Just the Tip of the Ice Berg: The Wall Street Bailout That Isn't

I hear it all the time! The financial markets are in ruin because of deregulation! No, it’s greed! The Republicans are responsible!

The truth is these things all played roles in the sinking of Wall Street, but not as much as you might think. Worse yet, the visible financial problems of the past two years are just the tip of the meltdown coming to wreak havoc among us.

Let’s face it. The financial health of the United States and its economy are rotted, ruined not just by years of Republican demands for deregulation and greed, but by decades of tolerating an economic and political system cultivated to redistribute income and wealth from working families to the super-rich.

Blame Ronald Reagan, Alan Greenspan, George W. Bush and the former Republican majorities in the U.S. House and Senate. These guys enacted policies that gave to the rich and stole from the poor and middle classes. And they got plenty of help from the Democrats, especially Bill Clinton.

Take Nafta for example. Clinton pushed it through congress. The treaty made it easier for U.S. employers to outsource middle class jobs to Mexico where workers earn a fraction of what those positions paid here. Exporting jobs allowed our corporate heroes to boost profits, dividends and stock prices. The benefits mostly traveled to the top two percent highest income earners.

Likewise, Bush’s tax cuts for the rich speeded us into the disaster. They helped to drive and keep three million manufacturing jobs overseas and resulted in the worst job creation numbers since the Great Depression. Giving the affluent tax breaks provided them with money they didn’t need. However, desperate CEO’s desired the cash.

The primary responsibility of these corporate wizards is to push profits and stock prices up one quarter after the next. In the period 2001-2005, the stock markets stayed mainly flat, and less so when inflation is factored in. So our corporate heroes desperately needed investors with lots of cash to bid up the values of their shares. They got it with Bush’s tax cuts. However, in order to attract that money, CEO’s needed to push up earnings. Outsourcing middle class jobs became the primary method of achieving this goal; and this made the tax cuts another income transfer program that weakened the demand for goods and services.

Unless there is inelastic demand, all markets reach a point of saturation when they can no longer consistently raise earnings. That’s the point where demand contracts, becomes flat, or grows too slowly to guarantee earnings always rise. Bush’s tax cuts speeded up this process throughout the economy.

The mortgage and investments industries are only the most glaring recent examples of markets reaching this point. Saturation forced mortgage companies to enlarge their market by reducing their standards for loan applicants. Then Wall Street and others transformed these bad loans into investment instruments, leading us to our present predicament.

It didn’t help that both industries found themselves no longer burdened by as many regulations as in decades past.

In the current crisis, only bailing out mortgage lenders and investors is like trying to stop blood flowing from a twenty inch gash on your chest by placing a band aid on your finger because that’s where some of the blood is.

That’s because thirty years of income and wealth mal-distribution brought about this crisis and needs to be reversed. If the government moves to significantly strengthen the demand sector, the economy will move forward again.

The first place to begin is for the government to purchase the bad mortgages held by banks while forgiving the sub-prime borrowers and letting them own their houses.

In the short run, this should boost the economy by stimulating consumer demand for goods and services because millions of families would no longer be burdened by mortgages they can no longer pay; and it would infuse lenders and investors with badly needed cash while relieving them of their appalling debt. The stock markets might then become stable or even rise. But that’s not going to happen, not even for the common good, since the Republicans and many Democrats only want to bail out the rich investors. Okay, they might throw some crumbs at the borrowers for window dressing, but don’t expect more than that.

This 700 billion dollar bailout smells like another income transfer scheme inasmuch as investors are going to be relieved of their burdens, and lots of profit going to the affluent will be created, while sub-prime homeowners and tax payers will be footing the bill.

And that’s not doing much of anything in the long-term because it doesn’t deal with the fundamental problem of the economy—income and wealth mal-distribution. In fact, it may worsen things because the proposed bailout will be enlarging this cancer.

Profit saturation is occurring in other industries and for the same reason as the mortgage and investment sectors, only to less obvious degrees.

That’s why we’re only at the tip of the iceberg. Things will get worse before they become better, even with a bailout that includes borrowers. And this is only the beginning of what needs to be done to prevent the economic disaster that is approaching. A solution that only embraces investors may exacerbate the coming quandary in the long-run.