A Wall Street Bailout Wouldn't Help Anyone But Rich Investors
September 27, 2008 Economy
According to a Sept. 19 New York Times article titled "Putting a Price Tag on a Government Bailout:"
According to a Sept. 19 New York Times article titled "Putting a Price Tag on a Government Bailout:"
- The government is considering an $800 billion fund to purchase so-called failed assets.
- It is considering a separate $400 billion pool at the FDIC to insure investors in money market funds.
- It pledged $29 billion to help JPMorgan acquire Bear Stearns.
- It agreed to buy as much as $200 billion of stock in Freddie Mac and Fannie Mae.
- The Federal Reserve offered an $85 billion bridge loan to AIG.
- The Federal Reserve joined with other nations to pump $180 billion into global money markets.
- The Treasury Department promised $50 billion to insure the holdings of money market mutual funds for a year.
In his new book, The Wrecking Crew, Thomas Frank writes:
We can now say of that philosophy which regards good government as a laughable impossibility, which elevates bullies and gangsters and CEOs above other humans, which tells us to get wise and stop expecting anything good from Washington -- we can now say with finality that it has had its chance. Whenever there was a choice to be made between markets and free people -- between money and the common good -- the conservatives chose money. It's time to make them answer for it.Frank, founding editor of the Baffler magazine and a contributing editor at Harper's, is the Wall Street Journal's newest weekly columnist. He is also author of What's the Matter with Kansas?, The Conquest of Cool and One Market Under God.
Terrence McNally: Your first book was about advertising; your last book was about voters and culture, and in this book you take on the Republicans and the methods of their madness over the last 30 years. What's the evolution for you personally?
Thomas Frank: It's curious, isn't it? I wrote a Ph.D. dissertation about the advertising industry in the 1960s. And it was an interesting subject because it was about how Madison Avenue went from being so square in the '50s to being so goddamn hip and cool in the '60s, which of course they remain to this day.
TM: Most have forgotten the organization man in the gray flannel suit.
TF: Our whole commercial culture today is so much cooler than you or I could ever hope to be. In that book I said that coolness has become a kind of orthodoxy of the consumer society. I love coming out here to Los Angeles just to see this theory in action. It's such a shock when you come from Washington or Chicago. Coolness is a civic philosophy out here.
I started out studying culture and coolness and hipness. I was a punk rocker, and I rode my skateboard, and then I got interested in business culture.
I came to an important realization when I was writing The Conquest of Cool, which is, if you don't understand capitalism and business, you don't understand America.
At the time everybody wanted to be in Cultural Studies and talk about how everyone was dissenting by buying some different brand at the supermarket -- remember those days? And it dawned on me that they were just completely missing the boat. If you don't understand the way business dominates our politics and every other aspect of life, you don't understand this country.
I guess for everybody else in the world this realization was a no-brainer, but it took me a really long time to figure it out. While I was coming to that amazing epiphany, the new economy bubble was going, the dot.com froth. I was watching that unfold, and reading, among other things, the Wall Street Journal's op-ed page, but also Fortune magazine. Remember Fortune got up to 500 pages an issue back then?
TM: It was as big as Vogue.
TF: It was cooler than Vogue even. I would have CNBC on all the time. ... I was writing a book about the thinking of the new economy -- this kind of feverish overheated idea that we had turned some economic corner and that the old rules no longer applied and we didn't need the regulatory state anymore. That's what One Market Under God was about, and that led naturally into studying conservatism.
Because economic talk, whether it's on CNBC or in the pages of the Wall Street Journal, whether it's in Fortune or coming from a book like The Beardstown Ladies, a personal investment handbook. This is political.
It doesn't seem like it's political on the surface; maybe it's just some dude picking stocks. But it is political. It has a political agenda. And that's when I became interested in conservatism ...
... Well, I've always been interested in conservatism. As you know, I'm drawn to irony; everything I'm talking about here is an ironic situation filled with unintended consequences and everything turned upside down. So What's the Matter with Kansas was about the biggest irony in all of this -- the phenomenon of working-class conservatism. I don't want to say this has been an unexamined irony, because there have been great books written about this subject. But nobody's ever really gotten to the bottom of it, and I decided I would try that.
Now here I am. I move to Washington, D.C., what a strange thing, and when I get there, this wave of scandals and corruption breaks, the Abramoff thing. At the same time federal agencies are being taken over by the industries they're supposed to regulate. I'm watching lobbyists running the city, running the federal government, and I said, there's got to be a theory that can explain all of this. How do you explain all of these things happening at the same time? And that's The Wrecking Crew.
TM: You write: "The fantastic mis-government of the kind we have seen is not an accident, nor is it the work of a few bad individuals or bad apples. It is the consequence of triumph by a particular philosophy of government, by a movement that understands the liberal state as a perversion and considers the market the nexus of human society."
TF: That's funny, isn't it? That describes their theorizing -- and the way they talk.
In the last few days we've seen the grave consequences of the constant deregulating -- first the Reagan years, then the Bush years -- the rolling back of oversight.
We're being dragged down by, among other things, a market in credit default swaps that we know nothing about. It's unregulated, it's unscrutinized, nobody understands it. I've read numerous stories about it -- I barely understand it.
TM: I've read that if they could get their asking price, the total payout on credit default swaps would be greater than the GDP of the planet.
TF: There's more value in them than there is in everything traded on the New York stock exchange. I read that in the newspaper, so it must be true!
TM: Kevin Phillips pointed out in Bad Money that the whole financial sector used to be about 10 percent of the economy. It's now 20 percent.
TF: It's what we do. We don't make anything in this country anymore. We make financial innovations. We figure out crazy new ways to package debt until beggar thy neighbor. That's what we do, that's what Americans are good at now. And we're being dragged down by it.
The thing you have to understand is that the conservative philosophy taught in every economics department in America says that markets are fundamentally self-regulating. When markets get out of hand, investors will understand that and will flee to safety. Ultimately the market will always right and correct itself and always come back to equilibrium.
TM: The aggregated self-interest of all investors will steer things right.
TF: But of course the opposite is the case. Markets boom and bust, markets panic.
First markets get crazy exuberant in the 1990s, and people are convinced of these absolutely asinine ideas that we've turned some kind of historical corner, that the old financial rules no longer apply, that man has suddenly become a different creature.
Then they swing entirely the other way: The end is upon us, the game is over. We're in 1929. And hell, we may be. Things look pretty bad.
That's the way markets behave. Unless you patrol conflicts of interest and the possibility of corporate boards looting their own companies, that's what they're going to do every time. They're going to rip you off. They're going to steal you blind, unless there is all sorts of scrutiny, unless you can understand what's going on in markets.
And of course, do you understand collateralized debt obligations?
TM: No, though I was doing shows in 2005 talking about the subprime crisis and how it was going to come back to bite us. But it's gone way beyond that. If it was just gimmicky subprime housing loans that would be simpler, but it is all these instruments that were created by financial guys to sell to financial guys.
TF: Given Triple-A ratings for Lord knows what reason. And once they've got that, then they're out there in the stream and they're being traded. They're all over the place, and everybody's got them, entire companies are dependent on them.
At the end of the day we're all going to take an incredible shellacking for this, for what Wall Street has done. For the fact that we just let them self-regulate, we just let them do as they please.
Who's going to get bailed out? Why, they are. They're going to do all right. The government is going to buy their stupid toxic paper off of them at Lord knows what price. I don't even know how they're going to set a price since the things aren't tradable right now.
TM: That was (Paul) Krugman's point in Monday's (New York Times) column. The only way to get enough money out there for this to work would be to pay what they're asking. But that's wasting the taxpayers' money. But how do we pay what they're actually worth? Either we don't know, or it's a hell of a lot less than they're asking. Otherwise someone would be buying.
TF: If you do that, then the companies are going to go out of business, and that's what you're trying to avoid in the first place. I admire energetic interventionist government. There is a place for deficit spending. I believe in it. I'm a Keynesian, I believe in Franklin Roosevelt. There's a place for it, but it has to be done responsibly.
Up until about three days ago I thought Secretary Paulson was something of a hero. He was actually doing something. He was no Herbert Hoover, he was out there swinging. But now I don't know.
The first thing that we've got to sort out is the responsibility for this, and this comes right back to The Wrecking Crew. These people have deliberately sabotaged the oversight function of government in numerous different ways, and we're not just talking about financial deregulation.
By the way, some of the biggest financial deregulators are on John McCain's campaign, and the dude is actually out there now presenting himself as an enemy of Wall Street. It's extraordinary. We're living through the most topsy-turvy times. I mean, maybe John McCain will come in as president and he'll have the spirit of Theodore Roosevelt in him and maybe he'll do right. I'm not counting on it.
TM: The American public is in an enormously tricky place. They have this economic crisis and two failing wars on their hands, and they have a choice between someone from the party that's given them all that and someone that by most standards is less experienced than they're used to.
TF: That doesn't really matter because Obama knows who to hire.
TM: I'm talking about public perception.
TF: He knows as much about this subject as McCain, I guarantee you.
TM: Oh, much more.
Your book tells how the conservatives, especially the real leaders, have painstakingly and methodically emasculated government so that all it can do is authorize wars and bailouts.
TF: It doesn't supervise markets in a proper way -- and that's deliberate.
TM: The FDA doesn't properly watch your food or your pharmaceuticals, OSHA doesn't adequately watch labor practices in meat packing plants.
TF: The agencies have been so dumbed down. I mean lobotomized. You look at FEMA in Hurricane Katrina, now we see the same thing in financial markets. These people are totally unprepared, they have no idea what they're doing.
They've hollowed out the federal agencies and deliberately chased away the best and the brightest. This is a theme in conservative thought -- to keep the best and the brightest out of government, and then to make sure that regulatory agencies don't actually regulate. They've been doing that ever since Reagan, you know, war on the EPA, war on OSHA, war on the Department of Labor, war on unions.
And agencies are essentially in the pocket of business. There's a term for this: They call it "regulatory capture," which makes it sound really boring, but in fact it's fascinating. I can rattle off for you three or four different federal agencies where people have said either on paper or allegedly had supervisors tell them that they don't answer to the public, they answer to industry.
Their client is industry. A document on the Department of Labor Web site said the customer is business. The Department of Labor! -- that's supposed to be looking out for the worker. The FDA has said this. At the Federal Aviation Administration, there was a scandal just a few weeks ago.
And scandals keep erupting. We've already forgotten about last week's scandal at the Department of the Interior. You had the crazy business with the minerals management service that is supposed to be extracting royalties from the oil companies. Turns out they're actually partying with these guys, sleeping with these guys. I mean they're actually getting it on with the industry.
TM: Because of everything else happening, that was like a blip for five minutes. At a time when -- other than, Viva Sarah Palin -- "Drill Baby Drill" was the biggest campaign issue the Republicans have. So what happens if we do drill on our land? We don't actually get the money. The government is literally sleeping with the oil companies, so you'll never see any of it. If you remember, some of the old scandals would be like one mink coat, one overnight stay.
TF: The conservatives love to refer to government -- especially liberal government -- as being inherently corrupt. It steals your money through taxation and hands it out to people that don't deserve it. It regulates your business. It does all these things that are inherently corrupt in the eyes of conservatives.
Remember in '94, when the Gingrich people came in, they were supposed to be replacing what they would always say was a very corrupt Democratic congress. Boehnor even repeated this at the Republican Convention, that the Democrats were so corrupt. You know what they were doing? They were writing bad personal checks (laughs) and they had this business with postage stamps, someone had swiped some postage stamps.
TM: And one was making money selling books at the back of his speeches.
TF: At the high water mark of liberalism in the Johnson era, the biggest political scandal in those days, leaving aside the Vietnam War, was the Bobby Baker affair.
Bobby Baker was on the cover of Life magazine, it was supposed to be so awful. He was one of Lyndon Johnson's great cronies. He had somehow gotten the contract to have vending machines on military bases. That's it. That's the liberals, man. And now you've basically got government by contractor in Washington, D.C., where they've outsourced and privatized every imaginable kind of work.
TM: Including the agencies themselves. One after another, the heads of the agencies are former lobbyists for the industries they're now regulating.
TF: Then they go through the revolving door. It sort of rotates above the city of Washington, this giant golden thing. They come in from wherever -- let's say, they work at the Department of Homeland Security for a couple of years, then they go off to the homeland security industry, this very rapidly growing, extraordinarily lucrative industry. Based, by the way, in Washington, D.C., just one of the reasons that Washington, D.C., is now the richest city in America.
They go into that industry, and they lobby their former colleagues for contracts. The Department of Homeland Security is just an enormous piÃƒÂ±ata filled with gold doubloons to be smacked at by lobbyists.
This is all so depressing. Do you understand what we're talking about here? I mean we are talking about the ruination of government. We are talking about people that, for the last eight or 28 years, depending on how you look at it, have used the government for their personal profit, and have run it into the ground. They have run it completely and utterly into the ground to the point where now they have to bail out their buddies. They let these guys go hog wild, they stole with both hands, and now we have to go bail them out.
TM: You've brought up homeland security. Let's talk about the politics of the bailout. Just prior to the 2002 election there was the big Homeland Security bill, and Democrats said we will vote for this, but you've got to unionize the workers at the very least.
And Republicans used the fact that Democrats wanted to unionize TSA workers as a campaign tool. Max Cleland, the triple-amputee Vietnam vet and former head of the VA, was voted out because he wasn't patriotic enough. And the Iraq War authorization bill was done just before an election. Now I see this bailout being voted on just before an election.
TF: Well, they have to do it now.
TM: I know they do, and I don't say they were so competent as to schedule this crisis for now.
TF: This may put a Democrat in the White House.
TM: Though White House Deputy Press Secretary (Tony) Fratto did say that the bailout plan had been drawn up over previous months and weeks by administration officials ...
But now they're saying to Democrats, we've got no time to fiddle around. Pass what we came up with or else. So when Democrats say we've got to own something, we've got to get something in return for our money ...
TF: At least there has to be accountability and supervision.
TM: We have to get some stake so that if things turns around, we can profit from that, not merely ...
TF: It's not going to happen. I'm here to tell you. They might add such a provision, but there's no upside to this, you understand, as far as I can tell.
TM: You mean you don't think that ownership can make any difference?
TF: They have to have supervision so that it's done correctly.
TM: But you're saying that these assets are never going to be worth anything.
TF: They're trying to re-inflate a bubble, for God's sake. It's the dumbest idea in the world. I mean maybe I'll be proven wrong, let's hope I am, but it just strikes me as utterly foolhardy. I don't believe in free market theory, but these people bought when they should have sold. Let them go. They need to get spanked. But instead they get the air bag.
TM: Do you follow that to its logical conclusion?
TF: I don't want the economy to fall apart, of course. You have to inject liquidity at a time like this, there's no question about it. At the end of the day, whether you like it or not, this is a capitalist country and we have to prop it up. Sometimes it's ugly and sometimes it's unseemly.
TM: And sometimes it's done on the cheap.
TF: What frustrates me is that these guys get bailout after bailout, and the people that I care about -- ordinary, average, working Americans -- get nothing. I mean, they get the bankruptcy bill. They get the screws tightened on them. It's de facto illegal to form a labor union in this country. Their wages haven't gone up for eight years. The economy's been growing, productivity goes up, they get nothing. Gasoline is almost unaffordable. Unemployment is at 6 percent and rising, I mean, who knows where it's going to be the next time around.
TM: Seven point seven in California.
TF: Beer is cheaper than gasoline, beer is cheaper than milk. It just makes me so ...
TM: Let me ask one last thing: What should people do?
TF: We have to demand accountability from government. When the book first came out, just a few months ago, I used to suggest things like setting up a Blue Ribbon commission to look into the entire history of outsourcing. At the time that seemed like such a great idea, so shocking and so radical.
And it's all gone so much further now, and they're pushing it down our throats so fast.
I don't know how to respond.