Friday, 17 April 2009

On Crises, Bailouts, and Prosperity

In order to understand what is meant when élites speak of a “crisis”, the rational observer will naturally ask a few basic questions. A first enquiry would concern the situation before the current crisis: what was happening in society before the crisis was declared? By examining the status quo ante, we can gain valuable insight into what does and does not constitute a “crisis” in the minds of ruling élites. Another, related, question concerns the measures proposed and taken by government to respond to the crisis: what is done directly, and what is done indirectly? What is guaranteed, and what is left to chance? It seems entirely reasonable to assume that those things considered by a person or institution to be of crucial importance are the ones least likely to be treated as a hoped-for byproduct of that person’s or institution’s actions. One does not generally leave one’s true priorities up to chance. Further, it is instructive to ask who the principal beneficiaries of the measures taken are, and at whose expense they are taken. The fact that these questions are at best peripheral to the public debate, if they are asked at all, is instructive in and of itself.

The “Non-Crisis”

The years preceding the current crisis were characterised by two key features: increasing poverty, unemployment, and underemployment with stagnating or declining real wages, and sharp cuts in social benefits on the one side, and ever-increasing record profits and massive concentration of wealth on the other. Over 30 million Americans suffered from hunger, 12 million children were so undernourished as to severely impair their physical and mental development, 49 million Americans lacked health insurance coverage, those who did have insurance could only be sure that their “insurers” would spare no expense to deny them necessary treatment, while ever more Americans were forced to depend on various forms of predatory lending to survive. Meanwhile, corporations such as AIG benefited from the dismantlement of the regulatory framework in the form of steadily increasing profits. Economists estimate that between 1980 and 2005, approximately 20 trillion dollars were redistributed upward to the top 10% of the population by income.

This, it bears repeating, was not a “crisis”. This is what was called “prosperity”.

The “crisis” did not begin until the speculation bubble, built as it was on poorly understood, “exotic financial instruments” backed by virtually nothing, predictably popped, causing “record losses” for those who had been celebrating “record profits” for over a decade earlier.

Crisis Management

Based on the above analysis of what is and is not a “crisis” for policymakers, it is not hard to predict the official response to the current crisis. Indeed, the engineers of the crisis (including some, such as Lawrence Summers, Robert Rubin, Henry Paulson, and Timothy Geithner, who went on to become the US government's crisis managers-in-chief) were so certain of the governmental response – which has been repeated many times over the past several decades – that they took risks that would otherwise have been suicidal.

Given that the “crisis” lies not in the impoverishment of the population but in the entirely predictable consequences for the financial sector of its irresponsible (and highly profitable) conduct, the response to the crisis should come as no surprise. The immediate response has, predictably, been to pump trillions of dollars, with no conditions and no oversight, into the pockets of those largely responsible for the crisis. While the public justification for these infusions of cash has been the need to restart the flow of credit, there is no such requirement attached to the funds. While this measure has led to jubilation on the stock market, it has not – surprise, surprise – led to any significant increase in the availability of credit. While the recipients of the bailout funds have generally refused to account for their use – understandably, as they are not required to do so – it has become clear that they have generally found other places to spend their free tax money, ranging from bonuses, dividends, and mergers and acquisitions to lobbying efforts to defeat the Employee Free Choice Act, which, if passed, would be a first step toward restoring workers’ right to organise.

While one might be moved to ask how badly these companies could possibly be doing if they can afford to spend their public assistance on such things, the media and government have dedicated their energies to concentrating public attention and outrage on the executive bonuses, which make out a minuscule portion of the funds, while the Treasury Department woos investors with the offer to buy up “toxic assets” jointly with hedge funds, while guaranteeing government absorption of any losses incurred. The profitability of the speculative “investment” banks that caused the crisis, then, cannot be left up to chance.

Though the focus of the crisis management might suggest otherwise, the majority of the population has problems of its own, to which the financial sector has added rapidly increasing homelessness and unemployment. This is not to say that the problem has been entirely ignored in Washington, of course, where the Obama administration intends to spend up to $75 billion – less than half of what was paid out to AIG alone (so far!) – to help those of the millions of homeowners facing homelessness who the administration feels have bought their homes in a responsible fashion. Similarly, the administration is acting to protect US auto executives from early retirement by forcing auto industry workers – one of the few groups of workers to have even marginally effective union representation – to accept substantial cuts in pay and contribution-based health care and retirement benefits. It is, of course, only fair that those enjoying continued prosperity should make sacrifices to aid those in crisis.

The hierarchy of bailouts is telling. The speculators who are responsible for the crisis receive taxpayer funds unconditionally and without limitation. When the funds run out, as they tend to do rather quickly, they can always get more. The government protects them from the risks inherent in the highly profitable “toxic assets” they created. The only apparent criterion for receiving these funds is that recipients must be partially at fault for the crisis. When auto executives need assistance, the government is rather less forthcoming. The major auto companies must first submit a plan for the use of the government funds, and be accountable for their proper use. Of course, this is not too onerous a burden for the auto executives, as the “recovery plan” required imposes the bulk of the burdens on the auto workers (the only people whose pay and benefits have been cut as a result of this crisis). Though this is certainly not as good a deal as was offered to the principal architects of the crisis, it isn’t all that bad, either. All that is required is a plan for the future that imposes the burdens squarely on the workers.

For the millions of homeowners facing homelessness due to fraudulent loans offered by shady subsidiaries of “reputable” financial institutions, on the other hand, the situation is rather less rosy. In order to get a piece of the much smaller pie theoretically available to them, homeowners must prove – how is anyone’s guess – that they were not irresponsible in buying their homes. While it may seem a bit odd at first glance to impose such a condition on the main victims of the crisis and not on the architects of the crisis, it actually makes perfect sense: no financial institution or investment banker could possibly meet the burden imposed on homeowners by the Obama administration. If a homeowner facing foreclosure cannot satisfy the government that her past conduct was responsible, her only recourse is to find space in America’s growing tent cities. No plan for the future use of government funds is good enough.

As harsh as the administration’s treatment of soon-to-be-former homeowners is, the rest of the population can expect even less. At best, the Obama administration’s stimulus package will replace the underpaid, non-union, and generally shitty jobs they lost with new underpaid, non-union, generally shitty jobs. For those lucky enough to get one. As much as the Obama campaign talked about passing the Employee Free Choice Act, the Obama administration has been at pains to make it clear that EFCA is not currently on the agenda. This means that union organisation, one of the few effective ways in which workers can improve their wages and working conditions, will remain beyond the reach of most of the population. Similarly, the millions (insured and uninsured) nearing bankruptcy under the weight of health care expenses, can be sure that the one reform that they almost unanimously demand – single-payer health care – is, in the words of one Obama spokesperson, “off the table”. Nor, in our current era of “Billion? Trillion? Who’s counting anymore?” is the subject of student loan and consumer debt forgiveness, which would substantially increase the buying power of the average American and provide a powerful demand-based stimulus to the economy, even mentioned.

To put it in the language of our Orwellian times, then, most Americans will continue to experience unabated prosperity, undisturbed by government interference.

If we were to assume that the crisis consisted of something other than a mere predictable drop in profitability on the part of an industry that produces nothing but profits for itself, a completely different crisis management strategy would emerge. The first priority would be to ensure that no one loses their home or income, or has their utilities shut off, as a result of the conduct of unaccountable institutions that have been allowed to gain control of the economy. FDR did this in the 1930s simply by decreeing a moratorium on foreclosures, evictions, and utility shutoffs. The second priority would be to conduct a massive investigation into the activities that led to this mess, including mortgage-trail audits of all mortgages involved and a full-scale SEC audit of the institutions involved, steps that have thus far been assiduously avoided by the Bush and Obama administrations. Simultaneously, the state could acquire controlling shares in the relevant institutions and use those controlling shares to save the viable and useful segments of the institutions (if any), while letting the remainder go bankrupt (a tactic that would also neatly resolve the bonus issue). Once the situation has been stabilised, the viable portions of the banks could be broken down into small, manageable, locally accountable units, and regulations could be (re-)enacted to ensure that no financial institution ever becomes “too big to fail”.

It all depends on what one considers a crisis.