Big Think

States Forced to Cut Services to the Bone: The Opportunity Cost of the Bank Bailout

Okay, the bailout of Wall Street isn't going to end up costing us $23.7 trillion dollars, the number that special inspector general Neil Barofsky fired off to call attention to the fact that banks are misusing the trillions we've given them, and are still hiding untold amounts of toxic assets off the books -- aided and abetted by the who-needs-transparency Treasury. But we have pumped at least $4.7 trillion into the financial sector -- and the pumping isn't over. On Wednesday, Fed chair Ben Bernanke told the Senate Banking Committee that it "may be appropriate" for the government to guarantee the "mountains" of commercial real estate mortgage defaults the banks will likely be facing in the coming months. At a certain point, these numbers are so huge it becomes hard to keep them in perspective, to be clear what $4,700,000,000,000 means in the real world. But reading about the effects of the massive budget cuts almost every state in the country is being forced to make puts the figure in perspective very fast. And it reminds us, once again, how lopsided the "recovery" has been: with banks that received billions in taxpayer handouts now reporting massive profits and setting aside record amounts for executive bonuses, and the American people continuing to face 9.5 percent unemployment, 10,000 foreclosures a day, and vital services being cut. So while Goldman Sachs crows about its $3.44 billion second-quarter profit, and Citigroup and Bank of America strut over the $3 billion and $2.4 billion they respectively earned, we are left to think about the opportunity cost of the trillions we have given to Wall Street -- to ponder what else we could have done with that money. Consider: at least 39 states have imposed budget cuts that hurt families and reduce vital services to their most vulnerable residents. The litany of those affected includes children, the elderly, the disabled, the sick, the homeless, the mentally ill, as well as college students and faculty, and state government workers. America's states are facing a projected cumulative budget gap of $166 billion for fiscal 2010. Even more budget gaps are expected for fiscal 2011. Total shortfalls through 2011 are estimated at $350 billion to $370 billion -- and could be even higher if unemployment continues to rise. These are massive numbers. But when you remember that we spent $180 billion to bail out AIG ($12.9 billion of which went straight to Goldman), you realize that that alone would be more than enough to close the 2010 budget gap in every state in the union. Toss in the $45 billion we gave to now-making-a-profit Bank of America and the $45 billion we gave to now-making-a-profit Citigroup and we are well on the way to ensuring that no state's vital service are cut through 2011. But instead that money has gone to the banks without any fundamental reform of the system, and without any strings attached about how much they had to turn around and lend to help the real economy recover. Or, indeed, without any strings attached about having to tell us what they did with our money. So all across the country the fiscal ax is falling. According to a report by the Center on Budget and Policy Priorities, at least 21 states have made cuts to public health programs, 22 states have cut programs for the elderly and disabled, 24 states have cut aid to K-12 education, and 32 states have cut assistance to public colleges and universities. The devastation is in the details: In California, around 500,000 children face being denied health coverage due to cuts in a welfare-to-work program. Minnesota has eliminated a program that provides health care to 29,500 low-income 21 to 64 year olds. Rhode Island has eliminated health insurance for home-based childcare providers. Maine has cut funding for homeless shelters. Maryland has cut funding for a school breakfast program. In Tennessee, an estimated 30,000 to 40,000 seriously ill people are expected to lose hospitalization and other needed medical services. In Washington, between 7,000 and 17,000 residents will no longer qualify for a public health care plan for people living just above the poverty line. Utah has cut Medicaid funding for physical therapy, occupational therapy, and speech and hearing services for adults. Michigan, Nevada, California and Utah have dropped coverage of dental and/or vision services for Medicaid recipients. Alabama has canceled services that allow 1,100 seniors to stay in their own homes and avoid being sent to nursing homes. Georgia has cut back on programs that offer the elderly Alzheimer services, drug assistance, and elder support, and made a $112 million cut in an initiative designed to help close the gap in funding between wealthy and poor school districts. Arizona has cut cash assistance grants for 38,500 low-income families. Louisiana has made cuts that could keep mentally ill individuals from receiving the medication they need to manage their conditions. Nevada will make it harder for low-income families to receive cash assistance and health insurance. Virginia has decreased payments for people with mental retardation, mental health issues, and problems with substance abuse. Illinois has cut funding for child welfare and youth services programs. Connecticut has cut programs that help prevent child abuse and provide legal services for foster children. Massachusetts has ordered cuts in geriatric mental health services, and prescription drug assistance, and made cuts in Head Start, universal pre-K programs, and services to help get special-needs children ready for school. Keep in mind, all these services are being cut at a time when more and more people are finding themselves in need of them. It's a perfect storm of suffering. Looking at all the money that has gone to the banks -- and how well they seem to be doing, using it to bolster their bottom line (and even buy other banks) -- while the real economy is doing so poorly, proves just how wrong the government's approach to the recovery has been. This approach was on full display during Bernanke's back-to-back testimony in front of the House on Tuesday and the Senate on Wednesday. He pointed to the bulls charging down Wall Street and the ballooning bottom line of the big banks as evidence that the steps taken by the Treasury and the Fed had helped avert a financial disaster. But he admitted that the prospects for increased employment or a decrease in home foreclosures wasn't likely for the next couple of years. And he admitted that "financial conditions remain stressed, and many households and businesses are finding credit difficult to obtain." But wasn't that the main reason for the bailout -- to get the banks lending again? Launching into his questioning of Bernanke, Senate Banking Committee Chairman Chris Dodd said, "Americans who have lost, or are worried about losing, their jobs, their homes, or their retirement security have watched as others reap the benefits of our government's response.... When can [the American taxpayers] expect the recovery that they have funded? When will working families see their rally?" Instead, they are seeing programs slashed, services cut, and state budgets balanced on their backs. Something is very wrong with this picture.

July 23, 2009, 8:21 PM

Why Visiting Pompeii Has Me Thinking About the Smoke Billowing Out of Our Economic Mt. Vesuvius

POMPEII -- I was in Pompeii a couple of days ago. Walking around the ancient city, reading up on its history, and thinking of its people -- wiped out in 79 A.D. by a volcanic eruption -- has me thinking a lot about warning signs. Warning signs fall into two categories: those that are recognized while there is still time to heed the warning, and those that are acknowledged as "warning signs" only after the fact, when it's too late to do anything but sift through the ashes and wonder why we didn't do something when we had the chance. In the case of Pompeii, the warning signs included a severe earthquake in 62 A.D., continued tremors over the ensuing years, springs and wells drying up, dogs running away, birds no longer singing. And then the most obvious warning sign of all: columns of smoke belching out of Mount Vesuvius before the volcano blew its top, burying the city and its inhabitants under 60 feet of ash and volcanic rock. But the warning tremors were dismissed as "not particularly alarming because they are frequent in Campania." And the billowing smoke was quaintly described as looking like an "umbrella pine." There is currently plenty of alarming smoke pouring out of our economic Vesuvius, but it too is being dismissed. Instead of "umbrella pines," we are being lulled with the sightings of green shoots. Don't worry about those economic tremors, we are told, our financial system is back on track, the worst is over, the bailout worked and we just need to sit tight and wait for the bottom to be hit (some are arguing it's already been hit), after which we'll start our slow but steady climb to recovery. But the warning signs are all around us: -- Unemployment has hit a level beyond the administration's worst projections, and last month reached record highs in Rhode Island (12.4 percent), South Carolina (12.1 percent), and Nevada (12 percent), while Michigan, at 15.2 percent, still has the highest jobless rate of any state. Meanwhile, over 650,000 workers will run out of unemployment benefits come September. -- Credit card defaults have surpassed 10 percent, and in May hit a record high -- the sixth straight month that dubious achievement has been reached. -- Foreclosure numbers continue to shatter records. There were more than 336,000 foreclosure filings in June, the fourth month in a row with over 300,000. That meant that, as of July 1, one in every 84 homes had been -- or was in danger of being -- lost. And more than 15 million homeowners now owe more on their homes than they are worth. -- In the first six months of 2009, 675,351 individuals filed for bankruptcy. In June alone, there were 116,365 bankruptcy filings -- a 40 percent increase over June 2008. -- Since the recession began, an estimated 2.4 million workers have lost their health care benefits. And the biggest warning sign that the natural order of things has been disturbed is how many of the very people responsible for the economic collapse not only are still in power, but are still lining their pockets with outrageous windfalls -- courtesy of the American taxpayer. According to last week's earnings reports, Goldman Sachs posted a $3.44 billion second-quarter profit, Bank of America earned $2.4 billion, and Citigroup $3 billion. On top of this, Goldman Sachs just announced that it was setting aside $11.36 billion for employee compensation through the first half of the year. And AIG -- which we bailed out to the tune of $150 billion -- is apparently doing so well they're ready to set aside $235 million in bonuses. After the earthquake that severely damaged Pompeii in 62 A.D., it is said that among the first buildings repaired were Pompeii's famous brothels. The metaphor holds. Only in 2009, we call them Goldman, AIG, Bank of America, and Citi. Though that is probably unfair. To the brothels. But wait, you might ask, isn't the government reacting to the warning signs? Isn't Congress currently redesigning our financial regulatory structure? Yes, but the redesign will give greater authority to the Fed -- which missed all the warning signs leading up to the meltdown. As Mark Williams, finance professor at Boston University and a former Fed bank examiner put it, "giving the Fed more responsibility at this point is like a parent giving his son a bigger and faster car right after he crashed the family station wagon." And what about the new "Pecora" commission, which has been charged with investigating how the financial collapse happened and how to prevent another one -- won't it point out the warning signs? Its chairman, Phil Angelides, certainly seems determined to. But look at its vice-chairman and the restrictions the commission is operating under. The vice chairman is Bill Thomas, the former GOP congressman from California, who earlier this decade chaired the House Ways and Means Committee. Even among shills for big business, he stands out. What's more, Mitch McConnell and John Boehner ensured the committee won't have much clout by forcing Democrats to agree to a provision that allows the committee to issue subpoenas only if one of its Republican appointees votes to issue one. Then there is the proposed Consumer Financial Protection Agency, which is supposed to protect consumers from the vultures that helped destroy our economy. But its ability to monitor warning signs is being undermined by Wall Street, with the charmingly named Financial Services Roundtable leading the charge. "Politically, it would be difficult to kill it outright," says Scott E. Talbott, the Roundtable's Senior VP for government affairs. "Our goal is to change the agency, change the proposal, to where the benefits outweigh the costs.... We're not for the status quo. We're for protecting consumers. The question is, what's the best way to do it?" I'm going to guess that, for Talbott's group, the "best way" to protect consumers will be a way that somehow does not protect consumers. And then we have today's blistering report from Neil Barofsky, the special inspector general overseeing the TARP program, showing that many of the banks -- instead of using the bailout money they received to boost lending -- have used it to make investments, repay debts, or buy other banks. The report also takes on the Treasury Department for its ongoing lack of transparency when it comes to requiring bailed out banks to let the public know what they have done with our money. It's hard to heed warning signs that are so deliberately kept out of view. Walking around Pompeii my friends and I kept wondering: "How could they miss the birds not singing, the water not flowing, the earth trembling, and the smoke billowing? The list of today's warning signs, which future generations may similarly marvel at, grows longer with each passing day. So the tremors continue to rumble beneath our feet and the plumes of smoke continue to belch overhead.

July 20, 2009, 7:06 PM

Sunday Roundup

Following in the hoofsteps of President Bush's 2006 State of the Union call to fight the creation of "human-animal hybrids", Sen. Sam Brownback this week introduced legislation outlawing "part-human, part-animal creatures, which are created in laboratories, and blur the line between species." The bill has 20 co-sponsors, all but one of them -- Mary Landrieu -- Republicans. Minotaurs, centaurs, mermaids, and satyrs everywhere vowed to vote Democrat. No word on whether Michael Steele plans to woo these diverse human-animal populations with a combination of fried-chicken, potato salad, and young men from Athens (reportedly the Minotaur's favorite). Elsewhere, John McCain delivered the most dizzying quote of the week, spinning Sarah Palin's resignation thusly: "I don't think she quit. I think she changed her priorities."

July 18, 2009, 11:59 PM

Shattering the Right vs. Left Prism Once Again: The Wall Street Journal Goes After Goldman and the Bank Bailout

Reading the opinion section of the Wall Street Journal this morning is convincing proof that those who want a progressive financial policy and those who simply want to save capitalism are in agreement about the madness of the administration's Wall Street policies. There, on the left side of the capitalist Bible, was an editorial taking repeated shots at Wall Street darling Goldman Sachs. And, over on the right, a two-fisted op-ed by former hedge-fund manager Andy Kessler in which he labels the government bailout of Wall Street a "dumb move" and "a bust." I'm planning to shrink down today's Journal, laminate it, and hand it out anytime someone in the media starts analyzing the economy using the cobweb-covered, tried-and-untrue right vs. left framing. You know that this way of looking at financial policy is dead and buried when Rupert Murdoch's pride and joy is publishing takes that I could happily have written myself. Let's start with the editorial, "A Tale of Two Bailouts," which decries the fact that, thanks to the policies of Tim Geithner and Larry Summers, Goldman "enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong." The piece is spiked with disdainful references to "the Goldmans of the world" and "the likes of Goldman, which apparently needs no help printing money," and takes issue with the way "we changed when we stepped in to save certain banks in the name of saving the system." It also dubs Goldman "Goldie Mac," saying: "Goldman will surely deny that its risk taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end." Compare that to the laudatory language and quotes used by AP business writer Stephen Bernard in his story yesterday on Goldman's "stunning" profit report. Bernard calls the company "the king of post-meltdown Wall Street" and repeatedly quotes a financial analyst who anoints Goldman as "the best of the best," "in a class by themselves," and "the golden child of the market." The Journal's take -- "We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business" -- is actually more in keeping with that of Robert Reich, who says that "Goldman's resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs.... Goldman's high-risk business model hasn't changed one bit from what it was before the implosion of Wall Street." Then there is Kessler's op-ed, which mirrors much of HuffPost's take on the serial missteps made by Obama's senior economic team. "We took the easy way out," he writes, "and, with the help of Treasury Secretary Timothy Geithner's loose 'stress tests,' swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending." Kessler also refuses to buy into the "'green shoots' psychology" that has spread through much of the media -- and rejects the all-too-frequent conflation of the Wall Street economy and the real economy: "By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth." There is much in the Wall Street Journal that I don't agree with but, when it comes to the failure of the administration to address and fundamentally reform what Kessler calls "the structural problems that got us into trouble in the first place," we are of the same mind. There is no daylight between a progressive position focused on the paramount need to get the real economy going and one based purely on what makes free markets work. The editorial goes so far as to suggest imposing a tax (yes, the Wall Street Journal is proposing a tax!), an FDIC-style bailout tax to be precise, "for those in the too-big-to-fail camp." We've reached the point where the only people defending the administration's Wall Street policies are the people benefiting from them -- or their good friends, Tim Geithner and Larry Summers.

July 15, 2009, 8:16 PM