The Populist

Take 2 trillion dollars in interest-only (subprime) loans made with absolutely no collateral or proof of income. Bundle them into hedge funds with minimum initial investments ranging from $100,000 to $5,000,000. Add a healthy dose of greedy investors – mostly investment bankers – leveraged to the hilt with the help of consistently low interest rates and a complicit Federal Reserve.  Stir well and let simmer for a couple of years. The problem is that this concoction didn’t just simmer, it boiled over and took the stock market with it. For months now we’ve been hearing about the record number of mortgage foreclosures on subprime loans. It was only a matter of time before the check came due. In the span of a week between Aug. 2nd and Aug. 10th, the Dow Jones Industrial Average dropped 1100 points. Worries about “overextended” credit came home to roost, not just in this country, but in markets around the world. In order to calm investors and stop the hemorrhaging, the Federal Reserve has pumped $101.25 billion into the market since Aug. 9th – Gulf Daily News. This influx of cash was designed to help investment banks suffering from the credit crunch to actually cover the debts that they so wisely let ballon out of control.  Hey, when money’s cheap and you’ve got such high yield investments, why worry about debt?  To further curb credit worries, on Aug. 17th the Fed cut its discount interest rates 0.5%. The discount rate is used when the Fed loans money to banks and other qualified institutions – CNNMoney. These moves, coupled with the infusion of over $500 billion dollars into worldwide markets have slowed the deluge of stock prices for now, but more is expected by banks and high-end investors. So, crisis averted, right? The top 10% of the richest 1% decided to gamble a little and came out on the short end. After all, hedge funds are just like hedge bets. What’s the big deal?

The big deal goes like this:  Just like every other major economic blunder in American history, the middle class pays for it: The Great Depression, the savings and loan scandal, and now this fiasco.  Let’s talk about taxes.  When a federal agency dumps over $100 billion into an unstable market, where does that money come from?  It doesn’t come from the huge surplus of dollars laying around in the federal treasury, because that hasn’t existed since the end of the Clinton years.  According to CBS NEWS, the federal deficit should “drop” to $205 billion this year.  Even if the $100 billion existed in the Fed’s budget at the beginning of the fiscal year, it’s still effectively debt.  More importantly, that’s OUR tax dollars.  What’s happening is, the Fed is bailing out investors who will pay no more than 15% (capital gains tax) with money coming from people who pay anywhere from 20% to 40% in income tax.  You see, very wealthy people do not get compensated the same way us middle class slobs do.  They don’t go to a job and pay income tax on what they earn.  They push vast amounts of money – or useless slips of unsecure stock, as the case may be – around and only pay on the profits.  Oh sure, they may pay taxes on their CEO salary at Sprint or Wal-Mart, but the majority of their compensation comes from stock options and investments.  It’s no wonder every tax break the current administration has handed out benefits the rich to a much higher degree than the middle class.  Dick Cheney has stated publicly that he’d like to see the capital gains tax sharply cut – another boon to the top 1% of the investor class that currently holds over 90% of all stock value, according to the Economic Policy Institute (Aug. 2006).

But hey, not only is it the average tax payer who has to help clean up this mess, it’s the average investor.  Major investors were racing to sell off stock to pay back the debt on their bad hedge fund bets.  Where did this sell off come from?  The same place the middle class invests.  Mutual funds lost billions of dollars as the Dow continued to tumble.  The average investor did the right thing.  They sat tight, weathered the storm, and lost money.  In the end, the richest investors got what they needed; an infusion of cash, a lower discount interest rate, the promise of another drop in the short-term rate from the Fed – CNNMoney, and a chance to do it all over again by borrowing cheap money to shove right back into high yield, get-richer-quick-scheme investments. 

So what about the poor families who lost their homes when they had to default on those subprime loans?  They were taking a big risk.  Why didn’t they understand the potential consequences of their actions?  According to George Bush, there will be no federal help for these people,  other than a potential attempt by the FHA to help them refinance a home they’ve already lost.  I guess they just should’ve known better. 

Next up: Death of the Middle Class – Part II; The wage crunch, the trade deficit, and the lack of consumer choice lead to empires led by little yellow smiley faces.