Paulson and Bernanke Spread the Wealth Around

During the campaign, then-Senator Obama provoked a media flurry and right-wing outrage over his comment to Joe the Plumber about "spreading the wealth around." They told us that this view was contrary to the American Way, that this was socialism.

Given all the concern over Obama's ideas about spreading the wealth, it is remarkable how little attention is being given to Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke's much more ambitious effort to spread the wealth. They are putting in practice measures that swamp any plans put forward by Obama in the presidential campaign, yet this massive government redistribution of wealth is drawing almost no attention whatsoever.

The basic story is that the Treasury and Fed together now control several trillion dollars of bailout funds. This money is being used with almost no accountability, especially with the Fed's portion of the bailout, which is by far the bulk of the funds.

Fortunes will be made or lost depending on how this bailout money is used. For example, Secretary Paulson just agreed to lend another $20 billion of the Treasury's bailout money to Citigroup.

In addition, the Federal Reserve Board agreed to guarantee up to $300 billion of presumably bad assets. This is an enormously valuable guarantee. If Citigroup had to arrange a comparable guarantee in the private market, it would almost certainly pay more than $30 billion a year.

This decision sent Citigroup's stock soaring. In the week since the bailout was announced, Citigroup's stock more than doubled, adding more than $25 billion to the company's capitalization. (The government could have bought the bank outright with the money it lent to Citi.) This is great news for Citigroup's shareholders, who would be holding almost worthless stock if Mr. Paulson had not been so generous.

Paulson's decision was also good news for Robert Rubin and other top executives at Citigroup. If the government had not stepped in, Citigroup would almost certainly be in bankruptcy and most of its highly paid executives would likely be out on the street.

Creditors of Citigroup also benefited. If Citigroup went into bankruptcy, their loans would be frozen for a period of time while the court determined what percentage of Citi's debts could be paid. At the end of this process, many creditors would only receive back a fraction of what they are owed.

The fact that money is being redistributed doesn't make it wrong to bail out Citigroup or any of the other companies now being aided by the various Fed and Treasury funds. We need to keep the financial system functioning. However, there is every reason in the world to be concerned about the extent to which these policies may be enriching the wealthy and well-connected at the expense of the rest of us.

In the case of the Citi rescue, there was no obvious reason why the shareholders should not be wiped out. They understood (or should have) that when they bought shares of the company that they could lose their whole investment if the company was poorly managed and went bankrupt. Similarly, there is no obvious reason that the management that wrecked Citi should not be thrown out and replaced with a more competent and lower paid team.

Even among creditors there are serious grounds for concern. Many holders of Citi debt may have dumped their bonds for a small fraction of their face value because they did not know a bailout was imminent. On the other hand, those with more insight into the operations of the Fed and Treasury could have made enormous fortunes buying up debt, or shares of stock, at discount prices.

Of course, Citi is just a small portion of the bailout story, but the same issues arise everywhere. Corporations that would be out of business if the market was left alone, are instead kept operating courtesy of the taxpayers' dollars. Due to the secrecy surrounding the bailout, the taxpayers can't even know whose vacation homes and private jets they've saved. (How can we know if we should expect a thank you note?)

While we may not know the details, we can be fairly certain that many people are making millions, and some might be making hundreds of millions or even billions of dollars, as a result of the Fed and Treasury's bailouts. Money is being redistributed to those who are skillful in anticipating Fed and Treasury actions, or alternatively who are politically connected, or perhaps just lucky.

In other words, we are spreading the wealth around in a really big way right now, and most of it seems to be going upward. The amount at stake in the tax increases that President-elect Obama plans to put in place is almost certainly less than $50 billion a year. The money that is being redistributed upwards through this bailout may be twenty times as much.

The politicians and media types who were upset about Senator Obama's interference in the market should be yelling bloody murder about the bailout. Their silence shows that they care nothing about the market; they only care about ensuring that money flows upward. They are fine with "spreading the wealth around" as long as it lands with those already at the top.