[Economy]
Out on Bail

As we go to press, Congress is poised to give Treasury Secretary Henry Paulson 5 percent of our GDP to make the worst possible investment. He wants taxpayers to take out Wall Street’s trash—and pay $700 billion for the privilege. Though the analysts who proved most prescient believe we’re still a long way from the bottom, Paulson plans to buy up toxic assets at “fair market prices”—which is to say more than market prices since holders wouldn’t otherwise sell. His bonus for brokering the raw deal? Powers any dictator would covet: “Decisions by the Secretary … are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Conservatives denounce socialized medicine, but can’t stave off socialized banking. Swift as Fannie and Freddie became wards of the state and AIG put us all in the insurance business, the U.S. government is assuming sole liability for banks’ rotten paper. Worse, unlike the 1989 savings and loan crisis in which the feds sold off insured loans from busted thrifts, today, as the Washington Post’s Sebastian Mallaby points out, “In buying bad loans before banks fail, the Bush administration [is] signing up for a financial war of choice. It [will] spend billions of dollars on the theory that preemption will avert the mass destruction of banks.”

Sound familiar? Last time Americans were sold on an imminent threat requiring unchecked executive authority, we got a bloody quagmire. Now the rush is on again. Congress is balking at the massive outlay, but Representative Average, from the 4th district of Wherever, is a little fuzzy on how derivatives work. So when the Fed chairman and Treasury secretary say that if he doesn’t play along, it’s economic Armageddon—don’t forget that the election is just two months away—he’ll give them what they want.

Bush is playing Paulson’s parrot. McCain is too dazed to continue his campaign. Obama, per usual, calls for change. Ideologues on both sides are so hidebound as to be useless: after Paulson announced his plan, the Wall Street Journal featured Democrat Lanny Davis complaining, “It should be more than just a $700 billion bailout. It should also include billions to help homeowners avoid foreclosure, to assist the auto industry, to upgrade the nation’s infrastructure, and to spur development of alternative energy sources.” Adjoining, a neocon clique pleaded, “Everyone Needs to Worry About Iran.”

Everyone needs to worry, all right, not about a demagogue a world away but about what will happen when Paulson’s gambit fails. Our debt will be out of sight, our credit rating shot, our currency cratered. Perhaps we’ll be able to warm ourselves by burning all that paper Hank’s buying.

[Left]
Red Ink

Our friends at The Nation have discovered a kind of socialism that they don’t like, the kind that involves banks. Give the leading magazine of the Left points—it’s right about bailouts that nationalize risk while keeping profits private. William Greider calls this “Goldman Sachs Socialism,” though it turns out he favors outright communism over Paulson’s puny measures: “Washington should literally take control of the banking and finance sector and employ its emergency powers to oversee and direct these private, profit-making enterprises.” So give Greider only half a point, if that.

James Henry, also writing for the venerable progressive weekly, has marginally more sober ideas in a piece titled “Socialism for Bankers, Savage Capitalism for Everyone Else?” Alas, he follows the otherwise perceptive Sebastian Mallaby’s unwise suggestion that government—or, mythically, “the public”—should be compensated for the bailout with partial ownership of the rescued firms. “This will permit taxpayers to share in the upside of this restructuring,” says Henry, “… the taxpayers as a whole will at least be able to receive some capital gains and perhaps some bank dividends for their trouble.” Sounds reasonable—except that the government is not the taxpayers, who will never see a dime.

The Left does better when it sticks to criticizing Paulson’s Wall Street care package, which truly is soft socialism for CEO’s. Reforms of the kind Greider and Henry propose, drastic or mild, are best left to the likes of Fidel Castro.

[Right]
Usual Suspects

Who’s to blame for the unfolding financial crisis? According to many conservatives, poor black people and, of course, Democrats.

National Review Online indicts President Carter’s Community Reinvestment Act for the meltdown. The CRA emboldened community organizers—like you-know-who—to force banks to make loans to uncreditworthy minorities, you see. Terry Jones of Investor’s Business Daily blames Clinton’s “multicultural housing policy” and his mandates to increase home ownership among blacks and Hispanics.

But as economist Michael Barr points out, about half of subprime loans came from mortgage companies that were unaffected by CRA’s mandates. Perhaps only a quarter of all subprime loans were made by banks governed by “multicultural housing” policies. Nothing excuses politically correct credit, but did community organizers really force lenders to infect all financial markets by repackaging their bad mortgages into securities? Did poor blacks invent credit default swaps?

Of course not. While these so-called conservatives criticize the misguided do-goodism of Democrats past, they ignore the present Republican administration that is pioneering socialism for the rich.

Bush proposed an “ownership society,” saying that Americans would prosper when they were given more economic freedom and accountability. Now the same administration insists that prosperity depends on bailouts, that accountability means disaster. Instead of Americans owning their own homes as free individuals, the Bush administration has made all of us collective owners of the worthless banks and lenders that ruined the real estate market. Never have so many owed so much to so few.

[World]
Debtors’ Prison

Another question that needs to be raised: should U.S. taxpayers save foreign banks? That’s what many Americans are asking themselves following Secretary Paulson’s insistence that his rescue plan include non-U.S. financial institutions. Yet the answer is all too clear clear: we have to, if there’s to be a bailout package at all.

As Paulson was quick to point out, in this meta-tangle of global economic disaster, America’s debt is also the world’s. Deutsche Bank has $11 billion in investments linked to the U.S. subprime crisis, while $1.45 trillion—and rising—of Fannie and Freddie debt is held by offshore parties. International finance, and all its festering liability, has become so intricately knotted that it cannot be unpicked along national lines. Commercial monoliths such as Deutsche and HSBC are neither foreign nor domestic, but global. If the Fed lets them sink, the central banks of China, Japan, and other nations, which for years have kept the U.S. afloat by buying dollar bonds, can easily return the favor. We could bring down their markets, but only through eviscerating our own. The global economy has indeed made our world flat—flat broke.

So, taxpayer to the rescue, to the tune of a trillion dollars. But what happens when the citizenry needs bailing out?

[Homeland]
Social Security

After spending 35 of the last 60 months in Iraq, the 3rd Infantry Division’s 1st Brigade Combat Team is taking on a new mission—at home. Beginning in October, the Army will station an active unit inside the United States. The Army Times reports that soldiers are being trained to subdue civil unrest and control crowds. No doubt they’ll be assured that protecting Hank Paulson’s house will be a cakewalk.

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