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The Conservative Curmudgeon
December 17, 2008
In Search of a Principle to Justify
Massive Bailouts
by Allan C. Brownfeld
The government bailout of our banking and financial sector is growing — with bipartisan support. The auto industry is in line for a bailout of its own, and there can be little doubt that other failed sectors of our economy will be making a case for taxpayer funds to prevent them from complete failure and collapse. Unless we proceed on the current course, we are told, a l929-like depression looms.
It seems unlikely that the fervor for bailouts will abate in the near future. Advocates may be correct in arguing that things would be even worse for the American society if the free market were permitted to work and industries were allowed to end in bankruptcy because of reckless behavior, selfishness, and greed.
Still, it is difficult to discern any meaningful principle to justify such a policy.On Wall Street, those who made bad decisions are not called upon to pay the price for what appears to be their irresponsibility. Michael Lewis has written of Wall Street’s excesses in “Liar’s Poker.” In his essay “The End of Wall Street’s Boom,” Lewis describes one company, Long Beach Financial, owned by Washington Mutual: “Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $l4,000 and no English was lent every penny he needed to buy a house for $720,000.”
Former Federal Reserve Chairman Alan Greenspan bears much responsibility for what has happened. It was he who persuaded Congress to end the Glass-Steagall Act, put in place during the Depression to avoid another market crash like that of l929. The law drew a sharp line between commercial and investment banking. Citigroup unraveled as a result of poor investments and questionable ethical standards. It proved too big to be regulated; over the past 20 years, the Federal Reserve has proven unable to get a handle on the bank’s excessive risk-taking and corner-cutting.
Robert Rubin, as Treasury Secretary in the Clinton Administration, joined with Greenspan in calling for the repeal of Glass-Steagall. Then, when he resigned as Treasury Secretary, Rubin accepted a position at Citibank. All of the decisions that have led to Citibank’s current troubles were taken while Rubin was chairman of the executive committee. Now, the U.S. Government has invested $45 billion in new capital to rescue Citibank. Shareholders will suffer very little for the company’s bad decisions. Beyond this, Rubin and other directors and executives who led to this economic disaster will remain in charge.
While President-elect Obama has promised dramatic “change” in Washington, his new economic team is drawn almost entirely from men and women who worked closely with Rubin and, in many cases, were trained by him. The newly designated Treasury Secretary, Timothy Geithner, owes his appointment as president of the New York Fed to Rubin’s lobbying of Larry Summers, who was Rubin’s deputy secretary at Treasury. Peter Orszag, who has been named budget director, was hired by Rubin to head a Democratic think tank that he founded.
Washington Post columnist Steven Pearlstein notes that, “... perhaps the next time Obama thinks about assembling his group of wise men to give advice on the economic crisis, he might at least have the good sense to leave Rubin out of the mix. At a minimum, it’s a glaring conflict of interest. More significantly, it sends a terrible signal about accountability and corporate governance.”
In the case of the auto industry, the Bush administration has already set up a $25 billion bailout program of loans. The industry now wants another $50 billion — with almost no strings. But the fact is that there is a prospering auto industry in the U.S. alongside the failing one in Detroit. In that successful industry, Asian automakers, manufacturing cars in the U.S., are prospering.
Detroit is failing for a number of reasons. One is that the manufacturers must pay union wages that average $60,000 annually, plus pension and health care benefits that double that amount per worker. A 2003 study by the Center for Automotive Research found that United Auto Worker (UAW) compensation is 68 per cent higher than the average for the U.S. manufacturing sector. UAW workers who “lose” their jobs go into a jobs bank that guarantees them full salaries for doing nothing as long as they do not accept transfers to open positions in other plants. A 2005 Detroit Free Press investigation estimated that the bank adds about $800 million annually to Detroit’s costs.
When it comes to compensation, General Motors’ Rich Wagoner’s total package for 2007 was $l4.4 million, or about $40,000 per day. The Washington Examiner states that, “Those are the kinds of compensation figures that should go to successful executives, not those who come hat in hand to Washington for a no-strings-attached bailout.”
Discussing the auto industry, The Cato Institute’s Daniel J. Ikenson declares that, “The intellectual arguments against an auto industry bailout are well established. Taxpayers should never be forced to subsidize any company, let alone a poorly run company. Subsidizing the Big Three would be tantamount to subsidizing failure. That’s bad policy.”
In Ikenson’s view, “Corporate bailouts are clearly unfair to taxpayers, but they are also unfair to the successful firms in a particular industry, who are implicitly taxed and burdened when their competition is subsidized. In a properly functioning market economy — the better firms — the ones that are more innovative, more efficient, and more popular among consumers — gain market share or increase profits, while the lesser firms contract....”
He continues, “The Big Three failed to sufficiently diversify into reliable, efficient, and aesthetic passenger cars when they were earning big profits and had the money to do so. Their bloated cost structures have given non-Detroit competitors a $30-per-hour advantage in labor costs.... If one or two of the Big Three went under, people would lose their jobs. That’s what happens in an economic recession, when less competitive firms are forced to contract. But the number of job losses wouldn’t be anywhere near as large as Detroit is telling us.... The bailout sought by Detroit would interfere with the adjustment process, while doing nothing to make the Big Three more competitive.”
If there is a compelling principle to set forth in behalf of a government bailing out failed banks and industries, it is yet to be heard.
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The Conservative Curmudgeon is copyright © 2008 2008 by Allan C. Brownfeld and the Fitzgerald Griffin Foundation. All rights reserved. Editors may use this column if this copyright information is included.Allan C. Brownfeld is the author of five books, the latest of which is The Revolution Lobby (Council for Inter-American Security). He has been a staff aide to a U.S. Vice President, Members of Congress, and the U.S. Senate Internal Subcommittee.
He is associate editor of The Lincoln Reveiw and a contributing editor to such publications as Human Events, The St. Croix Review, and The Washington Report on Middle East Affairs.
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