Redistribution: From Joe the Plumber to Robert Rubin
Okay, as we all now know, almost everything about Joe the Plumber is a lie. He doesn't own a plumbing business and apparently is not even licensed as a plumber, but he does raise a legitimate concern about "spreading the wealth around." The only problem is that in this country, when the government spreads the wealth around it usually means redistributing it upward.
That is certainly the case with the hundreds of billions of dollars being used to bail out the banks. The public has a real interest in keeping the banking system functioning. It has zero interest in subsidized the pay checks of wealthy bank executives or enriching the bank's shareholders, which Secretary Paulson is now doing.
There is no question about what is going on here. The public is providing massive subsidies to the country's major banks. The terms of the bailout were far more generous than what the banks could get from the private market. As a result, banks that might not have survived otherwise, or at least would have been forced to make serious cutbacks, can now keep operating as they had been.
This means that their high level executives will continue to draw salaries in the millions or tens of millions of dollars. It also means that the shareholders will continue to receive dividends.
This was not inevitable. Paulson could have imposed serious pay caps on executive compensation. In Germany, the banks that are getting government money can't pay their executives more than 500,000 euros, about $680,000. The United Kingdom also limited executive compensation as part of its bailout.
In addition, the banks in the UK are prohibited from paying dividends as long as they have public capital. This makes sense not only as a punitive measure, but it will also help them to build up the capital they need to stay in business.
It has sometimes been argued that the healthy banks would not take part in a bailout under such conditions. Let's see.
Suppose we apply the compensation limits/no dividend bailout rules, and then give everyone the option to opt in or out. Those taking the opt-out route will not benefit from the government's extension of deposit insurance nor will they be able to count on access to the Fed's discount window. My bet is that no banks go this route, but if any do, there will be plenty of investors happy to short their stock, assuming the government allows it.
But, Paulson went the bank welfare route. Joe the Plumber and everyone else should be very upset about this method spreading around the wealth. The top executives at the big banks will be getting the equivalent of several thousand years of TANF checks for a mother with two kids. And, unlike the mother receiving a TANF check, the bank honchos inflicted serious damage on the economy.
The big question is, which candidate is opposed to this sort of spreading around the wealth?
Polls Show Obama May Actually Benefit from the ‘BREADLEY Effect’
http://satiricalpolitical.com/?p=3945
October 20, 2008 9:04 AM | Reply | Permalink
The only problem is that in this country, when the government spreads the wealth around it usually means redistributing it upward
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Precisely!!
Why isn't anyone making this argument?? How come the middle class is made to feel like they are getting 'handouts' or 'welfare' and it is socialism? But when the airlines, banks, and auto & housing industries receive taxpaper subsidies it is a 'bailout' or 'rescue'?
What makes it capitalism when tax dollars trickle up but socialism when tax dollars trickle down?
I have been waiting in vain for someone to counter this utter nonsense.
Especially as it applies to home mortgages, credit and healthcare?
It just seems to me that the only time it is OK to use tax dollars en masse is to 'further capitalism' which is relying on the socialism taxdollars of the American tax payer.
This is complete hogwash.
Let's share the wealth with the middle class who actually PAID for the wealth that they will be receiving and who have GENEROUSLY bailout all those capitalists and titans of industries that need our money to remain 'competitive' in the 'capital markets'!
Give. Me. a. Break
October 20, 2008 9:52 AM | Reply | Permalink
Will any of this be reversible by a sane future administration? (Obviously if the banks need more bailouts, yep.)
But I think Dean is being a little hyperbolic on a couple of points: First, we do need at least a little bit of a functioning banking system to allow commerce to keep going -- businesses need some source of credit, and transactions have to be cleared by somebody. We just don't need a system where the tail wags the dog, i.e. the volume of secondary, tertiary and so forth transactions outruns the volume of real business being done. Second, if banks really had to cut back, the top managers would still draw their salaries. We've already seen that: tens of thousands of lower-level workers laid off in the financial industry, but the billion-dollar bonus pools must remain intact.
October 20, 2008 9:53 AM | Reply | Permalink
Obama has justified his ill-considered vote for the bailout of the rich by saying he demanded and got placed in the bill provisions that "guarantee" that executives who drove their businesses into the ground would not be rewarded. Obviously, this guarantee is no good. But when will anyone either in the blogoshpere or in the corporate media point this out? Obama isn't going to upset the apple cart of the corporaions that have backed him all the way. Don't forget, he has received far and away the most money from the crooks and con men of Wall Street from day one.
Of course, I'll be voting for Obama (he's the better choice, but what choice is there really?) but I think people are fooling themselves if they think they are getting a new FDR in this guy. They're not. And it's too damn bad because that is what we need. Unfortunately, Obama, while better than a Republican, is only marginally better than the Republicans on this issue. That does not bode well for the little people of America.
October 20, 2008 9:57 AM | Reply | Permalink
Apropos to Dean's post I just saw this article that is up at the Guardian's website detailing how execs at Wall Street firms such as Goldman Sachs are in line to receive $70,000,000.00 in bonuses.
http://www.guardian.co.uk/business/2008/oct/17/executivesalaries-banking
Some "guarantee" Obama and the Democrats got inlcuded in he bailout huh?
October 20, 2008 10:03 AM | Reply | Permalink
My bad!
It isn't $70,000,000.00 the executives are getting: it's $70,000,000,000.00!!!!!!!
I sure am glad the Democrat in Congress "protected" and took care of Main Street in the Wall Street Bailout Bill. Aren't you?
October 20, 2008 10:06 AM | Reply | Permalink
The public is providing massive subsidies to the country's major banks. Dean Baker
Well, it's not like the banks asked for these subsidies. They didn't need or want them. Had it not been their "patriotic duty" to take the money, they would have rejected this bailout root and branch.
October 20, 2008 10:10 AM | Reply | Permalink
Are you sure all of the banks didn't want the bailout? Are you sure that the ultimatum wasn't given to all to save one or two of those banks that really were in bad shape who didn't want that to be exposed? This is not my area of expertise, but I wonder...
October 20, 2008 12:14 PM | Reply | Permalink
"You might very well think that, but of course, I couldn't possibly comment." Francis Urquhart
October 20, 2008 12:27 PM | Reply | Permalink
Gotcha. More government by a not-so-clever Kakistocracy.
October 20, 2008 1:31 PM | Reply | Permalink
I agree with Joe the Plumber and the rest of the "regular" folks out there in GOPland. I'm tired of seeing the wealth spread around.
I'm tired of seeing federal tax dollars going from my Blue, elitist, high-income, high literacy state to Red states in the South. Why should MY wealth be spread to states that refuse to take care of their own residents?
Stop spreading the wealth!
October 20, 2008 11:01 AM | Reply | Permalink
Henry Paulson's Blunder
The financial crisis the world is currently experiencing was exacerbated by a single event - the collapse of Lehman Brothers. By allowing this to happen, Paulson caused chaos in the world markets creating the necessity for billions of dollars of tax payers money to be pumped into banks and financial markets.
Henry Paulson will be remembered for this single largest blunder of his life. Had he acted swiftly and not decided to let Lehman collapse, the inter-bank lending freeze that followed could have been averted. For fear of total loss, banks around the world stopped lending money to each other and that halted the entire financial system.
Banks and financial institutions suffering from sub-prime crisis would still have needed capital, but the extent and urgency to act virtually overnight would not have been there. Governments around the world are now risking trillions of dollars of tax payers money.
Henry Paulson was probably a good CEO of Goldman Sachs under the system that has since collapsed and is discredited. But for him to manage the $700 billion bailout with a handful of his former Goldman colleagues is a serious conflict of interest. These funds should be managed by an independent agency comprised of people with no vested interests.
I still believe that Bush Administration should have availed the services of Mr. Warren Buffet to manage the bailout and he probably would have even made some money for the taxpayers. Some may say that Mr. Buffett too has vested interest as he invested in Goldman's recently. I believe that is small change for Mr. Buffett and he is above all this anyway.
October 20, 2008 2:05 PM | Reply | Permalink
For fear of total loss, banks around the world stopped lending money to each other and that halted the entire financial system.
Yup. That's the conventional story -- wrong of course but there it is.
October 20, 2008 2:11 PM | Reply | Permalink
Agree on the Lehman Bros. comment. It certainly wasn't going to cost $700BN to bailout Lehman and a Lehman bailout would have stemmed the run on Financial stocks that further hampered liquidity.
October 20, 2008 4:45 PM | Reply | Permalink
There are signs that this iceberg is beginning to break up. There is a new report that house sales in Southern California are beginning to "surge" (the reprter's word). I spoke with an acquaintence a few minutes ago who is in Florida bidding on condominiums being auctioned. He said the market there has hit bottom, or close. I think the music is going to play one more round. I am going to be cautious though, cause there ain't many chairs left.
October 20, 2008 4:33 PM | Reply | Permalink
So, can we finally talk about fixing the housing crisis which is the root of the problem, instead of waiting for the "market to take care of it?"
We seem to agree that the bank subsidy was too expensive and perhaps even superfluous. So why can't we see that subsidizing the house payments of people who paid too much for houses during the bubble would be far more appropriate? If you want to spread the wealth in the right direction, a house payment subsidy/neighborhood stabilization program at least does that.
(I am against totally refinancing mortgages because of the extra paperwork and cost, and think we should subsidize existing mortgages until the market stabilizes.)
October 20, 2008 5:02 PM | Reply | Permalink
This convert mortgagors-to-tenants plan (but first, go to Nocera's business page column, below) seems to be similar to Dean Baker's rent-to-buy idea of earlier this year.
But unlike Baker's plan* it has made its way to The Times business page and to Joe Nocera's blog.
* It's not what you know; it's not even who you know; it's whether you're fortunate enough not to live in a benighted town whose excuse for a leading newspaper is the Washington Post.
October 21, 2008 5:49 AM | Reply | Permalink
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October 21, 2008 12:44 PM | Reply | Permalink