If we take a look at the recent self-described progressive US presidents (Jimmy Carter and Bill Clinton), we will notice that their progressiveness invariably fades away, not even intentionally. That is because the beast compels them to align themselves with its own reality. Carter, who campaigned against the wage stagnation of the Nixon-Ford years, collapsed in the face of the anti-inflationary policy inaugurated by the Federal Reserve under Paul Volcker in 1979. That policy opened the door to the financialization of the economy and the weakening of the labor market on which the Reagan presidency rested. Bill Clinton’s capitulation came with the abandonment of the health care reform and the deregulation of both communications and banking rules. The very people who implemented the latter are at the heart of the Obama administration. They are the proconsuls of the beast. For instance, Larry Summers, when he was in the Clinton administration, opposed all calls to regulate the trafficking of financial derivatives. Today Summers and Geithner are getting Obama to capitulate on the issue of capitalization of the banks in crisis.
Indeed, their newly launched plan is even more favorable to the banks than the Paulson plan of last October. The latter aimed at removing the toxic assets from the banks’ books. It ran aground on the question of how to set the prices that the government should pay the banks for their junk papers (mostly credit derivatives and related “structured” — i.e. unintelligible — investment vehicles). Such pieces of paper are not shares whose values are known every minute of the trading hours, no matter how low they get. They have no value that can be verified by means of continuous market transactions. Therefore, this type of paper does not have a (market) value but only an imputed one. The Geithner-Summers-Obama plan comes with a built-in legal trick. Washington commits itself to financing 90% of the bets placed on the value of derivatives by the very banks that own them. That is like a rigged auction. The public financing of the whole operation is in the form of non-recourse loans to the banks. Debtors of non-recourse loans can legally default if the value of the assets falls below the price at which they were purchased. The Obama government is thus treating junk papers as if they were true collateral assets.
For the banks, everything becomes a piece of cake. First, the banks rig the auction by using public monies to push up the “prices” of their own toxic assets. The new “market” prices of the hitherto toxic assets will recapitalize the banks. Then, if the prices of the junk papers, upon being sold, turn out to be below those reached at the rigged auction — which they will be — the banks’ books won’t show a debt to the government. The rule of non-recourse loans permits the banks not to repay the government loans. That is how the banks’ balance sheets will be freed from toxic derivatives. It’s no coincidence that Wall Street’s financial indexes shot up upon the unveiling of the Geithner-Summers plan. Not even Paulson, who was under pressure of daily Wall Street crashes, had thought up such a clever scheme. The government will be saddled with a debt corresponding to 90% of the monies thrown into the rigged auction.
Obama’s capitulation to the arsonists is complete. It increases the mega-banks’ power to blackmail the government. Washington has accepted the mantra of US monopoly capital (the beast of which I spoke at the beginning) that recapitalizing banks by means of temporary nationalization (as in Sweden in 1993) will squash the public’s confidence in the financial system, thus creating more instability, which, in turn, will jeopardize any eventual recovery. This is a totally false assumption; if anything, the opposite is the case. Worse yet is Obama’s acceptance of the view that the “assets” of the banks have a greater value than what they appear to have, unbeknownst to people. It seems that all the brouhaha about executives’ bonuses was a mediagenic smokescreen, behind which Summers and Geithner were working hard to consolidate capital’s power vis-à-vis the government.
Joseph Halevi teaches political economy at the University of Sydney. He is a member of the international editorial board of Economie Appliquée (Paris) and of the editorial board of Cahiers d’Economie Politique (Paris). He is also associated with France’s National Research Council’s Institut de Recherches Economiques sur la Production et le Développement at the University of Grenoble. Since 1990 he has been a regular contributor to Il Manifesto. This is an expanded version of “Obama: La legge inganno Summers-Geithner sugli asset tossici” published by Il Manifesto on 2 April 2009.