November 13, 2008

THE MUCH-HYPED $700 billion bailout for the banks has become a grab-bag of policies and giveaways to corporations of all sorts as the Bush administration reels under the pressure of collapsing stock prices, frozen credit markets and skyrocketing unemployment.

Treasury Secretary Henry Paulson announced November 12 that he'll use the second half of the $700 bailout fund for direct government investment directly into U.S. banks, abandoning his original plan to use the money to buy up bad mortgage-related debts from financial institutions.

Meanwhile, the lame-duck Congress, under pressure from president-elect Barack Obama, wants to use that fund to prevent the possible bankruptcy of General Motors. And with other corporate bankruptcies looming, many big corporations and entire industries are lining up to lobby for a rescue by the government.

If government funds are funneled to GM and other automakers, it would only be the latest in a series of sweeping government efforts to counteract the world financial crisis.

Treasury Secretary Henry Paulson

The $200 billion nationalization of mortgage companies Fannie Mae and Freddie Mac, the $150 billion takeover of insurance company AIG and the $700 billion bank bailout fund together constitute the most aggressive government intervention in the economy since the 1930s. And that doesn't count an estimated $140 billion in tax write-offs allowed by the Treasury Department to encourage bank mergers, or the extra $1 trillion in liabilities that the Federal Reserve Bank has taken on its books since September.

YET FOR all the money spent, the results are negligible. Loss-ridden banks are hoarding their bailout money and refusing to make loans. Fannie and Freddie continue to lose tens of billions of dollars.

Incredibly, AIG has even had to be rescued from its original government rescue: The Treasury Department is lowering the interest rate on the company's government loan, investing $40 billion in AIG stock, and spending another $50 billion to create off-the-books holding companies to buy up the toxic securities that the company owned. (It was just these off-the-books operations that allowed the banks to hide their bad assets in the first place, which set the stage for the financial meltdown.)

Still, the credit squeeze drags on, choking off consumer spending that's already constrained by falling real wages and rising joblessness. The biggest impact of this pullback by consumers is in the auto industry, with the three Detroit automakers reporting their worst sales figures in decades. As a result, the Democrats are attempting to use the lame-duck session of Congress to pass an economic stimulus bill that may include an emergency loan for the auto industry.

Treasury Secretary Paulson says the $700 billion allocated to the Troubled Asset Relief Program (TARP) shouldn't be used to bail out the car companies.

Beyond that, though, pretty much anything goes. In a November 12 press conference, Paulson announced that TARP funds--originally slated for buying up bad mortgage-related securities from banks--will now be used almost exclusively for direct government investments in banks and financial institutions.

This flip-flop--the latest of many by Paulson since the financial panic began in September--comes under pressure from Europe, where governments have partially nationalized their biggest banks. The U.S. had to follow suit or see money flow across the Atlantic to take advantage of foreign governments' financial guarantees.

So Paulson, a free-market Republican and former CEO of the investment bank Goldman Sachs, suddenly announced last month that the U.S. would spend $250 billion to buy up the stocks of some of the biggest U.S. banks. Now, he wants to spend the second $350 billion installment in the same way.

Already, the first $350 billion of the TARP fund is committed, with just $60 billion left to spend. And competition for those remaining funds is fierce. Insurers Allstate and MetLife have asked for bailout money, and American Express got federal regulators' approval to transform itself into a bank holding company, which makes it eligible for TARP. "The biggest surprise was how quickly it went from 'I don't need this,' to 'How do I get in?'" Michele Davis, head of public affairs at the Treasury Department, told the New York Times.

"Then," the Times continued, "there is the National Marine Manufacturers Association, which is asking whether boat financing companies might be eligible for aid to ensure that dealers have access to credit to stock their showrooms with boats--costs have gone up as the credit markets have calcified. Using much the same rationale, the National Automobile Dealers Association is pleading that car dealers get consideration, too."

WHILE LOBBYISTS turn the TARP into a piñata for Corporate America, the U.S. economy appears to be in freefall.

The big jump in unemployment from 6.3 percent in September to 6.5 percent in October means that more than 10 million people are out of work--a figure that doesn't include those forced to settle for part-time work or who have dropped out of the labor market altogether. The plunge in consumer spending--the worst since 1980--reflects not only rising unemployment and shrinking real wages, but the wipeout of $5 trillion in wealth since the housing bubble burst last year.

The U.S. economy is likely to get worse--much worse--before it gets better. According to one widely watched measure, manufacturing is at its lowest level since 1981. And the continued refusal of banks to lend to one another, let alone to profitable companies and creditworthy consumers, is jamming the gears of the U.S. and world economy, further suppressing demand.

Thus, what seemed to be a shortage of raw materials just a few months ago now appears as a glut, with the price of oil, for example, at about half the level it was at in July.

In the short term, the problem of overcapacity is most acute in the auto industry. "Blame will fly as the damage deepens, but the unhappy fact is that the market really doesn't need three big U.S. automakers any more," wrote U.S. News and World Report columnist Rick Newman.

"Compared with peak sales of nearly 17 million vehicles in 2006, sales in the U.S. market are likely to decline by at least 20 percent this year and possibly next year, too. The Detroit Three had too many factories during the boom times, and their overcapacity seems vast now that Americans are poised to buy 3 or 4 million fewer vehicles."

And with U.S. demand cut back, countries that depend on exports to the U.S. market--most prominently China but many others as well--are struggling with slower growth. Even China's $587 billion economic stimulus package to build new infrastructure--a spending plan that is far bigger, proportionately, than the U.S. bailout--is unlikely to absorb the industrial overcapacity in that country, let alone give a lift to the world economy.

"This package alone will not be able to turn the global commodities markets around," said Frank Gong, a China analyst for JPMorgan Chase. "For infrastructure spending, you probably need steel, cement, heavy machinery and a lot of cheap labor, but China is still going to see a big slowdown in exports and industrial output."

The deepening crisis will be the focus of a November 15 summit of the Group of 20 nations--the seven industrialized countries plus rising economies like Brazil, India, Russia, China and others.

The meeting, hosted in Washington by the outgoing and hapless Bush administration, was hastily planned and won't accomplish anything other than giving world leaders a chance to try and boost confidence in the financial system.

What's presented as coordinated efforts to boost the world economy are in fact competitive measures by rival nations, each intent on using the power of the state to shore up their financial systems and main corporations. The aim of each is to avoid the worst of the crisis by passing its cost on to others.

It's only in this context that Paulson's various bailout schemes make sense. Making up policy as he goes along, his priority is to protect his former fellow Wall Street CEOs and to shore up the banking system, not to help the workers who are bearing the brunt of the crisis.

The Democrats may prevail in their effort to include the auto industry in this ad hoc effort to keep the U.S. industrial base from unraveling. But unless and until working people are organized enough to fight for different priorities, the benefits of government intervention will go the same business chiefs who created this catastrophe.