Americans wondering: Is this Socialism yet?
Taxpayers of the world, unite!
Starting back in the hedonistic 80s, with laissez-faire ‘Reaganomics’ trailblazing the globe, Corporate America invited anybody with a pulse to an instant-credit party with promises of big televisions, big cars, big homes, big everything. Then the banks wrapped up all that borrowed credit (most of it in mortgage-backed securities) and sold it to Wall Street, where nobody suspected that the key to this sophisticated venture – the American consumer – would one day default on the whole thing.
Ignoring the platitude, ‘the bigger they are the harder they fall,’ the US government is moving to rescue bleeding banks and companies, to the tune of almost $2 trillion, arguing that they have become ‘too big to fail.’ It seems that American politicians have already forgotten the history of another grand system, known affectionately as the Soviet Union, which was also ‘too big to fail.’ But one day it all quietly imploded, and the best thing that could be said about the communists is that they knew when the game was up. America will never admit the game is over.
Today, Uncle Sam has entered the circus with a whip and a fistful of dollars in an attempt to tame the capitalist beast – with a lot of assistance from the taxpayer, of course.
“As finance grew, the banks got ever bigger – too big too fail, eventually, so… tottered taxpayers had to prop them up. Far from epitomizing capitalism, the undeserving rich undermined it: it was socialism for the wealthy.”
That extract was not borrowed from a socialist blog site, or an anti-globalization protester, but rather from the current issue of Economist magazine. Yes, when even the economists stop closing their eyes to the inherent abuses of the system, it is probably safe to say that things have gone too far in the wrong direction. But why did it take everybody so long to recognize the symptoms?
Signs of Destruction
There were many signs that the system was heading for a crash, but due to hubris, denial or simply not wanting to be the tedious doomsayer at the cocktail party, nobody wanted to press the alarm button.
In 1995, long before anybody knew what the heck a ‘subprime mortgage’ was, a guy named Nick Leeson was single-handedly destroying Barings Bank, the investment institution that funded Britain’s war against Napoleon.
Leeson’s unauthorized gambles on the Singapore and Tokyo stock markets eventually amounted to £ 827 ($1.4 billion), thus effectively ruining the Queen’s personal bank.
Did the banks learn their lesson from Leeson? It would be easy to argue that they had not because one decade later, Jerome Kerviel, 31, gambled away $7 billion dollars of France’s Societe Generale, prompting a huge drop in the stock and general panic in the global markets.
But these hugely destructive ‘mistakes’ can easily be forgiven (incidentally, neither of the abovementioned men are presently in jail. In fact, Leeson is the CEO of Irish football club Galway United, while Kerviel works at a computer security consulting firm) especially when we consider the stress of handling other peoples’ money on a daily basis. Still, governments should have been alert to the fact that there were serious structural flaws in the financial architecture.
Bernard Madoff (AFP Photo / Stephen Chernin / Getty Images)
Of course, things could have gotten much worse, and unfortunately they did. Overnight, a slew of corporate scandals rocked corporate board rooms around the globe: names like Kenneth Lay of Enron, Conrad Black of Hollinger International and Dennis Kozlowski of Tyco were the poster villains for everything that was wrong with big business (To briefly illustrate the abuses, Lay, who earned about $42 million a year as the CEO of Enron, cooked the company books to the tune of $300 million. He even pleaded with employees to hold on to their falling company stock at the very same time he was selling off his own; Lord Black, at one time the fourth largest newspaper magnate in the world, abused company funds for private use; Kozlowski misappropriated $400 million in company money, and it probably did not help his trial that his $30 million dollar New York City apartment was equipped with $6,000 shower curtains. Once threw his wife a $2 million party on a Mediterranean island with company money).
And last but not least, seventy-year-old Bernie Madoff, the legendary Ponzi king, defrauded about 5,000 investors – friends and family alike – of an estimated $65 billion dollars, thus providing a monstrous exclamation point to the present crisis.
But Madoff’s astronomical losses, taken together with the other mentioned white-collar criminals, represent a small fraction of the total damage of the ongoing financial crisis. Most importantly, these blatant crimes serve to remind us how important it is for government to have at least a limited hand in the ‘free market’ system.
Socialism for the rich, capitalism for the poor
Given the convoluted sophistication of the modern financial system, not to mention all of the annoying fine print, it is little surprise that the average Joe Plumber had no idea that his subprime mortgages were simply part of a huge speculative bubble. And once the housing bubble popped, or interest rates jumped, as they did, few expected their mortgage rates to increase beyond their ability to pay. Today, every fifth American homeowner owes more on his home than the property is worth. Eventually, however, the losses of the little guy became the losses of the big guy, and that’s never a good thing for the little guy.
“Many of them [the rich] derive their wealth directly from the financial sector, working for hedge funds, private-equity firms or investment banks,” the Economist reported. “A survey by Oliver Wyman, a consultancy, estimates that the financial crisis has caused high-net-worth individuals (as the banking industry calls the rich) to lose $10 trillion, or a quarter of their wealth.”
The article went to report that in Russia the number of billionaires has dropped by 50 percent, according to Finans magazine, while the assets of the ten richest individuals have lost two-thirds of their value.
In the past, the American taxpayer has bailed out the Savings & Loan sector, Long-Term Capital Management and even the state of Mexico, so nobody should have expected anything different in this latest crisis.
Today, the US government, in cooperation with the American taxpayer, is proud, partial owner of once-mighty institutions, including American International Group (AIG), General Motors, and home mortgage giants Fannie Mae and Freddie Mac, to name just a few of the forced acquisitions to date. But given the unknown asset risks that these institutions have hidden in their books, state ownership of these firms is nothing more than risky business, to say nothing about a quasi-form of socialism. Even the Europeans, the traditional liberal lefties that America loves to lecture, are now criticizing the American government's huge investment in the US economy. What's next? A 5-year politboro plan? Communal flats on Wall Street? Cheap vodka to forget it all? Barack Obama embalmed in a mausoleum on the Mall after his expiration?
The question must be: how many times can an economic system lose its innocence before it is swept away by a torrent of public outrage? It is no small irony that whenever there is a big economic blowout, declining urban infrastructure is touted as a means to spend an economy back to health. Today, that is exactly how US President Barack Obama hopes to resuscitate the American economy: by invoking the supply-side spirit of FDR and reviving America’s dying urban infrastructure. Urban blight, however, is the first sign that something is seriously out of whack with a national economy, not to mention a nation, in the first place. If taxpayer money was being spent appropriately (and not on super space weapons, for example, or super wars), then our streets and sewers would be in perfect working order. But unfortunately they’re not.
And what about healthcare, education and worker pensions? In America, the only public institution that seems to get lots of tender-loving care these days is the prison system, which now houses 25 percent of the world’s prisoners, and churns out ‘graduates’ at a higher rate than the universities.
Clearly, America’s priorities have been working in reverse, with far too much economic and political clout in the hands of those who don’t give a damn. If the financial crisis is good for anything, it will be to put the United States on the right course once again and give back power to the forgotten individuals who built America from scratch many years ago.
Otherwise, we’re on a road to Socialism, American-style, like it or not.