Bush tax cut debate cast in light of new Wall Street bailout documents

A video of Independent Vermont Senator Bernie Sanders is making the rounds this week. In the clearest language to come out of Washington on the topic, Sanders powerfully states what he sees as at stake in the battle over extending the Bush tax cuts for the wealthiest Americans. It’s a class war alright, he says, citing the shockingly lopsided and well-known if not fully absorbed statistics that speak to the culture in Washington that has been battling on the side of the rich and powerful for decades at the expense of the middle class.

The Sanders speech video is gaining popularity just as the press is digesting the massive number of documents made public by the Federal Reserve detailing the $3.3 trillion raid on taxpayers made in 2008 by the too-big-to-fail Wall Street firms and their Washington enablers.

Sanders on the Bush tax cuts:

“We gotta own up to it. There is a war going on. The middle class is struggling for existence and they’re taking on some of the wealthiest most powerful forces in the world whose greed has no end. And if we don’t begin to stand together and start representing those families, there will cease to be a middle class in this country.”

The New York Times reviews the Great Wall Street bailout of 2008 in light of the newly released documents:

[I]t’s good to know who got what at the bailout banquet. This helps us understand how expensive it is to live in a nation where big, politically interconnected financial institutions are not allowed to fail — even after they mess up in the most catastrophic of ways.

[…]

All of the emergency lending data released by the Fed are highly revealing, but why weren’t they made public much earlier? That’s a question that Walker F. Todd, a research fellow at the American Institute for Economic Research, is asking.
Mr. Todd, a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said details about the Fed’s vast and various programs should have been available before the Dodd-Frank regulatory reform law was even written.

“The Fed’s current set of powers and the shape of the Dodd-Frank bill over all might have looked quite different if this information had been made public during the debate on the bill,” he said. “Had these tables been out there, I think Congress would have either said no to emergency lending authority or if you get it, it’s going to be a much lower number — half a trillion dollars in the aggregate.”

Better late with the data than never, of course. And the release of these figures just ahead of Friday’s grim employment data — the jobless rate rose to 9.8 percent in November — makes them even more compelling. Clearly, the federal government was much more willing to deliver mountains of money to big banks that made big mistakes than it was to lend a financial hand to rank-and-file Americans struggling through foreclosures.

Federal officials have always argued that plowing money into errant banks and trading shops was the best way to rescue the economy, but to Edward J. Kane, professor of economics at Boston College, details of the Fed’s largess are reminiscent of a famous Winston Churchill quotation.

“Never have so few owed so much to so many, and given them so small a return,” Mr. Kane said. “We see, for example, how little these institutions have given back to troubled homeowners whose houses are threatened with foreclosure.”

GOP senators debating the “fairness” of extending all the Bush tax cuts this week are certain not to mention the “government handout” to Wall Street in 2008, the biggest American welfare check ever written.

[T]he low interest rates the Fed charged to institutional borrowers during the disaster translate into a significant subsidy, indeed a gift, to many of the firms that set the financial collapse in motion.

But the Fed is silent on how big that subsidy actually was.

Estimating its size will be the subject of much work in the coming months and years. For now, here’s a quick and dirty estimate of how much the Fed subsidized borrowers in just one program — the Primary Dealer Credit Facility — for just two weeks in September 2008.

From Sept. 15 through the end of that month, borrowings averaged around $100 billion a day. The interest rate charged on those loans was 2.25 percent.
Given that markets were frozen at that time, and given the dubious quality of some of the collateral posted to the Fed to back the loans, an interest rate of 10 percent would be a reasonable benchmark for measuring the size of this subsidy.

On the one hand, Citigroup, Barclays, Morgan Stanley, Goldman and the others paid roughly $75 million in interest over that September fortnight. Had the Fed charged 10 percent, the firms would have paid about $325 million. For just those firms, over only that period, that’s a $250 million subsidy.

“The justification was, this was to prevent the markets from exploding and the economy from being ruined,” Mr. Kane said. “They always explain their actions against doing nothing: ‘If we had done nothing, this would have been a terrible mess.’”

But the Fed has never identified any alternative approaches it might have taken other than the one it chose: simply hurling huge snowballs of cash at Wall Street.

These documents come too late to the public to shape new financial regulations. No surprise there. They’re not too late, however, to influence the debate over the Bush tax cuts, which are yet another enormous handout to the same Wall Street billionaires who benefited directly from the historic behind the scenes too-big-to-fail government bailout of their catastrophically bad businesses.

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