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Untied We Stand (Part Two)

April 15, 2011

Despite the fact that Obama hasn’t yet done a whole lot to justify the moniker “Democrat,” the real reason may be that he has had to deal with the institutional and structural tendencies of government to capitulate in the face of organized money.  Of course, the financial crisis that precipitated his entry into office was the biggest fiscal crisis to face a single president since the Great Depression (i.e., when Americans still cared about politics).  And Obama is just one person; his entry into politics couldn’t automatically change the fact that capital attracts the most talented members of any given profession, who will then have vested interests/ideologies in supporting those agglomerations of capital once they are in public office.  Nor does Obama have the power to change the fundamental structure of the United States’ tax laws without the support of legislators, all of whom are reliant on the super-wealthy for their campaign contributions.

The fact that the super-wealthy pay much lower percentages of their income in tax dollars than median taxpayers (relative to the bottom 99%) is only the tip of the iceberg of unequal and preferential treatment received by the wealthy.  The entire reason Reaganomics worked is the fact that the rich have had enough at stake to figure out ways to legally minimize (or sometimes evade) their taxes over the years.  Hedge fund managers seem to have it best:

So long as they leave their money, known as “carried interest,” in the hedge fund, their taxes are deferred. They only pay taxes when they cash out, which could be decades from now for younger managers. How do these hedge-fund managers get money in the meantime? By borrowing against the carried interest, often at absurdly low rates—currently about 2 percent.

After the great erosion of effective tax rates, what can be done by pliant legislators short of nominal increases in marginal tax rates on the super-wealthy to attempt to drag up the average?  Nonetheless, the state of the Internal Revenue Code doesn’t change the fact that the United States hasn’t done a whole lot to justify the moniker “free market democracy” recently.  The trend seems to be on the contrary; the plutocratic reappropriation of wealth from the government back to the wealthy has been given legal sanction and stamp of approval through TARP, abusive tax accounting policies, and other governmental programs that continue to exist without Obama mounting much of a fuss from the bully pulpit.

If there was any doubt of the corruption of the free market, Matt Taibbi’s blistering report on the Federal Reserve’s “distressed” “lending” “policies” should put that to rest.

It’s hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that’s exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan [wives of powerful Morgan Stanley executives] launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan’s penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.

So how did the government come to address a financial crisis caused by the collapse of a residential-mortgage bubble by giving the wives of a couple of Morgan Stanley bigwigs free money to make essentially risk-free investments in student loans and commercial real estate? The answer is: by degrees. The history of the bailout era reads like one of those awful stories about what happens when a long-dormant criminal compulsion goes unchecked. The Peeping Tom next door stares through a few bathroom windows, doesn’t get caught, and decides to break in and steal a pair of panties. Next thing you know, he’s upgraded to homemade dungeons, tri-state serial rampages and throwing cheerleaders into a panel truck.

It was the same with the bailouts. They started out small, with the government throwing a few hundred billion in public money to prop up genuinely insolvent firms like Bear Stearns and AIG. Then came TARP and a few other programs that were designed to stave off bank failures and dispose of the toxic mortgage-backed securities that were a root cause of the financial crisis. But before long, the Fed began buying up every distressed investment on Wall Street, even those that were in no danger of widespread defaults: commercial real estate loans, credit- card loans, auto loans, student loans, even loans backed by the Small Business Administration. What started off as a targeted effort to stop the bleeding in a few specific trouble spots became a gigantic feeding frenzy. It was “free money for shit,” says Barry Ritholtz, author of Bailout Nation. “It turned into ‘Give us your crap that you can’t get rid of otherwise.’ “

Perhaps the more compelling evidence that capital has run away in support of capital is that TARP and the Fed have repeatedly acted in ways that are blind to any and all political implications. The Fed has spread capital abroad without any sense of political or ethical propriety, and sends the bill to the American taxpayer:

Republicans go mad over spending on health care and school for Mexican illegals. So why aren’t they flipping out over the $9.6 billion in loans the Fed made to the Central Bank of Mexico? How do we explain the $2.2 billion in loans that went to the Korea Development Bank, the biggest state bank of South Korea, whose sole purpose is to promote development in South Korea? And at a time when America is borrowing from the Middle East at interest rates of three percent, why did the Fed extend $35 billion in loans to the Arab Banking Corporation of Bahrain at interest rates as low as one quarter of one point?Even more disturbing, the major stakeholder in the Bahrain bank is none other than the Central Bank of Libya, which owns 59 percent of the operation. In fact, the Bahrain bank just received a special exemption from the U.S. Treasury to prevent its assets from being frozen in accord with economic sanctions. That’s right: Muammar Qaddafi received more than 70 loans from the Federal Reserve, along with the Real Housewives of Wall Street.

Perhaps the most irritating facet of all of these transactions is the fact that hundreds of millions of Fed dollars were given out to hedge funds and other investors with addresses in the Cayman Islands…It’s one thing for the federal government to look the other way when Wall Street hotshots evade U.S. taxes by registering their investment companies in the Cayman Islands. But subsidizing tax evasion? Giving it a federal bailout? What the fuck?

The fact that Americans continue to foot this bill shows America’s relative complacency, and indicates why Obama has not yet stuck his neck out to put them to a rest: there is insufficient political will behind ending domestic corruption.  Nor is there sufficient political will in America to learn about the tax policies that allow GE to claim $3.2 billion in tax refunds for “business losses” reported to the government, despite reporting having earned $5.1 billion in profits to its shareholders.  GE has vastly expanded its in-house tax department because the reality is that “fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore” and pay nowhere near the 35% corporate tax rate that American politicians seem to take as a given.

Indeed, the vast majority (if not all) of GE’s accounting practices are fully legal, and therein lies the problem.  How can we expect capital to resist and ignore extant legal avenues of attaining further capital?  It’s a corporate officer’s job to maximize profits for shareholders.  Do we expect shareholders’ to invest on the basis of ethics?  Out of the goodness of their hearts?  How do we expect hedge fund managers to do anything different with their own finances?  Wouldn’t that make them appear soft in a world where they are paid to be unflappably hard?

Despite the public “outrage” over the obvious incongruity of what is “right” and what is “legal” posed by the treatment of GE and the super-wealthy, it seems as though the most direct result of the story has been a hoax press release by GE purporting to “donate” the $3.2 billion refund back to the Treasury.  The sad truth is that this is the corner the American taxpayer has put itself into: we can only hope that corporations relent out of some sense of pity they are not constructed to exhibit.  Even more sadly, the most political energy we muster is to come up with clever ways to scoff at our own misfortune.  You know, like in another blog post.

But that doesn’t change the fact that the United States hasn’t done a whole lot to justify the moniker “free market democracy” recently.


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