The Treasury bailout (today) seeks to make $700 billion of fictitious financial claims "real" that is, way overvalued as compared to their actual worth(lessness). But our total liability could be $56 trillion.
What is reducing real estate, stocks and bonds to junk is the exponential growth in this country's debt. Debts that cannot be paid have little market value at any price. The nation must make a choice: If the government bails out the large financial institutions for having made bad loans, then the only way the government can be paid back is by not forgiving the debts owed by homeowners. This would tighten the debt terms on debtors at the bottom of the food chain, against whom new bankruptcy are aimed. The government bailout of Fannie Mae and Freddie Mac for their junk mortgages packaged by predatory lenders such as Countrywide Financial and Washington Mutual is wrong.
It was at Wall Street's command that the BushCo deregulated all the key positions. Regulations didn't matter at the EPA, at the Fed under Greenspan, at the SEC under Mr. Cox (Donaldson resigned when the White House refused to let him regulate) or at the DoJ under Gonzales.
What to do?
The public interest requires maintaining the economy's basic bank and credit functions. But the Treasury should only buy junk mortgages at current market price. The price of using the Government's borrowing facility should be to forfeit all equity stock. The Treasury should also prohibit any financial institution that borrows from the Fed from paying dividends to shareholders or stock options and bonuses to managers. It also should give the government priority over all other creditors.
Second, we need to restore the Glass-Steagall separation of commercial banks from investment banks, mortgage brokers and other financial predators. On Monday, Sept. 22, Mr. Paulson's announced his Wall Street firm, Goldman Sachs, was transforming itself into a bank holding company. Should casinos take over Banks? Again, big fish eat little fish. New giants are emerging, larger than the government in debts and earning power. Is extracting interest from the U.S. economy the new form of taxation, albeit private?
Third, re-write the bankruptcy laws to favor debtors once again, not creditors. This means reversing the current bankruptcy code sponsored by lobbies from the credit-card companies.
Fourth, sharply increase property taxes, shifting them back off labor and sales. We need to return to the classical idea of taxing unearned and unproductive income instead of adding to the price of labor and industry. What has been freed from the tax collector by the shift of taxes off property has not lowered the cost of housing and other real estate, or corporate costs of doing business. The income "freed" has ended up being paid to the banks as interest. Labor and industry now pay twice for what they formerly paid only once. They still pay the same overall amount of taxes, but also pay an equivalent amount of interest.
Fifth, reaccess the need for a banking system that behaves in the way the present one does. In recent decades banks have made loans mainly to inflate asset prices by loading real estate and industry with interest-bearing debt.
Any solution does indeed need to be radical. But Mr. Paulson's power grab for Morgan Stanley and the rest of Wall Street in the closing days of the Bush administration just before the Republicans look like losing power must not stand. Government funds are not unlimited. Is it worth wiping out hopes for Social Security and public health care, for renewed national infrastructure spending and industrial restructuring in order to bail out a banking and financial system that has not contributed to economic growth but has weighed it down with reckless debt regardless of the economy's ability to pay?
Excerpted from Michael Hudson @ Counterpunch
