Sunday, September 21, 2008

The Economic "Bail Out" and the scamming of America

I decided to write a little note due to what I perceive is a massive lack of understanding about the recent economic events taking place and transformation of the American populace as a result. I have recently left a few cryptic status updates about George W. Bush having won a class war, presiding over the complete evisceration of the middle and poorer classes, while effectuating a massive transfer of wealth to the already wealthy.

Perhaps just a few words about myself in this regard. At Yale, I was an economics major focused primarily on the economies of developing countries. During the summer after my junior year, I got the chance to do work on behalf of my professor, Robert Evanson, on a project in Paraguay funded by the International Bank of Development. During that summer, I also had to do work in Brazil and Argentina, and got the chance to also travel to Bolivia.

However, rather than edify my interest in economics, the experience convinced me that this field was definitely not one in which to dedicate a life. Recognizing how corruption was institutionalized within the framework of international lending institutions, such as the IDB, the World Bank and the IMF, I soon learned why not one single African or Latin American countries had developed as a result of these policies, but in fact has all regressed since the 60's and 70's when many nations (in Africa, in particular) gained independence. I also soon realized how so many of the Asian "tigers" had developed, precisely by adopting policies completely antithetical to the theories of development that I had been learning (and majoring in) at Yale. As it seemed quite apparent that reality trumps theory, it was a truly major lesson in questioning authority, a lesson that would strengthen as I moved to various other fields in my strange life.

Yet this disillusionment also shattered what I had hoped would be the chance to do a Ph.D. in the field. I was convinced about writing about the relationship of economic development to "Gini coefficients", namely, a coefficient that measures the level of income equality within a particular region (or, most often, nation). It appeared intuitive that nations that has more flat levels of income distribution would likely have more economic activity or growth. I did not think that an absolute flat level might be optimal, but I figured that it would be much more advantageous quantitatively than the radically skewed levels found in most poorer countries. Because, however, this seemed somewhat intuitive, my not pursuing it didn't seem a great loss, though its realization, if proven, would have been a direct challenge to (and possible quantitative refutation of) the "trickle down" theories being sold by the Reagan acolytes.

But I would never forget this internal intellectual debate.

So this debate was immediately brought back to life in full force upon the seizure of power by the George W. cabal and the immediate call for tax cuts to the wealthiest Americans as a measure to boost economic growth. Because of the lack of economic understanding of the masses, and the professional packaging of such theories, George W. was able to effectuate those tax cuts with little opposition from Democrats.

Coupled with these legislative victories were calls for the privatization of social security and the management of such assets by Wall Street, with the eggshell think belief that somehow "Wall Street professionals" would be able to maximize returns much better that "government" and that Social Security was a very expensive policy that would spiral out of control.

When it came to some sort of nationalized health care, pundits argued, it was simply too expensive for "government " to afford, despite the fact that the United States is the only Western country to NOT have a nationalized health care system, has millions of Americans unable to get health care coverage, and spends nearly twice as much more on health care on a per capita basis than the next most profligate spender on health care, Switzerland.

And I also listened to the naive ranters of think-tank invented lines that "Well, the government can't do anything about the economy," though the United States budget is BY FAR the largest conglomeration of spending packages, was able to help lift the United States out of the Great Depression, and, by itself, funds and maintains one of the largest single industries in the world, the defense industry. It is sad how sound bytes can obfuscate the most obvious and elementary realities.

Nevertheless, the recent moves by the US government highlight the intertwined nature of all that I have previous mentioned. Earlier in the year, the United States has engaged in a government bailout of Bear Sterns investment house to the order of $29 billion. Then followed up with a $200 billion bailout of Fanny Mae and Freddie Mac mortgage lenders, an $85 million dollar loan to insurance giant AIG (, arranged with other global central banks efforts to put $180 billion dollars of funds into the banking system (, as Bush now wants power to raise $700 billion banking system bailout plan for the financial system, a move supported by Barack Obama.

The fundamental and obvious problem by these moves is that these moves do absolutely nothing to help ordinary Americans. In March, it was reported that nearly 1.5 million Americans could lose their homes (, continued to grow in June (, and if San Diego county is representative of other jurisdictions is only getting worse ( Not a single penny of the billions of billions of dollars that been authorized to be expended are going to prevent a single home from being lost. The $700 billion dollars, by itself, amounts to nearly $2,500 per American. How much of this money, if simply given to Americans directly, would prevent foreclosure? Probably quite a bit.

And surely the naive will somehow suggest that the massive bailouts to the banking industry will somehow prevent a bank collapse that would help ordinary Americans, conveniently forgetting the fact that Americans are ALREADY insured by the Federal government of losing their money by bank failure to the order of $100,000 under the FDIC. These are not measures to help ordinary Americans.

And let us not forget about the costs of the Iraq war, a cost that Nobel prize winner Joseph Stiglitz says could cost up to $2 trillion dollars. (

So why the earlier reference to Gini coefficients? Because even as the new millennium began, the United States was the most income unequal developed nation, in the area of Uganda, Cameroon, Ivory Coast and Nepal (for the record, the UK is not that far behind)( The result being that, if the earlier thesis that I held was correct, the transfer of wealth from middle and poorer people (though the use of taxpayer money, to which they would have contributed), to investment and commercial banking houses, which will wind up benefiting shareholders, directors, and partners of these houses, disproportionately, this suggests a REDUCTION in economic activity for the long run.

Rather than try to write the Ph.D. thesis right here as a blog post, a little simile may be helpful: if you play monopoly, when is the amount of economic activity the greatest? At the beginning, when ever player has a chance to purchase assets and has sufficient financial resources to do so. After a while the game boils down to those who end up owning a lot of property, and some stragglers who are in the game with no money and nearly no property. In order for the game to continue, those players must either quit and get out, or rely on the charity of the other players who say, "ok, you don't have to pay me now," or give them some sort of IOU. The game quickly becomes a game between big fish, while the others are pretty much spectators.

If somehow you decided to open up the bank and simply "give" them money, you could make the game more interesting again. It is possible that they could try to negotiate to buy some properties, and stay in the game. The game could get exciting again, at least for a while. But, if you decided to take the same amount of money, and give it to the big fish, divide up the rest, economic activity would not heat up much. Those with no money would stay quiet and isolated, and those big fish, may already have assets that even without the extra money, they could continue playing. In real sense, the United States has opened up the treasury and the FED and caused massive amounts of money to be given to an absolute few large cats, while millions and millions of Americans, struggling with high oil and food prices, less jobs as a result of outsourcing, and higher mortgage payments, don't receive a dime.

The result of this is that income inequality will MASSIVELY increase, while economic activity will similarly continue to decrease. These bailout plans help those who absolutely least need help.

And the people don't even understand the basis mechanisms as to why this is happening.

If in the early part of the millennium, the United States found itself in the company of the aforementioned countries, expect that in the upcoming years, the US will find itself in the midst of countries like China, Zimbabwe, South Africa and Swaziland. For people who know these countries, and their history of wealth concentration, it doesn't get much worse than this.

By way of contrast, countries such as Japan, Finland, Norway, Sweden, Luxembourg and Iceland are among the most equal income distributed in the world.

I never got a chance to write the thesis, but I think I would have been on solid ground.

And I also think that I am on solid ground on saying that Obama offers nothing different on this issue of monumental import. He is not going to challenge the Republicans on fighting for the rights of ordinary Americans, but rather will take the lead on jumping into their framing of an issue that promotes poor economic policies that enfranchise the enfranchise and further disenfranchise the disenfranchised. This is not change, but the same old shit.

And cognitive dissonance can cause you to cheer, cause you to pray for better Supreme Court picks, but given how few people even have contact with the law, this is more symbolic than meaningful, but people WILL feel the effects of these poor policies (and already have, thus are bleating for "change"). But change needs to be more than a campaign slogan, and I can assure you that Obama just ain't it.


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