Born of Crisis, the Bailout State
In the course of the past two years, my blog has been completely vindicated. Excuse me while I gloat, even if the price of my schadenfreude is misery for millions of people across the globe.
The economy has been gutted. Unemployment is skyrocketing, every day I read of thousands more being fired--National City, yahoo!, etc.. Faced with inadequate access to capital, companies have scaled down.
The idea of starving the beast hasn't really worked, if this crisis were manufactured to weaken the Democrats' hold on those noxious "social programs." Social security's Cost-of-Living-Adjustment is going up more than 5% next year; this could be a bribe to voters from Congress, or represent an end to the self-imposed gag order on the chronic understated rate of inflation.
Yes, I do own some silver, so I can't help it if I complain if it's gone down in value. Silver is a hard asset, unlike paper-denominated instruments like bonds, stocks, and cash. Traditionally, silver and gold are good hedges in times of economic instability, called "safe havens." This economic cycle has seen a huge amount of bank reserves, loans, and stock values simply vanish. As that money goes, so too does the upward pressure on prices that the extra money can bring.
Oil has fallen dramatically--no surprise since it too is a hard asset, something real. Americans had grown quite accustomed to higher energy prices. As they come down, the Little People should have an easier go of it.
Food prices remain high. The cost of consumer goods will lag increases in energy prices, so current price reflects the higher costs of transportation and feed, fertilizer, etc. from last spring. Even if energy prices stay low, the price of consumer staples might not go down for some time, due to this delayed effect. So expect to pay more for groceries.
When this credit crisis first exploded last month, I'd been rightfully skeptical of the motives behind the bailout. Those suspicions have evolved into doubts about how effective the bailout will be, even as I grew more confident that yes, indeed, there had been a crisis.
In a more trusting age, back when government seemed to lie less, perhaps the public could have believed that Paulson's plan was the right thing to do. But in recent years the public has been lied to about a great number of things, including Iraq's fictitious WMD and ties to terrorism, as well as being misled about the benefits of deregulation.
While warranted criticism of what our government has failed to do consumes millions of pages, the reality is that an end of trusting government has come. The natural consequence is political, for people to gather into groups to pursue shared goals and protect their interests. Awareness though is the key. Those who believe that government acts in their best interest--still--will be less likely to see the need to act, to lobby, to participate. Meanwhile, insiders who've been playing this game for decades, will continue to get what they want at the expense of the group.
We saw the effect of this game being played in the financial markets. The CEO of now-bankrupt Lehman Brother pulled in over $4 million in bonuses in April, even as his company crept ever closer to the abyss. Who knows how many other insiders have been milking their companies of all they can, even as their gross irresponsibility makes their collapse inevitable. Even if the stock price reaches zero, corporate insiders will have pulled out millions long before the Little People figure out what's happening.
On Wednesday Alan Greenspan testified before House guru of oversight Waxman (D-Calif.) that capitalism might not be working as promised. [See an article on Greenspan's stunning testimony here.] Greenspan testified alongside SEC Chairman Chrisotpher Cox, who's leadership skills are the equivalent of Michael Brown "heckuva job Brownie," the FEMA director during Katrina. Cox, Bernanke, Paulson are all master apologists; lacking in their testimony is an admission that they ever saw it coming, despite fully predictable consequences of radical de-regulation. In the same way, Brown never admitted funding cuts (due to Iraq) contributed to a reduction in funding for canal/levee repair and construction in advance of the breaches.
Inadequate government leads to a crisis, and the officials responsible bemoan the ineffectiveness of government. The crisis becomes an opportunity to shower billions on the private sector. Disaster capitalism is standard operating procedure for the neo-conservatives--it masks unprecedented levels of crony capitalism--the awarding of lucrative, no-bid contract to politically connected insiders.
The bailout may be the extension of cronyism into the financial services sector. Writing in truthout.org, Michael Winship explains:
"...the executive pay limits in the legislation apparently have so many loopholes you could fly a fleet of Gulfstream corporate jets through them. Oregon Congressman Peter de Fazio caught at least seven, "that will protect their outrageous paychecks and golden parachutes..."
Forbes asserts that Secretary Paulson earned in excess of $700 million in compensation during his time at Goldman Sachs, a company at the middle of this maelstrom. Is Paulson helper for the Little People or is he in fact just using the Treasury to help his friends?
Either way, a lot of money has already changed hands. Winship cites an Bloomberg article which reported $239 billion in employee compensation for the Top Five former investment banks since 2004. Those at the top have made a great deal of money, regardless if their companies go under, or have already.
Contributory negligence by the media
For the millions with sub-standard schools, crime, rural poverty, and long-term unemployment, Greenspan admitted what they've known for years: the system is broken. It's only when economic deprivation touches the investor class that the scope of the problem gets exposed via the media.
The corporate media appears to have been shaken from its cocoon by the scale of the credit crisis. The time to have exposed the reckless course of financial modernization was before all this mayhem began, but post-9/11 we were told that our national security was more important. Maybe the fear quotient has been all used up, and the media can't scare the people any more.
The media did play a large role in minimizing the truth and understating the scope of Bush administration failures. Are they playing catch-up now, trying to do for Obama what they didn't do for Kerry in 2004?
The shift from national security to economic security has become part of the media's narrative. The nation's security was paramount and sacrosanct until the "me"--my livelihood, job security, wealth--overshadowed the "we." All of a sudden it's become quite acceptable to be afraid not of terrorists but of the immediacy of economic collapse, unemployment, foreclosure, poverty.
Could Americans discard "Country First" if they faced more immediate personal economic challenges? Most likely a military reaction to a terror attack would be swift in coming; the people could easily rally behind their leader as they did after 9/11. It's doubtful that patriotism which the use of military force invokes could serve as the unifier that it did back in 2001. Internationally, all our credibility has been used up.
We are a culture whose nerves have grown numb from constant shock and awe--fear-mongering gestures by National Security State hungry for more power, money, and control. It would take a catastrophe many times the size of 9/11 to re-create 9/11-style reaction. Like the boy who cried wolf, it will take ever bigger warning calls to stir fear, if the press could ever perform the function of warning the public at all, an essential duty that must be exercised to keep the powerful accountable. In a future period, if another terror attack were perpetuated, the people might react far less predictably.
The nexus between politics and terror has become far less useful to incumbents jerking the reins of the National Security State. In her recent article, Arianna Huffington thinks the "Spec market on dread" no longer works:
"Unfortunately for McCain, playing the Be Afraid game has gotten a lot more complicated than it was back in the good old days when all you had to say was 'Cipro' and 'duct tape' and the electorate would reach for its GOP security blanket."
She cites a recent paper paper on changes in Terror Management Theory, which Huffington explains could indicate "voter reactions to those kinds of threats may be changing -- and that terror warnings or the evocation of looming attacks may, in fact, have the opposite impact on McCain than they had on Bush..."
Terrorism may not be the mobilizing and unifying event once trumpets fade and people realize there's no state directly responsible. "Let's get 'em!" becomes "get who?"; "Get'r'done" becomes "get what done?"
A terror event is unlikely--which country would be foolish enough to grant refuge and comfort to terrorists planning such a strike? There's no state unwise enough to invite retaliation by the US under the Bush Doctrine. Any event would likely be a false flag operation meant to blame an innocent country or group of people.
Trapped in history
Does our government really serve the people? We can hide behind jingoism and military-loving ultranationalism, but government is more of an independent actor than an entity acting with the consent of the governed, on their behalf. Once the State reaches a certain critical mass it becomes sentient, self-aware like the computers that start the world of Terminator in the third movie.
Self-preservation is the first priority of any sentient being. The computers in Terminator recognize the threat posed by humans, which it then sets out to destroy. If the future victims of State power were to catch on to their growing disempowerment, the threat posed to the Little People could be anticipated and steps to limit the Federal entity undertaken. Instead, we are trapped in a recurring cycle of economic downturns coupled with intermittent spasms of patriotism that convert public discontent into action directed against the State's enemies.
War is the ultimate tool of Statism--it denies citizens their freedom, and even their lives, through conscription. The economic burdens of war convert useful private property (itself reward for fair labor involuntarily taken by the State in the form of taxes) into the destructive practice and frequently pointless waging of war. The wars need not be "hot"--the Wars on Terror and on Drugs have been used to gloss over the underlying expansion of government where billions are showered on un-winnable causes.
Wars aren't the only vehicle by which the State grows. Any crisis can be used by the State as an excuse to increase its taxes, and expand its control over the lives of citizens. This most recent financial crisis is but one potential justification for a larger role of government, accompanied of course by the bloated, inefficient bureaucracy, the American equivalent of a command and control economy active in all aspects of Americans' private lives, whether for the purpose of fighting terror, drugs, or whoever the day's designated boogeyman might be.
The enlargement of the State isn't a straight-line but rather a sequence of steps. Wars and economic crisis usher in "reforms" that become a methodology to further increase the size of government.
One characteristic of expanding government is the inability to ever go back to the way things were before the crisis. For example, at the end of World War Two, the average tax burden on Americans stood far higher than it did during the Depression. Nowadays, it's doubtful the Congress would see fit to simply restore the Enron loophole and go back to the way things were before changes in the law like Glass-Steagall made the unregulated speculation, and its corresponding collapse, possible. Instead Congress' mistake to de-regulate will incur all kinds of invasive new regulatory efforts--far beyond that needed to remedy the immediate crisis.
To protect the public ("the children") from the greed of a de-regualted system, more traditionally Democratic programs will need to be implemented. The bailout, initially at $700 billion quickly ballooned into a $850 billion bill with the addition of spending unrelated to the crisis.
The economic cycle would appear to go from excess growth to none, from boom times to depression. We are led to believe these cycles are natural, and the simple product of economic variables beyond anyone's control. In actuality, capitalism does have an inclination towards periodic episodes of creative destruction. This shouldn't glaze over the truth that excess demand doesn't have to run wild, and that much of the volatility and suffering could be alleviated through better regulatory practices.
The Depression came on the heels of the Roaring Twenties, a period during which many people grew absurdly rich. Wealth built up during the Clinton years and Bush-era taxation changes led to record imbalances in the distribution of wealth.
The situation we now have can't be equated with the Depression, but rest assured, the Democrats will inflate the size of government. If need be, they will find the justification to match the policy like the Republicans did in concocting false intelligence for the Iraq war. It surely wouldn't take much to show that our bridges are falling down, our schools underfunded, and medical system dysfunctional.
Look hard enough and one can find any number of crises in America: health care, obesity epidemic, diabetes, savings, college funding, debt--public and private, energy gluttony, education, on and on. The traditional Democratic response is to shower money on the problems, New Deal-like.
On a public perception level, the GOP sees itself as the counterweight to a Democratic approach to governance, as it must appear to be different. Yet their recent track record is one of regulatory abandonment, unnecessary foreign interventions, and overspending. In the last throes of his campaign, McCain is striving to distance himself from years of Bush-led fiscal promiscuity.
The notion of anyone in Washington changing the system is ludicrous, yet Barack Obama has positioned himself to be the source of change in the universe. With the credit crisis as a backdrop, of course change will sound good. Still, Barack's fixation on the bailout shows that the momentum in Washington is against changing the size of government. The knee-jerk response is to flood the private sector with more money, despite the ugly truth that the bailout money is apparently being hoarded by the banks, set aside to cover losses and unforeseen expenses.
Foreclosures continue. Government can't mandate that the banks lend or keep them from getting paid by delinquent borrowers (though it's attempted to slow foreclosures.) But as the ownership stakes in banks increase as specified in the bailout plan, more and more red tape and bureaucratic bloat will enter the banking industry. Banks will have to follow even more federal regulations, and will be less efficient at lending, though do it in a more politically correct way.
Now if nationalization of the banking system is the only way to protect it, then I'm all for it. But nationalization will end up making the banking system less efficient. The costs of running banks will explode, as government-run entities typically do a horrible job on trimming expenses. Instead, government-run entities thrive off inefficiency.
Am I sounding like Ayn Rand? Well I hope so. If the so-called conservatives were really doing their job, they would have accepted the need for regulatory reform on a preemptive basis, before the reaction was needed.
I will pose the thesis that the Republicans have been lead by fakes, social conservatives. Social conservatism is about stealing the libertarians' best stuff while abandoning the accompanying pain and effort of real change.
The social conservatives' inability to run government well--no surprise considering the contempt with which they hold it--may well usher in a new era of massive federal programs. In allowing "anything goes," this laissez faire approach may have seeded a New Deal here in the 21st century by overextending, then crushing, the financial markets.
Rather than cut spending, the so-called conservatives expanded it. Instead of paying for kids' health care, they've doubled the Pentagon's budget. Instead of controlling the banks and futures market, with a good deal of help from the Democrats, they let them degenerate, chanting some mantra about how all regulation is bad. Meanwhile levees sink, bridges collapse, and roads crumble, more casualties to an either/or set of budgetary decisions which put military spending and low taxes first.
The corporate media was content to let the Republicans pretend to be whoever they wanted to be. This Peter Pan-like world fit well into the dreamy state of affairs after 9/11. Americans were clearly led to believe they would be safer by bombing some random Muslim nation. Without knowing who really did 9/11, the American people were content to get their revenge on someone, never mind whether or not we had the evidence that the targets of our wrath actually did it.
Ultranationalism clearly blinded this nation. Americans grew to believe the Bush could lead them through the crisis. Instead we've traded crises, national security for economic. Maybe we now have both. And the next poor President will have to try and correct the mistakes of his predecessor.
The biggest problems in our near future will be fiscal. The next President will have dramatically less tax revenue flowing in, plus the added burden of interest payments on all the trillions that Bush borrowed. Add in the cost of a bailout that's already over $1 trillion, and you have a President who maybe can't do too much at all to help this nation.
Could this entire crisis be a debt bomb that went off to soon? With all that toxic debt out there, no one really disputes that this credit crisis would not have ever occurred. It was simply a question of when it all hit.
Had things not gotten so bad until after the election, then McCain would have been more likely to win. Obama is up in the polls largely because of economic issues. The economy has become the issue of the campaign simply because self-security trumps national security. Even the most ardent Bush/war supporters will admit that we can't have a strong defense without a strong economy.
Even if you stand beneath he expanding shadow of the National Security State, thankful for its shade from the imploding economy, you must still admit that our private economy must take precedence. Someone has to pay the taxes and actually make things. Without economic growth, there's no way to fuel the State, which exists like a parasite on the back of taxpayers. Trough-feeders need to be aware of how dependent the State is on the private sector--the hand that feeds them (although many corporations pay no taxes at all.)
The right to tax is the equivalent of Bond's "00" designation: the right to steal. The State makes nothing. It simply absorbs capital, resources, time, effort, and energy like some giant Black Hole. The more that it sucks in, the bigger it gets, the more demanding, and the more gluttonous. Unabated, it will increase until there's nothing left except the State, or its rejects, who will be left to fend for themselves in a YOYO (Your On Your Own) world.
The so-called conservatives have failed to stop the growth of the State. The Democrats have become too much a part of the Washington consensus to seek change from inside the system. While a message of change might be a successful rhetorical play, we will see in the near future what Obama is really about, and just what change he's really talking about.
We may be headed back to an era of big spending, although the size of the existing debt may limit this approach to governing, traditionally a Democratic bastion.
If the Conservatives meant to tie the hands of the Democrats, they've succeeded in bankrupting the Treasury. This will stall but not stop the Democratic spending spree which will soon begin. The Democrats can continue to borrow, but they are also likely to up taxes. Eat the rich, I say, as they've had an easy ride under Bush and need to pay their fair share.