttner blamed the repeal for contributing to the 2007 sub-prime mortgage collapse and as the reason why banks were so willing to give sub-prime loans with such lax standards that there are stories where people weren't even asked if they could sustain their income to pay the mortgage, much less have a job.

http://en.wikipedia.org/wiki/Glass_Steagall_Act