Time to stop the rip-off
By Hossein Askari and Noureddine Krichene
The crisis in the United States has taken a dangerous turn over the past week,
a turn that may prove to be the undoing of the Barack Obama presidency.
On January 20, Obama stepped into much more than the worst economic and
financial crisis since the Great Depression. He inherited the helm of a country
ravaged by 30 years of runaway human greed and a complicit government that
rewarded it. Obama now finds himself in the middle of a perfect tempest,
buffeted on the one side by a relentless financial and economic downturn and on
the other a bewildered nation waking up to the landscape of unparalleled
economic injustice that had been hidden out of sight with most Americans
working hard just to get by.
If Obama does not get a handle on what ails America, and soon, he risks losing
the support of the American people, destroying his
presidency and leaving the American economy in financial freefall and a nation
tearing itself apart.
On his election, Obama wanted to take the "safe" approach to the economic and
financial tsunami gripping the United States. He picked a team that had managed
the economy for over the previous 16 years. Although he had relied on Robert
Rubin as an advisor during the campaign, he was astute to see that Rubin would
be nothing but trouble. Rubin, who had chaired the White House National
Economic Council and had been secretary of the Treasury under president Bill
Clinton, had been a champion of Wall Street. He had come from the helm of
Goldman Sachs and was the enemy of financial regulation and adjusting the
income tax rates of hedge fund managers to that of ordinary Americans.
He even had a darker side. After leaving the Treasury he joined Citi Bank,
where he squirreled away a fortune in salary and bonuses as Citi raced towards
its destruction. How could a person who had been at the helm of the US Treasury
have driven Citi into the ground?
Still, Obama could not distinguish the forest from the trees. He wanted Larry
Summers as his secretary of the Treasury, the man who had been at Rubin's side
at the Treasury and had later replaced Rubin as secretary, comrade in arms with
Rubin in fueling the excesses of Wall Street and protecting the pocketbooks of
Wall Street barons.
Fortunately, Summers' abrasive character was seen as a deal breaker. Obama
still wanted the Harvard professor so as to ensure "continuity", no matter what
that continuity signaled. So he tapped Summers to be the chairman of the White
House National Economic council, ironically the first post for Rubin under
Clinton and a post that did not require Senate confirmation. Still wedded to
his "safe" approach, Obama picked Timothy Geithner to be Treasury secretary.
The row over Geithner's tax problem was a smoke screen. Geithner had worked
with Summers and Rubin at the Treasury and was the president of the New York
Federal Reserve. In that post, he voted on the Federal Reserve Open Market
Committee to reduce interest rates to historic lows; he was a member of the
trio (along with his predecessor at the Treasury, Henry Paulson, and Federal
Reserve chairman Bernanke) that had pushed for the Troubled Assets Relief
Program, let Lehman Brothers collapse while saving Bear Stearns and negotiating
the misguided bailout of Citi; stayed mum on the subprime debacle and much
more.
The last thing the new president needed was continuity with the failed policies
of the past. He needed the opposite, a break from the past and new blood. He
needed individuals with maturity, sound judgment, no conflicts of interest and
unquestioned integrity.
With the wrong team in place, it was obvious that Obama would have a tough time
putting the nation on a new course towards economic recovery. This was not the
foundation of "change" as promised. What has and will continue to transpire are
the same old policies with marginal differences when the political heat becomes
too hot.
Large-scale bailouts have been a mistake. Badly run and insolvent institutions
should be allowed to fail. New institutions will replace them. Yes, there will
be turmoil. But with bailouts we will have continued turmoil for years and
years, larger budget deficits and a shaky and failed financial system as our
foundation, with even larger failures on the horizon.
Let's be practical. We don't know where the bailout money is going and we may
never know. Look at AIG. The bonuses that AIG paid are a tiny tip of the
iceberg. Where has much of the money paid to AIG gone? The answer is: Goldman
Sachs (US$12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2
billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion); and foreign
banks, including: Societe Generale of France and Deutsche Bank of Germany,
which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and
UBS of Switzerland ($5 billion).
These financial institutions are getting US taxpayer money through the back
door with no haircuts (that is losses) and with no restriction. They took risky
bets and bought insurance from AIG (credit default swaps). Now AIG cannot honor
these bets. The likes of Goldman Sachs ("smart" Wall Street executives) must
have known that these were risky bets for AIG but they counted on bailouts if
AIG was in danger of folding. That's why they paid and bought insurance from
AIG. They took advantage of the unregulated mess that was Wall Street. Now they
are benefiting again.
They received high returns and fat bonuses when the going was good. Now they
are being made whole and continuing to receive fat salaries at the expense of
the American taxpayer! If AIG owes all this money, let them default and we will
see if any of its creditors deserve to be bailed out, case-by-case.
More importantly as we go down this road with the likes of AIG, there is no end
in sight. After we have put $170 billion into AIG we cannot let it go bankrupt.
Each time AIG comes back for another $30 billion, we will say "yes". AIG will
play poker with us and we will want to protect our past cash infusion in AIG,
so we will say "yes". The US will be bankrupted while former partners, now
shareholders, of Goldman Sachs become wealthier by the day.
This is the biggest rip-off in the history of man. There is no end in sight.
When will the Obama administration get it? Obama will have to learn the
toughest decision there is in business - when it's time to stop throwing good
money after bad money.
Along with their bailouts, Wall Street executives have been pleading that
bonuses are needed to keep talent! This is talent? People who have ruined
America and the rest of the world are talented? Anyone who calls these
opportunists talented should be himself fired. Where could they get other
lucrative jobs while the economy is imploding?
People should be fired, not rewarded. If we have learned anything it is that
Wall Street has become too big relative to the total US economy, increasing its
share from roughly 15% to 30% in about 30 years. It is time to adjust. Wall
Street must be reduced in size, not kept as is. Let them find useful and honest
work. Work in manufacturing. Teaching. Law enforcement.
The outrageous executive pay levels are only one dimension of a much bigger
problem that ails America, a problem that demagogues are desperate to hide.
Economists Emmanuel Saez and Thomas Piketty, using Inland Revenue Service data,
have shown that the share of income in America held by the top 1% in 2005 was
as large as it was in 1928, the heyday of robber barons; and their share had
increased from 7.5% in 1979 to 14% in 2005.
Over the same period to 2005, the mean after-tax income of the highest 1% had
increased by 176%, as compared with an increase of 69% for the top quintile,
20% for the fourth quintile, 21% for the middle quintile, 17% for the second
quintile and 6% for the bottom quintile. As deplorable as the rise of income
inequality has been in the US, to a level that surpasses anything in the other
advanced countries, the rise in wealth inequality has been even more extreme.
In 2001, the latest year for which we have survey data, the top 10% of the
population owned 71% of the total wealth, with the top 1% controlling 38% of
the wealth (this compares to 23% for the UK, the country with the next highest
wealth inequality). On the other hand, the bottom 40% owned less than 1% of the
nation's wealth.
Ever since 1929, inequality had fallen but in the early 1970s the process was
dramatically reversed, with wealth inequality doubling between 1970 and 2001.
It is not just inequality. Those at the bottom of the ladder in the US are
plain poor! Yet demagogues oppose any attempt to address poverty and inequality
and label it as the trend towards socialism.
While Wall Street whines and threatens, the US economy is at a 70-year low. The
nation has embarked on a perilous path to satisfy the continuing greed of
financial executives. The US economy cannot sustain a deficit of 13% of GDP, a
public debt at 130% of GDP, and unlimited expansion of the money supply at zero
percent interest rates to bail out those that have ruined us.
The US economy has suffered from imprudent monetary policy, distorted interest
rates, excessive fiscal deficits and from Wall Street's greed over the years.
The risks ahead are obvious: uncontrolled and devastating inflation, a
collapsing dollar, unsustainable public debt and a crushing tax burden on the
disadvantaged.
With the real economy in such a state, Wall Street must be reigned in. We
cannot accept that nothing can be done except unlimited bailouts while average
Americans and much of the world suffer and mortgage their children's future. At
the same time, the underlying and urgent issue of income and wealth inequality
must be addressed as the poor are suffering disproportionately at this time of
severe economic and financial crisis.
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is an
economist at the International Monetary Fund and a former advisor, Islamic
Development Bank, Jeddah.
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