“Doing the Math”—The Bailout and its Cost to Main Street
Liz Hager, “Trillion Dollar Bill,” (©2008 The Artist)
This election cycle the Spinmeisters have done their best to bombard us with divisive tribal categories. Already in play are
Black versus white
Female versus male
Western “mavericks” versus Eastern elites
Small town versus urban “values”
Working people versus WHO? Welfare mothers? People who’ve lost their jobs?
With Treasury Secretary Henry Paulson’s announcement of a $1 TRILLION bailout proposal for the Wall Street banking and insurance firms, another divisive couplet surfaced—Wall Street versus Main Street. This one has merit, however, as the shear magnitude of this bailout will effect a majority of us in our pocketbooks for years to come. Paulson’s plan doesn’t specify how this bailout will actually occur. No one has a confident answer on a clear path out of this calamitous situation or how much it really might cost. No wonder people tune out. Better to take to our metaphorical beds in the hopes that the migraine will pass.
Americans have short attention spans. We get snarled up in trivial issues, presumably because we don’t like spending the time required to educate ourselves on the more substantive, sometimes highly complicated, issues. Understanding a complicated issue like this one isn’t easy, especially when the explanations are obfuscated with Wall Street jargon and acronyms. But one fact is plainly clear—Main Streeters will pay for the bail out, either through an economy hobbled by staggering levels of debt owed to foreign countries, higher taxes or both. Will the pain be severe enough to force a change in habits on our street?
The short and simple of it is this: The meltdown of the financial markets is the direct result of risk-seeking Wall Streeters colluding with deregulation-loving politicians. Since the passage of the Gramm-Leach-Bliley Act in 1999, which deregulated the banking industry, financial firms have put riskier mortgage “paper” on their balance sheets in pursuit of greater profits. Fine, but Uncle Sam wasn’t minding the metaphorical store. When the economy headed south consumers defaulted on loans and the underlying paper (asset) held by the banks went belly up. But because the paper was resold (and resold), no one knew exactly which institutions held the assets. No one knew how much the asset was really worth. Write-downs and mounting panic. Thus was our magnanimous Uncle forced to step in to avert a crisis of his own making.
Main Streeters are not without culpability, however. After all, we stood by while politicians engaged in this reckless deregulation strategy. Perhaps we felt they knew better than we. Perhaps we too were a little bit greedy, invested as we are in the Wall Street’s assets.
What will this bailout cost us Main Streeters? Let’s “do the math.”
With roughly 91 to 136 million households filing tax returns, the burden on every tax-paying household could average between $7,353 and $10,990. And, while corporate taxes do add to the pot, it’s hard to get a handle on how much, since nearly a third of all Fortune 500 companies are effectively paying 0% tax rate (or worse, receiving money back from the government).
How will portion of this extra debt impact your Main Street household? Hint: This is not a rhetorical question. We will pay by tightening our belts—having to work more years before retiring, commuting in old cars a while longer, taking on extra jobs to pay the bills, sending our kids to cheaper colleges or none at all, eschewing trips, renting rather than buying. Figure out your version of belt tightening.
The public forgets past financial disasters caused by markets not properly regulated—the Savings and Loan debacle and Enron’s implosion after gaming the trading system come to mind. Amnesia prevents us from recalling that disaster in the financial markets hurts us—middle-class working Americans— most of all. The clerks on Wall Street, as well as the small business owner on Main Street suffer alike.
The immediate benefits of the bailout are clear and somewhat comforting—Main Streeter’s Money Markets will be safely insured. But the future ramifications of the bailout are murky indeed. How will experts decide what the “paper” is worth and, therefore, the cost to the Government (i.e. us) to acquire them. What’s more egregious, the plan doesn’t give taxpayers a stake in the upside should the Treasury sell off the asset it buys at a profit.
The next President will have one heck of a long-term problem on his hands. That’s in addition to the costs of the Iraq War and the rising costs of our dependence on fossil fuels. After money is sucked out of the system for the bailout, the war, and fossil fuels, where’s the money going to come from for desperately needed health care reform?
Although this seems an abstract issue, you can see that the effects are not abstract. We Main Streeters must educate ourselves about the workings of Wall Street. We must become more sophisticated, conversant, and, yes, responsible. We must demand intelligent oversight and transparency of the financial markets. We must insist on an upside reward for us in the plan.
No sensible investor would accept risk without reward. Why should we?
How did we get here?
Bill Gruver— A Big Regulator for the Little Investor: synopsis of the Gramm-Leach-Bliley “reform” of Glass-Steagall Act
As an aside: You remember Gramm’s characterization of American’s “whining” about the economy while acting as McCain’s advisor. . . if not >http://www.youtube.com/watch?v=wXkd-NVOyJE)
“Was Adult Supervision Needed on Wall Street?” —securities law professor Michael Greenberg on “Fresh Air”
Analysis of the Plan
Joe Nocera — Hoping a Hail Mary Pass Connects
Princeton economics professor Paul Krugman Conscience of a Liberal blog