Aftershock

by Robert B. Reich

  Increasingly, too, the most accomplished doctors and medical specialists, and the best hospitals and health care facilities, have become available only to the very rich. New health reform legislation will extend care to more people and necessarily limit what doctors and hospitals can charge, as does Medicare. For this reason, the law is unlikely to dramatically increase the supply of either. One likely result will be to increase the market price of the most desirable physicians and facilities, making them accessible mainly to those who can afford them.

  Whether it’s an education at a prestigious school, excellent medical care, or even gorgeous oceanfront property, anything that’s desirable but in limited supply has become less accessible to the vast middle class as purchasing power has become concentrated at the top. And as the rich have simultaneously withdrawn from institutions dedicated to the common good, like public schools, they both bid up the price of desirable private ones and reduce the quality of what remains public. Increasingly, upscale towns, gated communities, and office parks are financed by fees paid by their wealthy inhabitants. Having seceded from townships or jurisdictions inhabited by the middle class and the poor, the very wealthy pay fewer local taxes to support services for those of more modest means.

  As the income gap continues to widen, deprivations like these are likely to cause many Americans to feel even poorer and, in many cases, more frustrated. In other nations, at other times, wide disparities in income and wealth have led to political instability. Summarizing the research, economists Roberto Perotti and Alberto Alesina have found that “income inequality increases social discontent and fuels social unrest. The latter, by increasing the probability of coups, revolutions, [and] mass violence.”

  This has not been the case in America, at least not so far. Here, opulence has provoked more ambition than hostility. In this respect we are different from older cultures with feudal origins and long histories of class conflict. For most Americans, the rich have not been “them”; instead, they’re people whom we aspire to become. We worry only when private wealth exercises political power. It was here that Theodore Roosevelt and Woodrow Wilson drew the line on the trusts, and Franklin D. Roosevelt damned the “economic royalists.” Private wealth applied to ostentatious consumption is perfectly appropriate; applied to the purchase of political power, it becomes diabolic.

  Given the chance, most members of the middle class want to join the ranks of the rich and gain all the perks that come with great wealth. The real frustration, and the final straw, will come if and when they no longer feel they have a chance because the dice are loaded against them.

  6

  Outrage at a Rigged Game

  Americans might be able to accept a high rate of unemployment coupled with lower wages. We are likely to accommodate absolute as well as relative losses in our standard of living for a long stretch of time. We might abide even wider inequality. But when all of these are added to a perception that the economic game is rigged—that no matter how hard we try we cannot get ahead because those with great wealth and power will block our way—the combination may very well be toxic.

  Losers of rigged games can become very angry. I remember when in 2009 my employer, the University of California, announced that due to state budget cuts, the salaries of all faculty and staff would have to be reduced. Most of my colleagues grudgingly accepted the outcome; we were all in roughly the same boat, and the state’s budget was in crisis. But when the San Francisco Chronicle reported that a few top administrators at the university had gotten pay raises, all hell broke loose. Suddenly the sacrifices seemed larger and less tolerable. (In fact, the Chronicle exaggerated, but the damage was done.)

  Something like this has been happening on a national scale. Even before the Great Recession, evidence began accumulating that the game was tilted in the direction of big business and the wealthy. Recall the busting of unions, the slashing of payrolls, and the shredding of employee benefits, without any attempt by government to constrain or reverse these practices; the junk-bond and private-equity deals that flipped companies like cards, burdened them with debt, and forced mass layoffs; the resplendent pay packages of top corporate and financial executives and traders, even as marginal taxes on the rich were cut and Wall Street was deregulated. In the 1980s, irresponsible gambles by some savings-and-loan banks cost taxpayers $125 billion; one such bank was owned by Charles Keating, who “donated” $300,000 to five U.S. senators, thereby greasing the skids with federal regulators. Insider trading scandals involving junk-bond kings including Ivan Boesky and Michael Milken did their damage. The BCCI money-laundering scandal ruined the reputation of Clark Clifford, advisor to four presidents. Then came the corporate looting scandals: In 2002, CEOs of giant corporations like Enron and WorldCom were found to have padded their nests at the expense of small investors. Other corporations that cooked their books included Adelphia, Global Crossing, Tyco, Sunbeam, and ImClone. Every major U.S. accounting firm either admitted negligence or paid substantial fines without admitting guilt. Nearly every major investment bank played a part in defrauding investors, largely by urging them to buy stocks that the bank’s own analysts privately described as junk.

  In the years leading up to the Crash of 2008, Wall Street made large and risky bets with other people’s money. Goldman Sachs, among others, created bundles of mortgage debt and persuaded investors to buy them, hawking them as good investments. Goldman even lobbied credit-rating agencies to give the mortgage bundles high ratings as solid bets. Yet Goldman simultaneously, and quietly, bet against them—“shorting” them, in the parlance of Wall Street. When the bottom fell out of the mortgage market, Goldman made a huge profit.

  Through it all, government regulators slept.

  Despite all this evidence that the deck was stacked, the voting behavior of most Americans did not noticeably change. As I’ve noted, voting tracked the business cycle. On the upswing, we rewarded incumbents; on the downswing, we punished them. Apart from temporary bouts of unemployment at the bottom of the cycle, most Americans did not seem particularly worried by the long-term tilt of the playing field in favor of big business and Wall Street, and their ever cozier relationships with Washington. The three coping mechanisms allowed most people to achieve an adequately comfortable standard of living notwithstanding. But in the wake of the Great Recession, with their coping mechanisms gone, Americans surely will pay more heed. We will be more sensitive to how the game is played and more upset by evidence of collusion at the top.

  We are already showing signs.

  In the fall of 2008, after Wall Street’s big banks found that some of their bets had gone bad, the failure of Lehman Brothers caused the Street to panic. Washington moved to save the banks. Hank Paulson, George W. Bush’s secretary of the Treasury, along with Ben Bernanke, chairman of the Federal Reserve Board, and Timothy Geithner, then head of the Federal Reserve Bank of New York (and soon to be Barack Obama’s Treasury secretary), warned the nation of economic catastrophe if $700 billion in taxpayer money were not immediately made available to the banks. President Bush and President-elect Obama hastily agreed, as did Congress. Paulson and Geithner then engineered the bailout in secret, deciding which financial institutions should receive what amounts of money, and on what terms.

  The giant bailout of Wall Street was sold to the American people as a way to save Main Street and jobs. But it appeared to do neither. The bankers on Wall Street mostly saved themselves, using the taxpayers’ money to keep their banks sufficiently solvent to do a new round of deals that generated them billions of dollars. Yet little or nothing trickled down to Main Street. Small businesses could not get loans. Few homeowners were able to renegotiate their mortgages, and large numbers lost their homes. Wall Street lobbied successfully against a proposal to allow homeowners to declare bankruptcy rather than forfeit their homes. The proposal would have given distressed homeowners more bargaining leverage with the banks that owned their mortgages. Not surprisingly, in a poll taken by Hart Associates in September
2009, more than 60 percent of respondents felt that “large banks” had been helped “a lot” or “a fair amount” by government economic policies, but only 13 percent felt that the “average working person” had been.

  The whole thing began to look like a giant insider deal created by Wall Streeters for Wall Streeters, at everyone else’s expense. Before coming to the Treasury, Paulson had headed Goldman Sachs, one of the most successful of the big banks. Geithner had been installed in the New York Fed by major bankers, including Robert Rubin, Treasury secretary under Bill Clinton, who also had headed Goldman Sachs and was now a top executive at Citigroup. While engineering the bailout, Paulson and Geithner consulted with Lloyd Blankfein, who was then CEO of Goldman Sachs. Not coincidentally, perhaps, Citigroup and Goldman were among the largest beneficiaries of the bailout.

  When Paulson and Geithner considered whether to bail out giant insurer AIG, which owed Goldman $13 billion, they consulted with Blankfein. They did not demand that Goldman (or any of the other parties to whom AIG owed money) accept a penny less than what was owed them—even though, as the inspector general who oversaw the bailout subsequently noted in a critical report, Goldman would have collected far less had AIG been forced into bankruptcy. In effect, $13 billion went from taxpayers to AIG and then promptly from AIG to Goldman—although for many months Geithner and the Treasury refused to disclose that, and Goldman refused to acknowledge it. E-mails from officials at the New York Fed instructed executives at AIG not even to disclose the payments in its public filings with the Securities and Exchange Commission. The inspector general concluded that the AIG deal “offered little opportunity for success,” and left taxpayers holding the bag.

  Paulson and Geithner defended the bank bailouts, arguing that Goldman and other major Wall Street banks were “too big to fail” because the rest of the financial system had become so dependent on them. Yet Paulson’s and Geithner’s subsequent actions made several of the big banks even bigger—providing Bank of America, Wells Fargo, and JPMorgan Chase additional subsidies in order to consolidate with other, weaker institutions. Furthermore, each bank was allowed to value its bad loans (most of which were unlikely to be repaid in full) at whatever price it wanted as long as it passed a so-called stress test conducted by Treasury officials, whose only information came from the banks themselves. And the Federal Reserve kept the price of money so low that the big banks could borrow it essentially free.

  Not surprisingly, within a year, most of the remaining banks were hugely profitable again. It would have required great effort on the part of their CEOs to avoid profitability. But the CEOs took full credit, and they and their top executives and traders once again were earning vast sums. Once again, Wall Street traders and executives were getting yearly bonuses that exceeded the lifetime earnings of most middle-class Americans. Although millions of homeowners still faced foreclosure, even the banks’ mortgage businesses returned to profits. The government was subsidizing the banks’ mortgage loans, but the banks were not passing the savings on to homeowners. “If banks had cut mortgage rates in line with [the subsidies], homeowners would have benefitted,” The Wall Street Journal revealed. “Instead, the benefit appeared to have accrued to the banks.”

  The public felt duped. Although most of the banks repaid the government, the inspector general predicted that much of the bailout, including the money sent to AIG, would never be repaid. And the damage done to the economy as a result of the banks’ recklessness was incalculable. When Lloyd Blankfein tried to defend Goldman’s giant $16 billion bonus pool for 2009 by saying the firm had been “doing God’s work,” he was roundly criticized. A week later he issued a formal apology, admitting that Goldman “participated in things that were clearly wrong.” He did not offer to return the $13 billion that had gone from taxpayers to Goldman via AIG, however.

  After the bailout, there was much talk in Washington about regulating the Street to prevent a similar collapse and bailout in the future. But the Street’s army of Washington lobbyists kept new regulations to a minimum. The White House sought to charge banks for the cost of the bailout, but this hardly constituted reform; at best, it compensated for the costs of cleaning up the mess. Proposed rules to constrain the trading of derivatives—bets made on changes in the values of real assets—were riddled with loopholes big enough for bankers to drive their Ferraris through. Yet Congress did not allow distressed homeowners to declare bankruptcy.

  Nor was there any enthusiasm in Congress or in the White House for using the antitrust laws to break up the biggest banks—a traditional tonic for any capitalist entity “too big to fail.” If it was in the public’s interest to break up giant oil companies and railroads a century ago, and years ago the mammoth telephone company AT&T, it was not unreasonable to break up the extensive tangles of Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs, and Morgan Stanley. There was no clear reason why such large-scale banks were crucial to the U.S. economy or to the living standards of most Americans. Logic and experience would suggest the reverse.

  Why didn’t politicians do more? It may have had to do with Wall Street’s money. The Street is where the money is, and money buys campaign commercials on television. It is difficult to hold people accountable for bad behavior while simultaneously asking them for money. In recent years Wall Street firms and their executives have been uniquely generous to both political parties, emerging as one of the largest benefactors of the Democratic Party. Between November 2008 and November 2009, Wall Street firms and executives doled out $42 million to lawmakers, mostly to members of the House and Senate banking committees and House and Senate leaders. In 2009, the financial industry spent more than $300 million lobbying members of Congress. During the 2008 elections, Wall Street showered Democratic candidates with well over $88 million and Republicans with more than $67 million, putting the Street right up there with the insurance industry as among the nation’s largest equal-opportunity donors.

  Any potential government toughness with regard to the Street was also constrained by the revolving door of people moving between Wall Street, top jobs at the Treasury Department, and banking committees of the Senate and House. Deep wellsprings of empathy are commonly found in the troughs of anticipated employment.

  Had the banks not been rescued from their wildly irresponsible bets, several would have disappeared just like Lehman Brothers. Yet less than a year later they were back at it, confident they would be bailed out by taxpayers if their new bets went sour. And they were using a portion of their winnings to essentially bribe lawmakers to keep the game going, much as it had been before. Who could blame the public for believing the game was fixed?

  Wall Street has not been the only beneficiary of the fidelity of lobbyists and the acute responsiveness of Congress to the wealthy. According to the Center for Responsive Politics, spending on lobbyists escalated from $1.44 billion in 1998 to $3.47 billion in 2009, and almost all of these lobbyists represented big corporations and their executives. Even these figures understate the true extent, because lobbying laws are vague about who must register as a lobbyist, and enforcement is casual at best. The numbers also fail to reflect myriad meetings between lawmakers and the corporate executives and other wealthy people who bankroll campaigns.

  Sad to say, as the costs of campaigns have escalated, political contributions from wealthy individuals have grown steadily more important. (To be sure, the Internet has created more opportunities for small donors to participate, but large donors continue to dominate.) Even before the Supreme Court’s grotesque 2010 decision in Citizens United v. Federal Election Commission, which opened wide the floodgates of corporate money by deeming corporations “people” with First Amendment rights, attempts to reform campaign finance had left wide loopholes. The finance committees of most politicians have become the exclusive domains of the wealthy because only they have networks of affluent friends and business associates who can so readily and efficiently be tapped.

  Modern Washington is far removed from that
of the Gilded Age at the end of the nineteenth century and start of the twentieth, when, it’s been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today’s culture of political corruption rarely takes the form of outright bribes or campaign contributions expressly linked to particular votes. A wealthy Wall Street or corporate executive receives an invitation to have coffee with, say, the chairman of an important congressional committee. The invitation may have come about without any effort on the part of the executive, or he may have solicited it. In either case, the real value of the event to the executive is that it confirms to others that he is capable of commanding the attention of a powerful person in Washington. The photograph memorializing the coffee chat, complete with signature, hangs discreetly on the executive’s office wall. The personal thank-you note that arrived from the politician is slyly shared with others.

  What this does for the executive is incalculable. He has become someone with access to a powerful ear—become a person, it is presumed, with connections, a person with influence. Such a reputation is valuable to him socially; even more so financially. It gives the people with whom he does business the sense that he can deliver on whatever he proposes. It doesn’t matter if this inference is incorrect. The appearance of power means that from now on the executive’s clients, customers, suppliers, creditors, and investors will be that much more willing to cut a deal.