After nearly a year of debating and haggling, Congress is finally about to take a modest, positive step forward with its bill to overhaul Wall Street. But by readying social security cuts and tax breaks for big corporations, the Obama administration is setting up an economic disaster that could have been crafted by President George W. Bush. It’s a political nightmare for the Democratic Party.
How Did We Get Here?
While the road to our current economic mess has been three decades in the making, we know how we got here. Washington pushed policies that favored short-term Wall Street profits over the living standards of our citizens, eroding the middle class and destabilizing our entire financial system in the process.
As University of Texas economist James K. Galbraith explains for AlterNet, this strategy is enshrined in the ideology of mainstream U.S. economists, who simply refuse to acknowledge the existence of financial fraud. Economists’ blind faith in the power of markets is so strong that they cannot envision market systems in which the rules are systematically broken for profit on a massive scale. That is what happened in the savings and loan crisis, and it is what happened in the years leading up to the Great Financial Crash of 2008.
As we learned from Congressional hearings on Lehman Brothers and Washington Mutual, the Securities and Exchange Commission’s case against Goldman Sachs is just the beginning. This kind of thinking convinced administrations under both political parties not to enforce serious regulations, and it convinced Congress to repeal useful and constructive rules.
Those rules prevented the financial elite from looting whole sectors of the economy. While many banks ultimately booked big losses on their subprime bets, they spent years making massive profits—and massive bonuses—on those very same bets. Those bonuses never get repealed. The scam worked. Wall Street effectively pillaged the entire housing industry, converting the life savings of much of the American middle class into banker bonuses.
Protests Lead To Progress
Fortunately, the public has had it with Wall Street excess, and that pressure will very likely lead the Senate to pass to a handful of significant, if modest, reforms this week. As Andy Kroll chronicles for Mother Jones, protesters descended on K Street and the homes of bank lobbyists over the past two days to speak out against bank abuses and demand action.
As Mary Bottari of the Center for Media and Democracy describes for GRITtv, progressives have already won a huge battle by ordering an audit of the Federal Reserve’s secret bailout operations. The Fed has pumped well over $4 trillion in emergency funding into the banking system over the course of the financial crisis, but nearly $2 trillion of which is still outstanding. It’s our money, and we don’t know anything about it. As Bottari explains:
For the first time ever, we’ll be able to see who got the money [and] what collateral the American taxpayers got in return. We’ll also be able to examine the stealth bailout of Fannie Mae and Freddie Mac that is still ongoing.
Putting the Deficit Before Jobs
That’s the good news. The bad news is that President Barack Obama’s political advisers have convinced him that slashing the federal budget deficit will play better with voters than taking action on jobs. As Robert Kuttner notes for The American Prospect, that is simply an insane political calculus, particularly when one realizes Obama’s pending strategy for cutting the deficit. And Obama’s plan is just as bad from an economic perspective.
There may very well come a time when the U.S. really does need to address its fiscal situation, particularly if the financial sector demands another taxpayer bailout in the near future. But right now there is no pressing need to cut the deficit. If investors were worried about the government’s ability to make good on its debt, it would be charging higher interest rates. Instead, interest rates are at their lowest in decades.
Curb Military Spending, But Leave Social Security Alone
But if you wanted to cut spending, an obvious place to look would be our huge, wasteful budget for military adventurism. There are plenty of good reasons to oppose the wars in Iraq and Afghanistan that have nothing to do with the U.S. economy—but the economic reasons are compelling: the Iraq War alone has been a $3 trillion drain on the U.S. economy. That’s a lot to spend for a prolonged and pointless war.
One place you absolutely should not look to make cuts is in Social Security, because the program funds itself, and is currently projected to be just fine until 2037. Unlike the wars in Iraq and Afghanistan, Social Security provides real, tangible benefits to U.S. citizens, and has radically transformed the plight of America’s elderly for the better. Only Wall Street opportunists support Social Security cuts—even Tea Partiers are against them.
But as Kuttner notes, Obama is currently contemplating slashing Social Security, while raising revenue by taxing the middle class, and winning Congressional Republican support by cutting taxes for big corporations.
A Political Train Wreck
It’s a plan straight out of the President George W. Bush playbook. Bush successfully pushed through a host of tax cuts for the rich during the first half of his presidency, and sought—unsuccessfully—to privatize Social Security during the second half. The plan to loot Social Security failed for a reason. It’s a political train wreck everywhere off Wall Street, where financiers see the allure of big profits from a smaller or privatized system. As Kuttner emphasizes, Republicans won’t even have to lie to paint Democrats in a negative light:
“You could hardly hand the Republicans a better gift for the fall election. Imagine the GOP TV spots, Fox talking points, and Wall Street Journal editorial: Obama Administration Has Secret Plan to Raise Your Taxes and Cut Your Social Security.”
In fact, there is still plenty of room in the budget for spending on jobs—if you’re worried about the deficit, fund it with a tax on Wall Street speculation. But as Art Levine details for Working In These Times, there is almost no Congressional interest in even the most modest job creation efforts. Without a serious effort from Washington to put people back to work, Levine notes that incumbents in both parties are going to face a political “tsunami” come November.
An economy that works only for Wall Street will fail. That is the most important lesson of the Great Crash of ’08. And while it appears that some progress will be made with the current financial reform bill, ignoring the jobs crisis while gutting Social Security would be a disastrous return to the Bush economics that brought us the worst economic crisis in generations.
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