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On the Senate’s last day in session in December, it approved the government’s $1.1 trillion budget for coming fiscal year.

Few people realize how radical the new U.S. budget law was. Budget laws are supposed to decide simply what to fund and what to cut. A budget is not supposed to make new law, or to rewrite the law. But that is what happened, and it was radical.

Wall Street’s representatives in Congress – the Democratic leadership as well as Republicans – took the opportunity to create an artificial crisis. The press called this “holding the government hostage.” The House – backed by the Senate – said that it would shut the government down at some future date if two basic laws were not changed.

Most of the attention has been paid to Elizabeth Warren’s eloquent attack on the government guaranteeing bank trades in derivatives. Written by Citigroup lobbyists, this puts taxpayer funds behind future bank bailouts if banks make more bad bets on complex financial derivatives, such as packaged junk mortgage loans.

Critics have focused on how there must be a loser for every winner in a derivatives contract. The problem is that if banks lose, the government will bail them out just as it did in 2008.

Less attention has been paid to what happens if banks win. They will win largely in making bets against pension funds. Indeed, pension funds have not been treated well by Wall Street in recent years.

They are in a bind. Pension funds will fall further and further behind what they need to pay retirees if they do not make the impossibly high returns of 8.5%. The guiding philosophy of pension funds has been that instead of making employers pay enough to cover the pensions they have promised, funds can make money purely financially – by Wall Street sharpies.

The problem is that safe interest rates today are less than 1% for Treasury bonds. Everyithing else – stocks, corporate bonds, and hedge fund derivatives – are much more risky. And when Goldman Sachs, or JPMorgan Chase draw up a derivative for a client, their aim is to make money for themselves, not for the client.

So pension funds have been at the losing end. Most funds would have done better simply to turn their money over to Vanguard in an indexed fund, and saved management fees.

At the state and local levels, pension funds in New Jersey and other states threaten to go the way of Detroit pension funds – to be cut back so that bondholders can be paid.

Many corporate pension funds also are behind, because companies are using their record profits to pay higher dividends and to buy back their stocks to create price gains for speculators.

But the funds most under attack are union pension funds. These are the funds that Congress has gone after. The fight is not merely to scale back pension funds – and avoid the government’s Pension Benefit Guarantee Corp (PBGC) being bailed out – but to break the power of unions to attract members or to defend them.

The Congressional budget act states that pension funds with more than one employer – such s construction industry funds, teamster funds for truckers and public service workers funds – can be scaled back in order to pay Wall Street creditors.

Labor now is told to go to the back of the line behind Wall Street. If the economy is too debt strapped to pay everyone what is owed, then the new motto is Big Fish Eat Little Fish.

Wall Street is eating the pension funds.

This goes hand in hand with Obama’s fight to scale back Social Security and, ultimately, to privatize it. Now that Republicans are in a majority of both the House and Senate, the Democrats will be able to take an anti-labor position and then try to blame it on Republicans.

Yet Democrats themselves were the leading advocates of the anti-labor, anti-pension fund policy. This special “rider” to the budget bill was known last spring to the House Budget Committee. Yet something tricky happened: While the committee approved the anti-labor pension rule, no record was taken of which members and which party voted for the radical change, and who opposed it.

For instance, Marcy Kaptur, who replaced Dennis Kucinich from Cleveland after the Democrats helped the Republicans gerrymander his district, said that she should remember who voted which way on the House Appropriations Committee she served on.

So this is the problem: the supposedly liberal Democrats are in the lead for scaling back pension funding, Social Security and labor protection in general.

Here’s an indication of how bad the situation is. Pension funds – union pension funds as well as corporate pension funds – are supposed to be backed up by the PBGC. But that agency has been headed by a former Lazard Freres investment banker, Joshua Gotbaum. He’s now at the Democratic Party’s pro-Wall Street think tank to refine their anti-pension policies. He has explained to the press that he wants to “save” pensions – by scaling them back.

This is the new Orwellian anti-labor rhetoric. “Saving” pensions means reducing what workers were promised – back when they negotiated lower wage gains in exchange for greater retirement security.

The new law permits pension plan trustees – often Wall Street financiers – to cut benefits without having to ask the PBGC to take over the plan. This “balances the federal budget” by saving the bailout funds for Wall Street, not for labor.

The problem is that the Employee Retirement Income Security Act (ERISA) of 1974 — vastly underpriced the contributions that employers would have to make in order to pay retirees. The problem was designed to fail from the beginning, because Wall Street and corporate lobbyists fought to underfund the program. They knew from the very beginning that pensions would fail in the end.

Yet at the same time, the law stated that benefits already earned by workers cannot be cut back. But last December’s Congressional budgetary coup d’état ruled that now, employee retirement benefits can indeed be cut back. Retiree claims are not treated on the same level as financial debts to Wall Street investors. They are sent to the bottom of the line of claimants.

Their strategy is basically Malthusian: to blame the pension problem on the fact that America is de-industrializing, leaving not enough new union members to pay the dues that are necessary to pay retirees. This is because the pensions were designed to be a Ponzi scheme from the outset – needing new contributors to pay the early entrants.

This is of course the argument that President Obama is making regarding the need to cut back Social Security too.

This turns out to be the big picture at work for the next two years. Outside of Wall Street, the economy is not really growing. Obama is escalating military spending in his heating-up confrontation with Russia and China, and that will take a large part of the budget. More bailouts and subsidies for Wall Street over their derivatives bets – the rule that Senator Warren criticized – will eat up more government revenue.

So something must give – and the PBGC is one of the designated victims. The aim is to avoid government help for pension funds in arrears – and nearly all funds are in arrears, because of the basically malstructured idea of making money financially instead of helping the economy actually grow by investing to produce more goods and services and raise living standards.

Congress has just legislated the right to scale back pension funds if they’re managed by labor unions, e.g. on multi-employer contributors. This will hit blue collar labor the hardest, especially unionized building superintendents, and service workers.

Once this is done, the idea of rolling back pensions can spread to other kinds of pension funds besides union funds. State and local pensions, corporate pensions and even insurance company annuities can be cut back.

And the great aim at the end is to privatize Social Security. Scaling back labor union and corporate pension funds will enable Wall Street propagandists to come out and say, “See, the only way you can be safe is to have your own private accounts, and manage your own money.”

The problem with this approach is that “managing our own money” turns out to be deciding which Wall Street firm is going to manage it – and of course, they manage it in their own interest first and foremost. They do this by raking high management fees that keep most of the returns for their own salaries and bonuses. In the end, the place their clients funds in bad bets.

The great argument for having Wall Street manage pension funds instead of labor union economists or their own people is that the mafia is strong in many unions. That’s indeed the case. In 1982 a federal consent degree stripped the Teamsters of its power to control its investments. The assumption was that if labor unions are crooked, then Wall Street must be more honest, is absurd. It’s basically one set of financial predators against another set.

Here’s how Prudential Insurance became notorious for ripping off the funds of clients it managed, for instance. It might make two bets on a given day: one, that a stock or bond would go up, and two that it would go down. At the end of the day it would put the winning bet in its own account, and the losing bet in the account of its clients.

This is how crooked commodity traders have worked for many decades. In Ghana, for instance, the cocoa commission traders would place two bets: one, that cocoa prices would rise, and two, that they would fall. They kept the winning bet for themselves or their family members; the losing bet would be placed on the government’s balance sheet.

In a nutshell, this is how Wall Street has been treating pension funds. This is why Orange County, California, sued Wall Street, and why other cities have sued Wall Street firms over mismanagement that have led to huge losses for their funds – and super gains for Wall Street at the other end of these trades. The idea of “fiduciary responsibility” is no longer enforced, now that Obama’ Justice Department has made it clear that it is not going to charge large Wall Street banks and their brokerage arms with criminal fraud. The gates are now wide open for such fraud.

With this in mind, now let’s go back to the new Congressional budget law. It gives priority to debts owed to Wall Street; debts to labor now will go to the back of the line, and be scaled down so s to pay corporate raiders and banks.

The first great test case is expected to be the Teamsters’ Central States Fund. The rationale for cutting back pensions for drivers is that in 1980 it had four employees for every retiree. Today, it has just one driver for every five retirees. How can such a plan succeed?

The normal answer would be, by turning to the PBGC.

But let’s look more closely at the alleged source of the problem. It’s not just that there are so many fewer employees per retiree. The Teamsters Central States Fund is a prime example of Wall Street mismanagement. Goldman Sachs, Northern Trust and other firms make the decisions, not the Fund’s own board. A recent report has found that “Roughly a third of the pension system’s shortfalls — or almost $9 billion – can be traced to investment losses accrued during the financial industry’s 2008 collapse. These losses were in addition to more than $250 million in fees paid by the plan to financial firms in just the last 5 years.”

Obviously there is as much conflict of interest at work in letting Wall Street sharpies manage pension funds as there is in letting Mafiosi rip them off.

The important thing is that the PBGC has been as lax in oversight as the Federal Reserve has been lax in overseeing the banking system. But whereas the Fed then bailed out the banks in 2008 on the ground that they were systemically necessary for the economy to function, no such assumption is being made with regard to labor’s pensions.

It seems part of a long-term strategy to cut back pensions, privatize them into individual accounts managed by Wall Street investment banks and insurance companies, and then to privatize Social Security.

This is part of the strategy to use the demand for budgetary balance to privatize the nations’ infrastructure too as it falls apart – on the ground that the government is broke, and cannot raise taxes on the rich or simply print the money itself to fuel economic growth.

It looks like Greece may be the test case for where the American economy is heading.

Michael Hudson’s book summarizing his economic theories, “The Bubble and Beyond,” is now available in a new edition with two bonus chapters on Amazon. His latest book is Finance Capitalism and Its Discontents. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. He can be reached via his website, mh@michael-hudson.com