Dr. Evil and the Gajillion Dollar Bailout

A salvo from Armine Yalnizyan on the bailout:

GAJILLION DOLLAR BAILOUTS: FIVE THINGS TO THINK ABOUT

By Armine Yalnizyan, Canadian Centre for Policy Alternatives

As the US government continues to figure out just how much it will take to bail out financial markets, up to the tune of $1 trillion dollars, the sound of Dr. Evil’s voice creeps into in my head – “Okay then. We will hold the world ransom..for One..Hundred..BILLION DOLLARS”

What’s unfolding south of the border is like a crazy Hollywood action movie. Except it’s not funny.

The scale of the thing eclipses any other government intervention in recent history and represents a damning indictment of the cries for a ‘free market’ and ‘less government’ that we’ve been hearing in the U.S. and in Canada for the past 20 years.

If this story was unfolding in Canada, the equivalent amount would be a $100 billion – about half the size of every other thing the federal government does.

It is the sheer size of this disaster that helps put a few things into focus.

First, and most striking: What a stupid way to spend such huge amounts of money.

Think how much further $1 trillion would have gone if even a fraction of it had been invested in creating more affordable housing options, the problem that triggered this mess in the first place.

Or imagine if it had been invested in public supports to help stretch Americans’ paycheques and improve their lives. Think of the public health care and education opportunities a trillion dollar investment could have given Americans.

It’s dumb economics to spend such obscene amounts of money to offset a crisis created by investors, with no clear and direct advantage to the average person on the street other than to say we kept the banks from completely fouling our nest today.

The second striking thing is how risk got shifted from the titans of Wall Street – the big players who get paid fortunes to take risks, gambling with America’s future and the entire global economy – to hard-working families who could never get away with ducking the price for acting irresponsibly.

Of course, the bailouts are spun as benefiting everyone – and that’s true to a point. But a nation of primarily low-paid workers is paying for a handful of loaded losers who made bad bets. In what other type of crap shoot does that happen? The CEO of Lehman’s, which folded under his guidance, earned $40 million last year, including “performance” bonuses. Pardon the pun, but that’s rich.

Not only are average working stiffs paying for these bad boys’ mistakes, they are paying twice, if you count interest. Since the U.S. government is already in deficit, U.S. taxpayers have to borrow the money from someone who has it. Average Americans will be paying for the big risk-takers for a long time to come.

The third thing worth paying attention to is the scary amount of consolidation that these events are triggering. The credit crunch is paving the way for corporate concentration of power and market share in the U.S. and globally.

It’s a world that Dr. Evil would fit right into.

The numbers of players in the financial market are shrinking, making the market share of those left standing players even bigger.

Three of the five largest investments banks in the US have disappeared in the past 6 months.

Bank of America has just “steadied” the market by buying up small fry Merrill Lynch (valued at $50 billion), making it now the world’s largest brokerage with client assets of $2.5 trillion.

Last week Lloyd’s of London swallowed a shaky Scottish based mortgage lender that had lost half its market value. Now Lloyds dominates about 40% of the market.

This kind of corporate concentration should be sending shivers down the global spine.

What does any of this mean to Canada? Conventional wisdom holds that Canadians needn’t worry, the same things are not going to happen here.

But here’s the fourth thing. It’s true that the exposure of Canada’s financial institutions to this contagion has not been enough to warrant bailouts. Major writedowns have led to corrections in the stock market – so the value of your RRSP may just have taken a big hit, but there’s no wave of mergers, and our politicians are not on the hook for tough decisions. Yet.

But things are not looking good, as financial meltdown translates to economic slowdown, putting more jobs on the line on both sides of the border. And if lenders become more skittish about lending and hang on tighter to their money, interest rates will inch up.

All those credit card and mortgage payments that already are so hard to make at month’s end may lead to record personal bankruptcies, if things continue to sour in the labour market, or if the price of borrowing goes up. Canada is not immune to widespread trouble.

So here’s the fifth thing. In the middle of this fiasco, in the middle of an election, one politician has stood strong, focused and clear about the way ahead. Our Prime Minister has stated that governments don’t guarantee jobs, and that “Canadian consumer spending has been a rock that has sustained the economy and we anticipate that that will continue”.

That way of thinking – governments can’t do anything for you, let the market decide, you’re on your own – may have worked last year or even last month. But given the events of last week, the Harper line is starting to sound dated.

We’re learning from south of the border that governments do have a strong and vital role in keeping the market in check. It’s time Canadians start having that conversation — before the meltdown comes to a bank account near you.

8 comments

  • One of the most humorous moments in Paulson’s grilling before the US senate today came when one senator asked him if markets were the most efficient mechanism for pricing then how could a government run market get the prices better. Now play the role of Paulson, two conditions apply: (1) Private markets are everywhere and anywhere way more efficient than government (2) you really want the 700 billion but without compromising on (1).

  • Good article, we need more like this.

    I wonder what it will take to get the American counter movement into a newer gear. It will be quite an interesting time for sure. It is sad that it is only crisis that brings out these motivations for change. Will this be enough to get some heads looking in new directions. I guess we’ll wait and see. I think many people point out that the labour market numbers are not all that bad in the US, eleviating any serious recessionary winds. However that is if you are just counting jobs. We all know that a job is not a job any more, it is those all important high wage jobs.

    It is amazing how all of a sudden everybody now seems to get it, i.e. just how marginalized, beat upon and polarized and ruthless “self” regulated markets were grinding down workers.

    The American dream was extended to those outreached desperate arms by the sub-prime mortgage victoms, promised a house and a roof to call their own. Eventually the wealth effects of such a housing bubble will blow all away when it bursts. And when it burst the American dream melted into a sea of hording NY financiers, running for the hills with their chests over flowing in gold.

    This meltdown is all about inequality it is about broken dreams and greed and a whole system based upon propping up the facade.

    Will this be enough to ignite a renewal, will the cultural levers be able to cover up the smell and the stink of this great injustice. Will the American public finally hear the call and throw these neo-con republicans to the Lions. Will Obama deliver them all from Dr .Evil and tyranny.

    Hard to say.

    I enjoyed this article quite a lot.

    I do have a question though, being a statistician/economist type guy, how was it we did not see all this coming. I mean it wasn’t like we didn;t see the credit elephant dancing about in the front office or anything. Why are we all so surprised. I have been expecting this since the day I read Jim’s paper Boom book. We all new the terms of trade have been so bad, and where was all the spending power in the US coming form. The limits of the credit wall could not have been that invisible. We have hit that wall with such a head of steam, it is like the whole system was in a state of denial. The crash sure was at some speeds that no economy had seen.

    I am sure there will be a whole lot down the road written about these unique moments in time. Is this how they felt in the 20’s. I do recall reading a few books during those times and scanning through some newspaper of that period. And the way it unfolded back then seems quite similar to now. The arrogance back then in the headlines seemed to think that it was something that was highly fixable, and nothing to worry about. THen suddenly the crash and all hell broke loose.
    Will we avoid it again or are we just on the edge awaiting the final push off into the abyss.

    Simply amazing watching those talking heads today in Washington.

    paul

  • Well insofar as fractal banking is a confidence game. And insofar as there was plenty of neoliberal hubris floating around all being backstopped by the Greenspan put something was going to happen. I personally got nervous the second the respectable left switched intellectual gears from developing a critique of capitalism and its limits to the question of how can we be smarter capitalists than capitalists (let us call that the politics of the third way).

    Mind you I do not expect my intellectual exile to end anytime soon.

  • China will hold the USA at ransom. China will be the NEXT economic superpower.

  • If, what some economists are predicting occurs and the U.S. dollar crashes because of the coming bailout; what will this do to the Canadian dollar?
    Can our dollar retain it’s value or something close to it?

  • What is happening is a wake up call for capitalism based on the greed of the few who cream off the money made by the many. Few years down the line is was the collapse of the comunism in the soviet block. The comunism was based on total control of the state. The same is happening to the man made doctrine called capitalism and its collapse is iminent. Isn’t time to think about other systems based on ethics and morals as well as clean financial gain that benefits everyone in the world rather than the few con man of wall street. I think the answer is in god made systems rather man made. The one who created this world is in better position to make a perfect system with no flaws whatsoever.
    Give other systems a chance or at least start educating yourselves about them to know what they are about.

  • On the one hand you criticize the US government for intervening in the economy and then you turn around that it proves that Canada has to be more interventionist. Say what? It’s a changing world and Canada needs policies which encourage flexibility and adaptability in business and labour markets – not direct intervention.

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