Bobswern has a great summary and crosspost up about some of the most recent developments and exploration of the ongoing saga of what happens when massive transfers of wealth are steeped in secrecy. Even when the underlying policies are sound, a lack of transparency in and of itself creates problems. When the underlying acts are themselves part of the problem, the potential exists for massive fallout, pushback, blowback, or whatever term you prefer.
What I intend to do is spend a few minutes discussing this without being as numerical or jargony as someone whose day job is to be an attorney or judge or securities trader or investment banker or Fed official. I won’t mention CDOs or accounting practices or calculating fair market value or the Maiden Lane Trilogy. Here I presuppose one very important belief:
a functioning democracy benefits from experts, technocrats, who can provide guidance and assistance, but all of us as citizens are ultimately responsible for the policies our nation pursues.
One of the core challenges trying to communicate information that powerful people do not want communicated is the double bind you will find yourself in rhetorically. On the one hand, broad statements that are clearly understood in plain English will be dismissed as incomplete, or specious, or speculative, or not understanding of the full complexity of the issue. If you don’t have a PhD, if you haven’t worked in the industry for 20 years, if you’re not a senior official…then you can’t possibly understand what’s going on; don’t worry your pretty little head about it, the experts are in charge. On the other hand, when specific, detailed commentary is offered to refute this assertion, those wishing to perpetuate secrecy know that the details simply go over the heads of most people. Not due to a lack of intelligence, but rather, due to a basic constraint upon time. We cannot all be experts in all fields. So, the detailed evidence is simply ignored in favor of personal attacks. One of the most effective silencing methods recently has been the notion that those of us agitating for transparency are somehow undermining Congressional Democrats, hurting the Administration. It’s baloney, but most of us humans have a great capacity for empathy and for attributing good faith to intentions even long past the point where good faith is warranted. In a very real sense, taking advantage of our sense of fair play is one of the prime methods of carrying out policies that really are not in the public interest.
This approach has worked very well through the AIG story in paticular, and the larger bailout efforts more generally. The perpetrators on Wall Street, at the Fed, from the Bush Administration, the Obama Administration, and Congress are actively trying to keep journalists and average citizens from knowing what has happened. There are different reasons for the obfuscation among the parties, but they are united by a common theme: they all know that what they have done, or failed to do, goes against the wishes and interests of the American people.
So let’s get to the story. The over-simplied context is that the Reagan-Bush era saw a steady effort to transfer wealth upwards. This approach was very successful, at least for a generation or so. However, at some point there’s a negative feedback loop that kicks in, where too much wage stagnation, too much deregulation of large businesses, too much corporate influence over the political process, too much loose monetary policy, too much misdirected spending, leads to hurting those even at the very top. Economists have a term for this, it is called marginal propensity to consume. It means how much of your marginal income, that last dollar you receive, you are likely to spend. As income goes up, this propensity goes down. So as more and more wealth gets concentrated, more and more of it just gets hoarded sitting around not doing anything productive. Eventually this lack of productive investment trickles upward, harming even the richest Americans. Wages are needed to buy goods that companies sell. Wages are needed to service debt on auto loans, student loans, credit cards, and mortgages.
Ultimately, assets are only worth what somebody else can afford to pay for them.
As bets were made on housing and stocks and cars and corporate mergers and currencies and so forth, ultimately wages couldn’t service the debt. People started defaulting in massive numbers. And not just ‘real’ people. ‘Corporate’ people started going bankrupt in greater numbers, too. Fortunately, we have excellent processes in our system to handle bankruptcies. We have full time professional attorneys and judges and accountants and so forth who specialize in bankruptcy proceedings.
However, not everybody likes going broke. It’s a little embarrassing to have on your resume ‘mismanaged company into bankruptcy’. Some people would, naturally, prefer that other people pay for their losses instead. Now for us regular folks, we’re on our own. But if you’re well connected, you can get ‘bailed out’, ie, have We the People pay for your mistakes. This is what we call privatized gains, socialized losses. There were bailouts in the 1980s and 1990s, but it wasn’t until the 2000s that these became large enough in size and scope so as to become significant political issues.
Due to the massive size of the collapse of the housing and stock markets around 2006 and 2007, the bailouts simply couldn’t be hidden. The major financial services companies and real estate interests didn’t just need a few billion dollars to keep the status quo going. They were going to need trillions of dollars, and the support needed to last several years, if they were going to pull this off. This was going to require massive cooperation among the Federal Reserve, Treasury, FDIC, and HUD. As early as 2007, the Fed was taking unprecedented ‘emergency’ actions (even while publicly claiming that ‘things are contained’, that it won’t be a big problem). By 2008, the actions had reached even greater scale. These actors were now intimately involved in picking specific winners and losers. This is crony capitalism at its finest.
It culminated in one particular insurance company, AIG. AIG’s leadership could refuse offers for private infusions of capital because they were placing their bets on a taxpayer rescue, specifically, the Federal Reserve Bank of New York. Through the fall of 2008, the FRBNY did just that, providing capital at sweetheart terms no private person would offer. But the Fed couldn’t act solely on its own. At the same time, Treasury and HUD were pushing Congress to allocate all sorts of legislative support, the two most famous of which were the Emergency Economic Stabilization Act of 2008 (EESA) which created the Troubled Asset Relief Program (TARP) and the Housing and Economic Recovery Act of 2008 (HERA), which, among other things, provided bailouts for Freddie and Fannie (which were expanded Christmas Eve of this past year), moved around the regulatory staff (which was used this past year to prevent the Inspector General from being an Inspector General), and provided additional taxpayer support to the real estate industry.
At this juncture, Democrats had two political strategies available. We could cooperate with what were, until here, largely Republican failures, or we could jump on board with their proposals and take ownership of the issues. This is the key strategic failure of Democrats in our time. It was a Democratic Congress that signed off on EESA and HERA. It was a Democratic Administration who appointed key officials from the Bush years like Gates (Defense), Geithner (Treasury), and Bernanke (Fed Chair), and more importantly, pursued and extended the secrecy surrounding all of this. Advisors like Rahm Emanuel and Larry Summers do not represent change. They represent the very wing of the party urging Democrats to do more and more favors for monied interests even if it hurts core Democratic constituents like minorities, women, unions, the poor, and the young.
To this day, our government is fighting Freedom of Information Act requests that Bloomberg news has been filing regarding the decision-making surrounding AIG. To this day, senior Democrats have for some unexplained reason decided that their preferred strategy is secrecy over transparency. They would prefer to have the same officials, in Washington and on Wall Street, in power today who created and/or overlooked the very crisis we are experiencing rather than replacing them with new people.
I don’t know why this is. I don’t know any powerful people who could give me an honest answer. But I do know one thing.
In plain English, the AIG payouts were theft.
The political question we are confronted with, actually, is pretty straight forward. It’s not complicated to understand. The choice we have is this: do we elect more and better Democrats by covering up for the people who failed over the past few years, most of whom are Republicans, or do we elect more and better Democrats by valuing transparency and accountability?
In case I’m not being clear, my vote is for the latter.
Crossposted at Daily Kos.