Last Monday, the secretary of the US Treasury launched a new version of his bailout plan for the American financial system. Global stock exchanges, unlike on other occasions, reacted with euphoria, even though this later evaporated. This plan, which constitutes an enormous robbery of the taxpayer and in particular the working class, is not assured of succes in resolving the issue of the insolvency of the American financial system. It’s failure would put in question much more than the rescue of the banks. The American population’s patient attitude has switched since the AIG affair. If the plan doesn’t work – a high possibility seeing that the banks suffer from a problem not of liquidity but of solvency – Obama’s political capital and the Congress’ momentum could be left exhausted and be replaced by more radical solutions.
How to Re-sell the Old Paulson Plan
Last October, the US Congress approved the Troubled Assets Relief Program (TARP) which was known by the name of the previous administrations secretary of the Treasury, Henry Paulson, in order to save the US financial system from collapse. In its moment we called this plan “the mother of all frauds”. Such was the revolt which it generated, in the context of the terminal weakness of the Bush government, that it could be implemented, with part of its funds being used for the recapitalization of various banking entites.
The plan presented this Monday by Timothy Geithner, current secretary of the Treasury, has a number of ammendements and additions, but in substance is almost identical to the old Paulson Plan, where the state buys the banks toxic assets. This reality, hwoever, is dressed up as a “Public-Private re-investment program in inherited assets”, as the new plan is called. But how can a scheme to finance investment firms and garuantee them important profits in exchange for buying mortgage loans and devalued shares from banks at inflated prices, be called a “public-private association”? In this way the investment firms or hedge funds which participate in the scheme will put only 7.15% of the capital whereas the Treasury hopes to dedicate from the outset between $75bn and $100bn from the TARP to the end of, together with the private sector, mobilising between $500bn and $1trln “of purchasing power in order to buy the inherited assets” from the last real estate bubble. Included among the mechanisms to encourage private participation are included loans with extremely favourable conditions to be put forward by the Federal Reservey Federal Deposits Insurance Corporation. These loans will be garuanteed by the government, which will take all responsibility in the face of any loss. However, despite the fact that the bulk of the financing for this plan comes from the state, the Public-Private Investment Funds will be overseen by private investors, who will get lucrative pay for their services in managing this robbery. It is no surprise therefore that, as the Washington Post informed on March 22, some of the richest and most powerful men on Wall Street are also the real authors of the adminsitrations plan: “Last autumn, the multimillionaire investors Warren E. Buffet, Goldman Sachs president Lloyd Blankfein and William H. Gross, director of PIMCO, the world’s foremost investment funds manager, suggested to Treasury functionaries the idea of creating and investment fund, using public and private money, in order to buy toxic assets from the banks, according to important ex functionaries of the Treasury”.
However, despite these advantageous conditions, which in contrast with Geithner’s previous attempts resulted in a strong rise in the stock markets on the day of its announcement, the plan is totally insufficient when it comes to restructuring a practically broken US banking system. It contains no clause obliging the banks who have not taken on the losses incurred by the sinking of their toxic assets to enter into the scheme, rather it is completely voluntary. At the same time, it shares the primary weak point of the Paulson Plan, in that it does not resolve the cental problem faced by the participating entities: the valorization of their assets. On the contrary, if it were easy to recuperate the value of these, the banks would not be willing to get rid of them. The economic authorities aim to resolve this problem via cheap financing by the FDIC, but this will not close the enormous gap between the prices of supply and demand of many of these bonds, great part of which may well keep depreciating.
The truth is that, as we have been saying, this is not a crisis of liquidity – the upon which the Treasury’s scheme is ultimately based – but a crisis of insolvency, which is to say a crisis which expresses the long-term structural impossibility of the banks regaining the capacity to pay, which is a result of the fact that the activity which they financed has ceased to be profitable and will not become so again due to changing economic conditions. The new government, in its servility to Wall Street, tries to avoid improving the health of the financial system via a temporary nationalization of the the recapitalized banks obliging them beforehand to recognize their losses, due to the weight which this powerful financial oligarchy still counts with as it perseveres in its struggle to save its bankrupt entities.
At the same time, within the path it has chosen this plan is too “timid”, due to popular opposition to a massive recapitalization of the banking system, although this path, as has been shown in Japan in its “lost decade” can only result in over-payment the eventual accumulation of mre toxic assets. In this way, the solution to this crucial problem keeps being delayed until the conditions for a successful relaunching of capitalist accumulation are given, a scenario which has been shown to be unforthcoming by the accelerated fall of the US and global economy.
At the same time, the plan implies great risks for the US government. Whislt it fails to resolve – as we have seen – the problem of the existence of zombie banks (banks which keep operating even though in reality they are practically broken or in the best of cases, have enough capital to stay on their feet, but do not comply with any of the functions which a bank should, ie lending to businesses and homes), it could be a chance for the banks which have already amortized their losses in these assets, wiping off their balance at no cost. On the other hand, if the gamble goes well for the government and there are profits, these assets will be sold later when the market recovers, and the investors or funds participating in the TARP will come out most benefited; but if it goes badly and there are losses, the taxpayer will foot the bill. In other words, a true con. Which could, in the eyes of the taxpayer, put paid to the already frail claims to these program’s already frail claims to legitimacy; a political necessity if new and more frequent interventions are needed in the future. This is what worries the most astute analysts of the global financial bourgeosie such as Martin Wolf of the Financial Times, who in his column writes, disconcerted: “If this scheme works, many fund managers will make huge profits. I fear that this will convince the common American that their government is organizing a graud in order to benefit Wall Street. Now imagine what would happen if, after carrying out these “stress tests” of the countries biggest banks, the government were to conclude – Surprise Surprise! – that it needs to make more capital available. How will it convince Congress to pay? The danger is tha this scheme achieves, at best, something without particular importance – giving more liquidity to past loands – at the cost of making something much more important more difficult: recapitalizing the banks”.
Let’s put these criticisms in the context of the expansion which the FED’s plan presupposes, and which is added to the $750bn to buy securities and the other $300bn to buy state bonds, the “star” measure announced last week to increase liquidity once interest rates can be lowered no more. This expansion would present an inflationary threat once the deflationary wave hit the floor, as well as the fact that it would mean an unprecedented increase in the countries debt, added to the questionable nature of its effectiveness given that there also exists the risk that despite the increase of money in circulation, this may not reach the “particulars”, instead staying hoarded by banks reluctant to lend (as is shown by the fact that despite the liquidity injected by the FEDsince the beginning of the crisis, the banks have gone from $50bn last August to $645bn today). It’s possible that these measures may fail to avoid a rise in real interest rates if the mass buying of Treasury bonds by the FED fails to neutralise the fall in global demand for these bonds, which would mean a continued increase in their supply over demand.
Confidence in Obama in the Eye of the Storm
The context of the launch of this plan is the growth of popular anger at Wall Street. The spark was the fact that the incompetent executives of AIG were paid $165m of taxpayers money. In its hurry to save the giant insurance company, the Obama government overlooked the fact that the company had signed contracts allocating bonds precisely to the chiefs of the financial division which had taken the firm to the brink. This put the government on the defensive: the allocation of the bonds provoked outrage across society, which caused Obama to condemn the measure with a declaration which appeared more orchestrated than sincere, reading his words from a teleprompter. It is in this context that all of a sudden criticisms have begun to rain down on the new US president. Probably the most devastating was that of Maureen Dowd, a columnist for the New York Times, a paper which had passionately embraced Obama during the electoral campaign. She said: “Barack Obama even needs a teleprompter to get angry, referring to the slow presidential reaction. The honeymoon period which the press gives to all new presidents seems to have reached its end before Obama has even had 2 months in power, long before the traditional 100 days. Bush’s government didn’t get to enjoy this in its second term either, but it was never praised by the press like the current President’s is – or was. This climate, at the same time, almost put paid to the secretary of the Treasury, who had been strongly backed by Obama before the launch of his plan as his premature exit would open up a monumental political crisis.
What is undoubtable is that the AIG affair has radicalized the situation, generating an explosive hostility to the financial sector. Congress is discussing retroactive tax on bonds – not only those of AIG, but on those of all who have received state money via TARP, even though the government is desperately pressing for this not to be undertaken. On the other hand, in the public ministry of the State of New York they are searching for the names of the beneficiaries of bonds in government-assisted companies, which has been considered by some bourgeois analysts to be an invitation to lynching. These legislators and public functionaries, many of them important representatives of their friends in Wall Street, fear that scandals like this one – which show the full extent of the avarice and greed of these financial parasites – will ruin the legitimacy of future necessary bailout plans. The popular fury has been let loose. As The Observer of March 22 notes: “For many Americans AIG has become the unacceptable public face of the economic crisis. The AIG brand has in fact become so toxic that they put security guards in the firms offices and in the houses of the high executives. Yesterday in Connecticut a group of protesters travelled the state staging protests outside AIG executives houses. They handed a letter asking the executives to give back their payoffs…Many AIG executives have received death threats with the news of the bonds, while ordinary Americans, facing the deepest crisis since the Depression, ask themselves why the financiers who helped to cause the crisis should benefit so much from it. A memo of internal security published last week by AID advised its personnel not to travel alone, to avoid going out at night, to be alert for unknown faces near their office or house and not to use the AIG logo in public”. This change in mood could signal a qualitative leap in the masses perception of the crisis. A Financial Times analyst, Christopher Caldwel, sums it up like this: “What until recently seemed like discontent with a slow economy is beginning to appear as opposition to the system”, and he adds this incredible comment to support his affirmation: “The American people are beginning to see those who ruined the financial system as they do the secret police of a communist country – it’s necessary to prevent them wreaking havoc in another sphere” (Financial Times, March 21). In this context, the political breathing space for Obama is closing in, as he is hemmed in between popular anger against the bankers and the enormous pressure of the latter – and the great majority of the sympathetic press – who resist any loss of their businesses and who have characterized the timid measures of the House of Representatives as “…a with-hunt in the style of McCarthy…This is the most profoundly anti-american thing I have ever seen” (FT,20/3). This pressure, at the same time, has permitted the betterment of the terms of the recent pro-Wall Street plan, as the President distances himself from the actions of the Congress and from the popular hopes placed in him. The conclusion of all this situation is depressing for the global bourgeoisie, as Martin Wolf expresses in the article already quoted: “The conclusion therefore is depressing. Nobody can trust that the USA still has a feasible solution to its banking disaster. on the contrary, with the public enraged, Congress on the warpath, a timid President and policies which depend on the capacity of the government to spend public money on poorly capitalized institutions, America is at an impasse. It is up to Barack Obama to find a way out. When he meets with is counterparts from the group of 20 in London next week, he will not be able to declare that he has found it. If that is not terrifying, I don’t know what is”. (FT, March 24). In this context, Obama’s political capital and the momentum of Congress could end up exhausted and replaced by more radical solutions in the next few months or, in the case of a turn in his politics – forced on him by the scale of the crisis -that he could end up sacrificing Geithner if his plan fails. In either case the costs and divisions in the dominant class could be very high and very deep, put the political system at greater risk. This is the moment for the workers to pass from and indignation to action.