Capitalism doesn’t scale

By Michael Fraase

Sunday, 21 September 2008 09:17PM CST

Section: Sustainability

CapitalismThe largest wealth redistribution plan in US history—a plan to transfer massive amounts of wealth from the middle class to the super-rich and massive amounts of power to the executive branch—is apparently garnering bipartisan support in the US Congress. The Bush administration has proposed raising the national debt ceiling to US11.3 trillion and letting the Treasury Department purchase up to US$700 billion in “toxic” mortgage-related assets without oversight or regulation.

The only restriction placed on Treasury Secretary Henry Paulson would be semiannual reports to Congress. Any reforms, according to Paulson, should come after the financial system is stabilized. Here’s the key bit:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Should Paulson spend the entire US$700 billion, it amounts to more than US$2,000 for every American citizen, more than the Pentagon’s annual budget, and about the equivalent as the direct costs of the Iraq occupation. And it appears to be a revolving credit line.

Representative Barney Frank (D-Massachusetts) told the New York Times of interest in limiting the compensation of executives of firms seeking aid under the plan: “There are going to be federal tax dollars buying up some of the bad paper. They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it’s ‘heads I win, tails I break even.’” The Bush administration has been adamant that any compensation restrictions are off the table.

As for not regulating executive compensation, consider the following:

CEO greed

Meanwhile, American productivity is up but the average incomes of working people are down. Harvard law professor Elizabeth Warren, who has been studying the underlying issues for more than 30 years told Jackie Crosbie of the Star Tribune, “The largest and most necessary household expenses have shot up by US$4,655 since 2000. Meanwhile household income has fallen by US$1,175.

But back to executive compensation. In 1980, according to a Pew Charitable Trust study, executives earned 42 times as much as the average worker. Today, executives make 400 times more than the average worker. Meanwhile, an existing single-family home became 60% more expensive.

What’s required, before any of this even starts is transparency. We need to know just who the American citizenry bailed out when we bought an 80% stake in American International Group (AIG) to the tune of an US$85 billion loan. As Gretchen Morgenson writes in the New York Times, AIG wrote US$441 billion in credit insurance. Who, exactly, bought this insurance? Because that’s who we really bailed out. We deserve to know. Turns out that AIG’s financial statements indicate it was European banks. Morgenson articulates the absurdity: “Billions in unregulated derivatives that were about to take down the insurance company that sold them were bought by banks to get around their regulatory capital requirements intended to rein in risk.”

Who’s to say this isn’t a last flailing gasp attempt by the free-marketeers to bluff the American populace into covering their losses. What would happen if we called the bluff? Global economic collapse? I don’t buy it.

It seems to me that ordinary citizens would take a significant hit in their investment and retirement accounts. That’s life. If you didn’t want risk you should have stayed out of the market. You gambled and you lost. So sorry. Consider it a lesson learned.

Speculators would take a bath. Gosh, that’s a big positive from where I sit.

Credit would also dry up. Would that be such a bad thing? As a culture, we’ve been living on borrowed money for more than a decade. The bill just came due. But the economy can’t grow without credit, you say. Well guess what—businesses are going to have to fund growth through profits instead of credit. Maybe—just maybe—that’s a good thing. A steady-state economy would be a tremendously good thing. It allows us to gather our collective wits about ourselves and decide—together—what to do next. Capitalism—at least unregulated capitalism—simply doesn’t scale.

But of course some form of this proposal will be implemented. These should be a start of the citizenry’s non-negotiable conditions:

  1. The Treasury Secretary reports monthly subject to Congressional and judicial review and supervision.
  2. The populace takes an equity stake in every company that sells its “toxic” assets to the government. The stake is proportional to the amount of “toxic” assets offloaded.
  3. Executive compensation restraints. No more than 20 times the lowest paid worker or contractor seems like a good start. Got minimum-wage workers? That puts your hourly rate at US$117 or about US$243,000 per year. Want more? Pay your workers more. Oh, and there’s a 5-10 year lookback for any company that participates in the bailout.
  4. Appropriate regulations are immediately implemented regarding transparency, conflicts of interest, and capital requirements. The guiding principle is to eliminate privatized profit and socialized risk.
  5. The price for each foreclosed property—residential or commercial—is set by the local tax assessor. That’s the amount that’s paid for the associated “toxic” asset. Until the properties can be assessed, all foreclosures on homesteads are on hold.
  6. Consumer bankruptcy laws immediately revert to their pre-Bush administration state. Bankruptcy judges are allowed to modify the terms of first mortgages on homestead properties.
  7. Immediate, retroactive tax surcharge (with a 5-10 year lookback) on the incomes/assets of the wealthiest citizens. See 21 September Firedoglake update, below. Not sure what the cutoff should be: how about US$250,000 annual income and/or US$5 million in assets.
  8. No counter-balancing conditions allowed. The core idea is those who benefitted under this scheme pay for the bailout.

Take it or leave it.

Update: Sunday, 21 September 2008 09:37PM CDT: Firedoglake has another condition that I’m embarrassed to say evaded me: The imposition of a tax surcharge on the incomes of the wealthiest Americans—those who benefited most from this charade—to pay the bailout’s cost.

Update: Monday, 22 September 2008 06:15AM CDT: Refined and amplified non-negotiable conditions.

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