The Los Angeles Times Sunday, December 28, 1997
THE BAILOUT BUBBLE
The American public has been cleaning up the financial messes of
the investor class--from Lockheed to South Korea--since the '70s.
Will 1998 be the year they refuse to pay?
By Kevin Phillips
WASHINGTON -- It's hard to avoid the eerie feeling that the biggest
political and economic news of the year ahead will be the failure--and
toppling economic dominoes--of some attempted giant financial bailout.
South Korea, maybe. Or a triple whammy from Indonesia, Thailand and
South Korea. Of course, it could be Japan, which is hurting--and too big to
be bailed out by anything but its own resources and fortune.
Possibly the International Monetary Fund, the global financial bailout
mechanism itself, could go belly up if enough Asian nations fail and
Congress shuts the U.S. checkbook.
But the pivot may be whether the ultimate problem comes in the
biggest bailed-out economy of all: the United States of Lockheed and
Chrysler, overnight loans from the friendly Federal Reserve, portable peso
oxygen tents, commercial bank transfusion kits, a capital city with more
influence-peddlers than Seoul and shady Asian political donors filling the
Lincoln bedroom.
Pejorative as that may sound, if there's a giant global economic bubble
out there, the United States has slicked up at least half the glistening soap
film. The first bailouts--Chrysler and Lockheed back in the 1970s--were
relative peanuts.
The big bubble pipe came out in the 1980s. Part of the action came
from tax cuts, deregulation and electronic program trading that helped turn
the global financial markets into a 24-hour roulette wheel and spectronic
Monte Carlo. But a large part also came from what can be called "lobster-
salad socialism"--the commitment of the major financial nations to bailing
out stock markets, banks, foreign central banks and even entire nations that
have made unwise investments.
The devices involved are too many and too complicated for more than
a one-paragraph tour: IMF bailouts, World Bank bridge loans, Brady
bonds, periodic floods of liquidity from the U.S. Federal Reserve, the New
Arrangements on Kevin Phillips, publisher of American Political Report, is
author of "The Politics of Rich and Poor." His newest book is "Arrogant
Capital: Washington, Wall Street and the Frustrations of American
Politics"
Borrowing (NAB) and Exchange Stabilization Fund. Small wonder that
after nearly two decades of this economic bungee-jumping, many overseas
banks, stock markets and Asian cartels started to feel invincible.
And their colleagues in the United States did, too. Multinational
corporations and Texas and Illinois banks got bailed out in the 1970s and
early 1980s. By the late 1980s, federal bailout benefits had spread--at an
eventual cost of hundreds of billions of dollars--to run-amok savings and
loans and commercial banks. The insistence from Washington, of course,
was that this was necessary to save Mom-and-Pop depositors.
Too often they were $5-million and $30-million Moms and Pops,
though, with fancy addresses in Nassau or the Cayman Islands. Until late in
the game, the U.S. federal deposit insurance honchos paid off big
depositors--in taxpayer dollars, mind--with no attention to the nominal
$100,000 limit. Without this support, the verdict of the marketplace would
have been Hooveresque. One expert pointed out that the share of U.S.
bank deposits held by financial institutions rescued by post-1986 federal
insurance payouts exceeded the percentage held by banks that actually
failed between 1928 and 1933, the Depression nadir!
Worse still, by 1992 and 1993, when all the banks were rescued and
their profits and stocks began to soar again, Washington paid no attention
to suggestions that excess profits taxes be imposed to recoup some of the
previous federal (read: taxpayer) assistance.
Bailouts for U.S. investors took other forms as well. After the stock
market crashed in 1987, the Federal Reserve pumped out money--liquidity,
in red-suspender parlance--to get the indexes back up. Some traders
contend that the Fed also bought futures contracts. Then in late 1994,
when the Mexican peso crashed, the Clinton administration arranged a
multibillion-dollar bailout to save investors in unsafe, high-interest Mexican
bonds.
One of the most encouraging Washington developments of the last
month, though, is the number of cynical conservatives, liberals and middle-
of-the-roaders who are starting to describe this as just what it is: state
capitalism, financial mercantilism, socialism or maybe collectivism. Take
your choice.
But most of all, forget the old definitions. Meaningful socialism no
longer involves collective ownership of factories. That's smokestack-era
stuff. The new financial socialism--considerably more popular in Palm
Beach than San Pedro--now collectivizes the perils of insolvency, not the
means of production.
If factory socialism 60 years ago worked to redistribute money
downward, financial collectivism reduces speculative investment risk and
therefore redistributes wealth and income upward--what we've seen in the
last 15 years.
Which brings us to the potential politics. The first question, for which
there is no clear precedent in financial history, is: How long can market
forces be kept at bay as bailout is piled on bailout? It's certainly possible
that 1998 will turn out to be the year the bubble pops. If so, it's a good bet
that popping Washington party-system and income-distribution bubbles
won't be far behind.
The ordinary citizenry, in both the United States and Japan, is starting
to figure out the abusive political economics involved. One well known
presidential contender, for example, recently complained, "The working
and middle classes are endlessly conscripted, dunned and sacrificed--to
rescue the investing classes." No, not Jesse Jackson or Ralph Nader.
Conservative Patrick J. Buchanan.
Up on Capitol Hill, a senator complained that, for Wall Street, bailouts
have been "a heads I win, tails the taxpayer loses" scenario. Sen. Edward
M. Kennedy? No, Republican Sen. Lauch Faircloth of North Carolina.
Three years ago, the American public was lopsidedly opposed to the
peso bailout, and the newest data suggest they're no happier to have the
United States helping to fund the IMF Asian bailouts. The Japanese
electorate, in turn, has become extremely sensitive to having consumption
taxes increased to fund rescues which they see as politicians taking care of
their banking and financial cronies and benefactors. What we may see here
is the beginning of a new issue--and, possibly, the beginning of the end for
bailouts and lobster-salad socialism.
The lobster salad part is beyond debate. One recent story in a weekly
newsmagazine noted that Wall Street is making so much money that young
employees are getting fired for discussing their salaries--or boasting about
their 50-inch TVs and $3,500 Rolex watches. The Center on Budget and
Policy Priorities just released data showing that because of Wall Street and
financial-sector profits, New York State now has the country's greatest
income gap between the rich and the poor. California is not far behind.
This suggests an obvious reform. Instead of taxpayers being saddled
with sustaining the IMF and the collectivized costs of insolvency, it would
make more sense to privatize these responsibilities to the banking and
investment sectors. Part of their riches of the last decade flowed from the
taxpayer-subsidized bank and S&L bailout. Now, it ought to be payback
time.
Congress can arrange that by ending the current taxpayer-based IMF-
funding in favor of a changeover to what economists call an FTT--a small
tax on financial transactions (stock, bond, currency or otherwise). By one
computation, a tax of one fifth of 1% of the value of each transaction in the
United States would raise $20 billion to $30 billion a year. The same tax,
globally, would raise something like a $100 billion, paid by precisely those
people and interests who profit from the IMF's de facto international
insurance.
Of course, there's a chance that the bubble machine can go on and on.
And there's a greater possibility that the bailout brigade can puff and patch
their way through 1998. But it's still tempting to conclude that one of the
next major issues of U.S. politics is coming up fast.
