The Democratic Party and Wall Street

By Barry Grey

1 October 2008

The role of the Democratic Party in promoting the plan devised by the Bush administration and Treasury Secretary Henry Paulson to bail out Wall Street has exposed the real social interests that this party defends.

From the moment Paulson broached the idea of using at least $700 billion in taxpayer funds to buy worthless mortgage-backed securities from the major banks, the Democratic leadership, including the party’s presidential candidate, Barack Obama, backed the scheme.

They accepted the basic framework of Paulson’s proposal. They echoed his claims and those of Federal Reserve Board Chairman Ben Bernanke that immediate legislative action was required to avert an economic catastrophe.

Despite their control of both houses of Congress, the Democrats never advanced their own plan to deal with the financial crisis. With Wall Street and the entire ideology of American “free market” capitalism discredited in the eyes of the American people, and popular opposition to the bailout mounting, the Democrats were in a position, as the nominal opposition party, to demand significant reforms of the banking system.

They could have called for tougher regulation of the banks and punitive measures against the multi-millionaire architects of the financial meltdown. They did nothing of the kind.

Instead, they took the lead in secret negotiations with Paulson to draw up legislation whose entire purpose was to protect the interests of the most powerful sections of the financial elite, such as the Wall Street giant Goldman Sachs, formerly headed by Paulson. They insisted that the crisis required a bipartisan response, and that a program to place immense public resources at the disposal of Wall Street, with the most far-reaching implications for the American people, should be excluded from the election campaign and implemented before voters could register their opposition on Election Day.

There is little doubt that the outlines of the scheme Paulson presented to congressional leaders on September 19 had been discussed in advance with the Democratic leadership. Barney Frank, the Democratic chairman of the House Financial Services Committee, who has led the Democrats in their talks with Paulson, had already publicly called for a government rescue of the banks along the lines of the $160 billion bailout of the savings and loan industry carried out in the late 1980s and early 1990s.

The Democratic-backed bill that emerged last weekend from these talks conformed in all essentials to the scheme initially proposed by Paulson. The supposed improvements included at the insistence of the Democratic negotiators amounted to window dressing aimed at duping the American people into thinking their interests were being protected.

Even the token measures initially called for by some Democrats to aid distressed homeowners were dropped, at the insistence of the banking industry and the Bush administration. The bill granted Paulson virtually unlimited powers to run the bailout as he saw fit, with no serious provisions for the government to recoup the vast sums it will lose in the purchase and eventual resale of the junk assets.

Perhaps the most extraordinary provision of Paulson’s proposal, barring any court review of his actions and those of the Wall Street firms he hires to manage the bailout, was largely retained. The bill that was voted on and defeated in the House of Representatives on Monday bars anyone from challenging the bailout program in court except on grounds of violations of the US Constitution. The program, its overseers and the banks that participate cannot be sued for violating existing laws—a blatantly unconstitutional restriction that amounts to a blank check for illegality and corruption.

As this provision underscores, the Democratic leadership wants nothing to be enacted that in any way threatens the interests of the most powerful banks and investment firms. They support the Paulson bailout because they themselves are deeply embedded in the milieu of Wall Street and consider their most critical constituency to be the financial aristocracy and the richest layers of the upper-middle class.

The Democratic Party’s open alliance with Wall Street reflects the economic evolution of social layers upon which it has long based itself. The past three decades of boom on Wall Street have immensely enriched sections of the middle class which profited from the growth of financial speculation.

Not a few prominent Democratic politicians embody this process: Jon Corzine, the governor of New Jersey and former senator of the state, who made hundreds of millions of dollars as chairman and co-CEO of Goldman Sachs; New Jersey Senator Frank Lautenberg, another small businessman who became a multi-millionaire; and Bill Clinton, who has amassed a personal fortune since leaving office by associating with big players on Wall Street.

This accounts for the utter indifference of the Democratic leadership to the popular opposition to the bailout and the crisis confronting the broad mass of working people.

Leading up to Monday’s vote in the House, it was apparent that the most serious threat to the bailout bill came from right-wing Republican congressmen, who feared being thrown out of office by angry voters and sought to posture as opponents of Wall Street. They denounced the measure as an affront to “free market” capitalism and demanded instead of a direct use of taxpayer money a government guarantee against banking losses, combined with a frontal assault on social spending and even greater tax breaks for big business.

The negotiations on the bill were dominated by efforts on the part of the Democratic leadership and Paulson to appease the Republican opposition by removing the token housing provisions and adding the insurance scheme, but only as an option to be used at the treasury secretary’s discretion. The result was a united front of Wall Street spokesman Paulson, Bush and the Democratic congressional leadership.

In the event, the bill went down to defeat, with 67 percent of House Republicans voting against and 60 percent of Democrats voting in favor. The vote itself reflected the close ties between the dominant sections of the Democratic Party and Wall Street.

Only three of New York state’s 23 Democratic congressmen (13 percent) voted against the measure. All four members of the Black Congressional Caucus from New York voted “yes.” In contrast, 15 of 34 Democrats from California (44 percent) voted against the bill. This is a measure of the degree to which Democratic legislators in the environs of Wall Street identify with the interests of the financial elite.

It is significant that the media has focused its attention almost entirely on the Republican opponents of the bailout bill, while saying virtually nothing about the 95 Democrats who voted against it. Though their opposition lacks any principled basis and has been far less aggressive than that of the dissident Republicans, in their statements on the floor of Congress and elsewhere they have adopted a more openly populist tone and highlighted some of the most egregious aspects of the bailout plan. The media has ignored them because it fears their protests will legitimize and encourage the popular opposition.

In the aftermath of the bill’s defeat, the Democrats have once again taken the lead in the effort to hold a revote and push the measure through. Speaking Tuesday at the University of Nevada at Reno, Obama said that he had spoken with Bush, the Democratic majority leader of the Senate, Harry Reid of Nevada, and other leaders about reviving the bailout plan.

Obama stepped up the campaign of fear-mongering in support of the bailout, saying that its defeat would mean that “thousands of businesses could close around the country,” and “millions of jobs could be lost.”

He added, “To the Democrats and Republicans who opposed this plan yesterday, I say: Step up to the plate and do what’s right for this country.”

Both he and his Republican opponent, John McCain, announced their support for an amendment, pushed by some Republicans who voted against the bill, to raise the federal deposit insurance limit from $100,000 to $250,000—a further sop to the wealthy that would ultimately be paid for at taxpayer expense.

At the heart of the bailout plan is a drive by the most powerful sections of the financial elite to utilize the economic crisis to effect a reorganization and further consolidation of the banking industry. In a front-page article headlined “Industry is Remade in a Wave of Mergers,” the Wall Street Journal reported on Tuesday:

“The notoriously fragmented American banking system is going through a decade’s worth of consolidation in a matter of weeks, with the US government often acting as matchmaker.

“At the end of last year, the three lenders that are now the largest in US banking—Bank of American Corp., JPMorgan Chase & Co. and Citigroup Inc.—collectively held 21.4 percent of all US deposits. Now, with this month’s government-backed sales of the banking assets of Washington Mutual Inc. to JPMorgan and of Wachovia Corp. to Citigroup, the Big Three instantly have a combined 31.3 percent of US deposits…

“For customers, it means less choice and the potential for higher fees as the big banks get more pricing power, further pressuring smaller rivals.”

With the assistance of the government, scores of small and mid-sized banks, and some larger ones, will disappear, and a few banking behemoths will emerge from the crisis with dictatorial power over the economic life of the country.

Whatever their minor tactical differences, both major parties are united in the defense of the financial elite and a bankrupt economic system that is preparing a social catastrophe.

The Socialist Equality Party rejects the entire framework of the bailout plan and the official debate surrounding it—a debate that proceeds entirely from the standpoint of the capitalist system, private ownership and control of the banks, and the subordination of all social needs to the enrichment of a financial oligarchy.

We call for the nationalization of the banks and major financial institutions, without compensation to their executives and big shareholders. These institutions must be turned into public utilities, controlled democratically by the working people, so that their resources can be used for productive purposes. These include the creation of jobs, a halt to foreclosures and evictions, the rebuilding of the country’s infrastructure, and the funding of education, health care and other social programs.

The Wall Street executives who are responsible for the crisis, who enriched themselves by means of financial manipulation and fraud, must be held accountable. Their assets should be confiscated and they should face criminal prosecution.

The struggle for this program requires a complete break with the Democratic Party and the building of an independent party of the working class, based on a socialist program and the fight to end the political rule of the banks and big business through the formation of a workers’ government.

This is the program being advanced by the candidates of the Socialist Equality Party in the 2008 elections—Jerry White for president and Bill Van Auken for vice president. We urge all those who see the need for a socialist alternative to support our election campaign and join the SEP.

To find out more about the SEP campaign, visit www.socialequality.com or contact us.