The New York Times
March 11, 2009
The Looting of America’s Coffers
Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”
The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.
In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.
The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”
On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking.” To prevent such problems in the future, he called for tougher regulation.
Now, it would have been nice if the Fed had shown some of this regulatory zeal before the worst financial crisis since the Great Depression. But that day has passed. So people are rightly starting to think about building a new, less vulnerable financial system.
And “Looting” provides a really useful framework. The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem.
Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.
But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem.
Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was “in a state of shocked disbelief” that “the self-interest” of Wall Street bankers hadn’t prevented this mess.
He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all.

The term that’s used to describe this general problem, of course, is moral hazard. When people are protected from the consequences of risky behavior, they behave in a pretty risky fashion. Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses.
This form of moral hazard — when profits are privatized and losses are socialized — certainly played a role in creating the current mess. But when I spoke with Mr. Romer on Tuesday, he was careful to make a distinction between classic moral hazard and looting. It’s an important distinction.
With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.
Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch’s losses from the last two years wiped out its profits from the previous decade.
What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.
In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it.
I understand this chain of events sounds a bit like a conspiracy. And in some cases, it surely was. Some A.I.G. employees, to take one example, had to have understood what their credit derivative division in London was doing. But more innocent optimism probably played a role, too. The human mind has a tremendous ability to rationalize, and the possibility of making millions of dollars invites some hard-core rationalization.
Either way, the bottom line is the same: given an incentive to loot, Wall Street did so. “If you think of the financial system as a whole,” Mr. Romer said, “it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury.”
Unfortunately, we can’t very well stop the flow of that money now. The bankers have already walked away with their profits (though many more of them deserve a subpoena to a Congressional hearing room). Allowing A.I.G. to collapse, out of spite, could cause a financial shock bigger than the one that followed the collapse of Lehman Brothers. Modern economies can’t function without credit, which means the financial system needs to be bailed out.
But the future also requires the kind of overhaul that Mr. Bernanke has begun to sketch out. Firms will have to be monitored much more seriously than they were during the Greenspan era. They can’t be allowed to shop around for the regulatory agency that least understands what they’re doing. The biggest Wall Street paydays should be held in escrow until it’s clear they weren’t based on fictional profits.
Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot.
Mr. Bernanke actually took a step in this direction on Tuesday. He said the government “needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm.” In layman’s terms, he was asking for a clearer legal path to nationalization.
At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take.
Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer — a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday — that the next candidate for looting already seemed to be taking shape.
It was an obscure little market called credit derivatives.


US Federal Taxpayer Subsidies to Corporations: $92 Billion in 2006

George Monbiot has a very good article on how subsidies to the rich and corporations is a tradition as American “as apple pie and obesity”. It’s hardly “socialist”. Monbiot cites the More Consistent Libertarians at the Cato Institute, reporting that US taxpayers subsidized corporations to the tune of $92 billion in 2006 alone. Obviously now the subsidies are even further off the charts.

Further, according to Monbiot:

“…A new paper by the US Institute for Policy Studies shows that, through a series of cunning tax and accounting loopholes, the US spends $20bn a year subsidising executive pay. By disguising their professional fees as capital gains rather than income, for example, the managers of hedge funds and private equity companies pay lower rates of tax than the people who clean their offices.”

“…Another report, by a group called Good Jobs First, reveals that Wal-Mart has received at least $1bn of public money. Over 90% of its distribution centres and many of its retail outlets have been subsidised by county and local governments. They give the chain free land, they pay for the roads, water and sewerage required to make that land usable, and they grant it property tax breaks and subsidies (called tax increment financing) originally intended to regenerate depressed communities. Sometimes state governments give the firm straight cash as well: in Virginia, for example, Wal-Mart’s distribution centres receive handouts from the Governor’s Opportunity Fund.”

Let’s not obfuscate. Socialism is where you give a damn about the working class, folks.

It is the ordinary operation of capitalism to direct social wealth to the rich. The social wealth has to be funneled to the rich not just through the market, but also through the state, as the capitalist state is the necessary thing that ensures that markets operate according to rules that more or less ensure that some things are produced, in addition to facilitating gambling and plundering. We should not be such starry-eyed Hallmark Card idealists (“Ooh! Entrepreneurs are so studly!”) that we forget the nature of an institution, the capitalist market, both theoretically and practically based on greed and constituent of greed and therefore prone to just falling apart due to everyone’s distrust of each others’ B.S. Whether liberal or so conservative that it’s fascist, the capitalist state is what props this junk up, on the overburdened backs of workers.

Employee Free Choice Act

If we vote in a Democratic President and a Democratic Congress, there could be enough political support to pass the Employee Free Choice Act, which would reduce the number of opportunities businesses have to terrorize employees trying to unionize, and could restore working Americans’ lost ability to form and join unions.

Through unions’ capacity to educate members, unionization would enable working Americans to begin to exert political influence on economic decisions, a sorely needed corrective to the disastrous elites-only conservative economic program.

Business can’t run government by itself because, immersed in conservative rat-actor ideology, business leaders cannot govern for the good of the whole society. Governing only for their own immediate interests, they ultimately destroy not only politics, the environment, communities, and working class lives, but also the economy, including some of the basis of their own privilege.

As immediately annoying as it is to business owners, we need a strong, smart, involved working class to have a society that isn’t hellish.

US Crisis, A Better Idea

Some reasonable analyses of the economic downturn:

Doug Henwood’s great radio broadcasts are here. He takes issue with Dean Baker and pounds a little hard on the theme of We Must Bail the Rich Out Because If The Economic System Collapses The Poor Will Be Hurt the Most. I am not so convinced–not by repetition, not by vehemence. It’s a hypothesis. Henwood, whom I usually learn from and love as one of those rare American intellectuals…and who also has great musical taste, is nonetheless a far-too-cranky guy, and in the spirit of MR’s John Bellamy Foster, is overly prone to going after some of the other 8 or 9 leftist American (or Canadian in the case of Naomi Klein) intellectuals with a super-persnickety beating stick.

(Henwood: If you want the full materialist philosophical justification / a more intellectually-legitimate substitute for Klein’s “The Shock Doctrine” thesis, go back and read Elaine Scarry’s beautiful opus magnum “The Body in Pain.”)

I’m never crazy about the tactic of establishing legitimacy with liberals by cartoonizing and carping about other lefties; but I understand why folks feel sanctified in doing it. It aint easy bein’ red around here.

Anyway, I highly recommend Henwood’s intervju med Ogmundur Jonasson of the Althingi. I loves me some Scandinavian red-greens–they are rays of sanity piercing through the miasma. (Also, if you listen to the Jonasson interview, first check out Rebecca Solnit’s piece on neoliberal Icelandic complacency in the October (2008) issue of Harper’s. As Jonasson points out, these days Iceland is a metonym for all of us.)

Mark Weisbrot’s (September 2008) “The United States and the World: Where are We Headed?” is easy to read and it is not too long. It assesses not just the financial collapse, but the wider economic problems and political failures that are the result of hegemonic conservative ideology.

Robin Blackburn’s (March 2008) “The Subprime Crisis” is very long (40+ pages) and somewhat difficult to read. It could have been better organized, and it contains tons of financial jargon. It would have been nice if it had included appendices explaining financial theories, concepts, and definitions, and you might want to read it with a copy of Henwood’s “Wall Street” at your side. On the other side of the coin, Blackburn’s piece gives more detailed insider information into the financial collapse in particular. It also offers policy fixes at the end, and I’m always glad to see Rudolf Meidner’s economics invoked.

At MRZine, James K. Galbraith’s “A Bailout Plan We Don’t Need” provides progressive alternatives to the current rich men’s bailout proposals, as they threaten to simply motivate capital to fail again. Such policy poverty reflects the US’s failure and powerlessness to regulate and discipline capital, due to the power of politically-organized capital, the power of finance capital in the Anglo-American economic model, and conservatism’s ideological head lock on the US. Galbraith’s piece here is short.

At CEPR, Dean Baker’s “Progressive Conditions for A Bailout” is not too long, but it does assume some knowledge of finance. I haven’t screened it, but somebody recommended a primer to understand Baker’s prescriptions: “The Giant Pool of Money” by Ira Glass on “This American Life”. Normally, NPR makes my blood freeze and I want to throttle those propaganda pricks. But maybe this particular show is useful.

Baker also has written a piece questioning bailout, “Why Bail?” As for all those gambling-happy Peter Pans who hope that tax money will be dedicated to preventing housing prices from normalizing, the CEPR observes that 15% of Americans spend over half their income on housing costs.


According to MR Zine, “The Israel Project, an international non-profit formed to present a ‘more positive public face’ for Israel” is not only cooking up unverifiable survey data to show that Americans want to destroy Iran or at least support Israel in destroying Iran, the organization “is also currently engaged in a major TV and print ad campaign at the Democratic and Republican National Conventions focusing on the threat of a nuclear-armed Iran.” Jennifer Laszlo Mizrahi, founder and president of The Israel Project, urges Americans to believe that ‘The nuclear clock is ticking faster than the diplomatic clock and time is running out.'”

Resources on the US Terror War

Al Jezeera. http://english.aljazeera.net/. News, world perspective.

Amnesty International. http://www.amnesty.org/. Human rights issues by country and issue; human rights programs; news.

Angry Arab News Service. http://angryarab.blogspot.com/. News and analysis in blog format.

Chomsky.Info. http://www.chomsky.info/. Political analysis by Noam Chomsky, one of the US’s leading intellectuals.

Commondreams.org. http://www.commondreams.org/. News analysis.

Congressional Quarterly. http://public.cq.com/archives.html. Information for US political leaders.

Democracy Now! http://www.democracynow.org/. News, analysis, and news correction.

The Dossier. http://www.thedossier.ukonline.co.uk/. Documentaries on the US’s Terror War.

Edward Said Archive. http://www.edwardsaid.org/?q=node/1. Archive of works (including political analysis) by the late leading American intellectual, Edward Said.

Empire Burlesque. http://www.chris-floyd.com/. News analysis and correction.

Documentaries (free). http://freedocumentaries.org/. Includes free documentaries on war.

Glenn Greenwald. http://www.salon.com/opinion/greenwald/. News analysis and correction.

Harpers. http://www.harpers.org/. News analysis.

Human Rights Watch. http://hrw.org/

Information Clearinghouse. http://www.informationclearinghouse.info/. News.

J Street. http://www.jstreet.org/issues. Issues presented by progressive Jewish lobby in DC.

Lapham’s On-Air. http://www.laphamsquarterly.org/onair.php. Analysis radio.

Le Monde Diplomatique. http://mondediplo.com/. News and analysis, world perspective.

Left Business Observer. http://www.leftbusinessobserver.com/Radio.html. Includes some war-related broadcasts.

National Security Archive. http://www.gwu.edu/~nsarchiv/NSAEBB/. Access to a sampling of critical declassified records on issues including U.S. national security, foreign policy, diplomatic and military history, intelligence policy, and more.

New York Times. http://nytimes.com/. News and analysis.

John Pilger. http://www.johnpilger.com/. News, analysis, documentaries.

Rightweb. http://rightweb.irc-online.org/. Includes summary information on US pro-war groups.

Sourcewatch. http://www.sourcewatch.org/index.php?title=SourceWatch. News correction.

US Military Overseas Timeline. http://www.adbusters.org/files/media/flash/hope_and_memory/timeline.swf

Fannie Mae & Freddie Mac

Excerpt from Krugman, Paul. 2008. “Fannie, Freddie, and You.” New York Times, July 14.

In which Mr. Krugman explains that while “profits are privatized” and “losses are socialized” (the defining feature of American capitalism) in the federally-sponsored private mortgage companies Fannie Mae and Freddie Mac, in this particular case, and by the fluke of good timing, the government actually briefly REGULATED these companies, reducing the threat of capitalist irresponsibility.

“The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because the downside is someone else’s problem. The classic example of how this can happen is the savings-and-loan crisis of the 1980s: S.& L. owners offered high interest rates to attract lots of federally insured deposits, then essentially gambled with the money. When many of their bets went bad, the feds ended up holding the bag. The eventual cleanup cost taxpayers more than $100 billion.

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.”