Only Rats Get Fat as Misdirected Bailout and Stimulus Funds go Down the Rat Hole

Congress should do now what it should have done back in the fall: kill the Wall Street bailout program.

After wasting $350 billion on a program that was misrepresented
from the outset, and investing hundreds of billions of dollars in
failing financial institutions that it could have bought outright for
less than it was investing in them (AIG was worth only a few billion
dollars in total at the time that the government bailed the company out
with an initial investment of $85 billion and Citicorp today is worth
less than the $45 billion the government has invested in that failing
firm), the Treasury Department, now acting at the direction not of the
Bush administration and outgoing Treasurer Hank Paulson, but the Obama
administration, is asking for the other half of the Troubled Assets
Relief Fund (TARP).

Aside from the corrupt aspect of this $700-billion boondoggle-the
handing over of borrowed taxpayer money to the very bankers and
investors who created the mess we're in today-the whole TARP program is
premised on a false assumption: namely that the US economy's problem is
a freeze in bank lending.

This is simply untrue.

Three economists at the Minneapolis Fed, in an article published on the Minneapolis Federal Reserve's website,
show using the Fed's own data that at the very point in September that
Paulson and Fed Chairman Ben Bernanke were warning Congressional
leaders in a secret session that the bank lending had entirely seized
up and that US was "days away" from a meltdown that would lead to riots
in the streets and the possible need to impose martial law, in fact
interbank lending was at record levels, and that commercial lending was
also flowing normally. True, long-term bond interest rates were
unusually (though not unprecedentedly) high, but then, that's what you
would expect when the treasury is borrowing enormous sums and lowering
interest rates, and thus raising inflation expectations long term.

The real point of the damning report by the Minneapolis Fed's
plucky trio of economists, is that banks aren't lending not because
they don't have enough capital, but because for the first time in a
decade, bankers are being prudent the way banks are supposed to be.
They are looking at companies seeking loans and saying, "show me your
balance sheet and your order book." Companies that are in trouble
financially, or that are seeing their sales plummet are being rightly
turned away, but companies with solid balance sheets and sales are able
to borrow what they need.

The other point is that contrary to the claims being made by both
Bush and Obama economic teams about the allegedly urgent importance of
the keeping credit flowing so that, as Paulson put it, companies will
be able to meet payroll and so that they won't start laying off
employees, what is needed is not looser or cheaper credit but programs
to protect the incomes of millions of workers who are losing their
jobs. (Unemployment, officially now at 7.2 percent, would actually be
closer to 17 percent using the more honest methodology in use prior to
1980, before the Reagan administration altered it to hide the impact of
the recession of the early '80s.)

The record shows that even as the government has blown $350 billion
on a Wall Street bailout, unemployment has soared, housing price
declines have accelerated, and retail sales have continued on a
six-month death march into the ground. While administration touts are
claiming that if there had been no bailout, things would be worse,
there is no evidence to support this claim. Things are terrible as it
is-in fact the economic collapse is being called the worst since the
onset of the Great Depression of the 1930s. How the hell much worse
could it have been?

Which brings us back to the current Obama administration demand for the other $350 billion in TARP funds.

It seems clear that what the country is facing is not a unique
credit freeze, but rather a classic recession (or depression), in which
spiraling industry layoffs of workers is leading to a collapse in
spending, which in turn leads to a further slowdown in business and
more layoffs. Because the social safety net in America has been
systematically shredded, with unemployment benefits only covering a
minority of laid-off workers, and then only for a short period and at
only a small fraction of their prior wages, the rise in unemployment is
crippling the economy. Being laid off in America is an unmitigated
disaster: no health care, no income, and a nightmare struggle even to
obtain food stamps. (People with homes and savings can be screwed out
of assistance because they have too many assets, for example.)

Nor is the other Obama rescue measure-the proposed $800-billion
so-called "stimulus" package--adequately addressing the problem.
Focusing on tax breaks (especially tax breaks for business) and on
large infrastructure projects, is once again wasting precious stimulus
resources. In the case of tax cuts, studies have repeatedly shown that
business tax cuts do nothing to stimulate business activity but rather
just enrich managers and shareholders, while tax cuts to consumers do
not even return a dollar-for-dollar stimulus. Meanwhile, investing in
infrastructure projects only provides incomes to relatively skilled
heavy equipment operators these days, not to the broad masses of people
who need help. Moreover, because the pool of workers trained to work on
such projects is limited, all boosting that spending does is push up
wages in that sector. (Besides, the last thing America needs is more
and better roads; it needs a wholly revitalized and expanded mass
transit system, inter- and intra-city, and that's getting short shrift
in this proposal.)

A stimulus package that works would expand welfare and food stamp
benefits for the chronically unemployed, would boost funding for
education-K through college--would provide grants to states and local
governments to compensate for declining tax bases, with stipulations
that the money be used to hire more teachers, more teachers' aides,
more librarians, more trash collectors, etc., not just lower taxes. It
would expand unemployment insurance coverage to all workers and extend
those payments for the duration of the recession while raising the
payments to provide a real subsistence wage. It would fund government
run programs to hire the unemployed, creating jobs that meet the
skill-set of the unemployed. The excellent CETA program, part of the
grotesquely maligned War on Poverty of the late 1960s, would be a good
model for this.

Meanwhile, of course, since we're talking about big bucks here, the
new administration should be looking to the future and figuring out how
to get the budget deficit back in check. And there, a first target has
to be the military, now chewing through well over $1 trillion a year,
most of it wasted and wrongheaded. For starters, the war in Iraq should
be ended. Period. Ditto for Afghanistan-a doomed venture. Then too, the
800 overseas military bases should be closed down, along with the
nation's nuclear missile and bomb program (okay, as long as China,
Russia, France, the UK, Israel, India, Pakistan and a few other
countries have the bomb, we could keep a few nukes for negotiating
purposes, pending a global nuclear disarmament agreement, which should
be a top priority). The truth is, the US military budget could be cut
in half or even more, without anyone really noticing. The US would be
the stronger for it, not weaker or more vulnerable. Even at half
strength, no potential enemy would want to threaten the US. (In fact,
arguably, a US that had pulled back from its current global stance
would be far more formidable an opponent if directly threatened.)

We are facing a grave economic crisis, but the boneheads in the
Bush and Obama economic teams are either clueless, or are too busy
protecting their friends on Wall Street (or in New York Fed Chief and
Treasury Secretary nominee Timothy Geithner's case, too busy figuring
out ways to cheat on his taxes), to either know or care.

Only mass public action will set this right. Hopefully, the public
is getting scared enough now to pry their eyes away from the tube and
start demanding that it be done, before another trillion dollars is
thrown down a rat hole.