rabble blogs are the personal pages of some of Canada's most insightful progressive activists and commentators. All opinions belong to the writer; however, writers are expected to adhere to our guidelines. We welcome new bloggers -- contact us for details.

Weekly Audit: Stop subsidizing Wall Street

by Zach Carter, Media Consortium MediaWire Blogger

Treasury Secretary Timothy Geithner rolled out his new Wall Street bailout plan on Monday and the progressive verdict is already in: This bailout doesn't look much better than the last one. In fact, Geithner's latest plan isn't much different from several other flawed proposals policymakers have floated over the past year. At its core, Geithner's program is just another attempt buy up "toxic assets" from banks at inflated prices.

If most major U.S. banks accepted current market prices for the bad, mortgage-related assets on their books, they would be insolvent. Geithner is trying to convince Wall Street that the assets are worth a lot more than everyone thinks they are, rather than deal with the fundamental problems of the assets and their owners. The plan unveiled on Monday involves a smorgasbord of guarantees for Wall Street investors, all part of an effort to sweeten the pot and convince them to buy toxic mortgage-related assets from troubled banks. Unfortunately, Geithner's revisions create new problems without solving key previous dilemmas inherent in the plan.

In a post for Talking Points Memo, Josh Marshall highlights a clip of Nobel Prize-winning economist Joseph Stiglitz rejecting a very similar plan in early February. Marshall asks "Why are we still at this?"

Under older formulations of the toxic asset purchase model, the government would have purchased the assets directly from banks. Since the assets are hard to value, this approach would have carried the risk that the Treasury would pay too much and provide banks with what amounts to a bailout (inflated price = free money + no strings attached). Geithner's new plan offers incentives that encourage hedge funds and private equity companies to buy toxic assets from banks. But the incentives do nothing to make sure the funds do not pay too much for those assets. Indeed, Geithner's plan actually encourages the private sector to pay too much. The troubled banks are still likely to be bailed out, thanks to a strong possibility that investors will pony up artificially high prices for their assets. The result is a set of economically irrational subsidies for both banks and Wall Street investment houses.

As Ezra Klein puts it for The American Prospect: "Imagine an art auction. Now imagine an art auction where Sotheby's loans money to the participants and promises to pay the losses if the paintings fall in value. Think the pricing will be the same? And who would you say is being protected: Sotheby's or the private investors?"

Still worse, all of those subsidies and guarantees for hedge funds mean that taxpayers are on the hook for much more than our private sector "partners," since buying up assets that nobody wants to buy is an intrinsically risky plan. In a sane investment world, taxpayers would benefit from a greater share of any gains from the investment. But the Geithner plan actually works the opposite way, as David Corn writes for Mother Jones: "The feds are shouldering much more of the risk burden than the private firms. Yet the feds would not get any greater split of the profits—if they ever materialize."

The government has intentionally created a gamble in which taxpayers bear the brunt of the blow for any losses, but allows Wall Street investors to enjoy a disproportionately large share of any gains. Subsidizing hedge funds and private equity firms serves no real economic function-- they do not make loans that help small businesses or consumers. If we are going to bail out troubled banks, we might as well control how our funds are spent and ensure that the mistakes that created this problem are not repeated: wipe out the shareholders who made bad bets on poorly run companies and kick out the management teams who drove those companies into the ground.

Everyone, of course, is still angry about those AIG bonuses. But excessive executive compensation is not only a problem for companies that have been bailed out, as David Moberg explains for In These Times. Outrageous CEO paychecks distort timelines for executives, encouraging them to take short-term risks at the expense of long-term profitability. This is bad not only for individual companies, but for the entire economy. The current financial crisis is a direct result of executives binging on risky securities to score big paydays without worrying about future damages to their companies' balance sheets.

It's also easy to forget that corporations are not merely wealth machines for their top executives—they are supposed to serve a useful economic function and fulfill actual social needs. Moberg argues persuasively that we need new rules for corporate accountability that align the interests of companies with the well-being of our society.

Over at Yes!, David Korten emphasizes the risk that important reforms on Wall Street will fall by the wayside if the government continues to focus on short-term emergency bailout plans instead of serious regulatory changes. It's past time for regulators to impose new rules on the game. The current financial crisis hit in the summer of 2007. Bear Stearns collapsed over a year ago. If the government had devoted more time to restructuring a broken financial system and less time orchestrating short-term bailouts, policymakers would have a much more effective set of tools to combat the crisis with. The most important lesson we have learned so far is that when a bank is considered too big to fail, it has become too big to exist. If lawmakers do not force over-sized financial behemoths to downsize, the entire economy will be jeopardized again when Wall Street's next speculative bubble bursts.

At present, however, Geithner seems content to simply blow another bubble with a new set of windfalls for Wall Street. If that sounds like a raw deal for taxpayers, that's because it is.

This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter.

And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net.

This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.

Thank you for reading this story…

More people are reading rabble.ca than ever and unlike many news organizations, we have never put up a paywall – at rabble we’ve always believed in making our reporting and analysis free to all, while striving to make it sustainable as well. Media isn’t free to produce. rabble’s total budget is likely less than what big corporate media spend on photocopying (we kid you not!) and we do not have any major foundation, sponsor or angel investor. Our main supporters are people and organizations -- like you. This is why we need your help. You are what keep us sustainable.

rabble.ca has staked its existence on you. We live or die on community support -- your support! We get hundreds of thousands of visitors and we believe in them. We believe in you. We believe people will put in what they can for the greater good. We call that sustainable.

So what is the easy answer for us? Depend on a community of visitors who care passionately about media that amplifies the voices of people struggling for change and justice. It really is that simple. When the people who visit rabble care enough to contribute a bit then it works for everyone.

And so we’re asking you if you could make a donation, right now, to help us carry forward on our mission. Make a donation today.


We welcome your comments! rabble.ca embraces a pro-human rights, pro-feminist, anti-racist, queer-positive, anti-imperialist and pro-labour stance, and encourages discussions which develop progressive thought. Our full comment policy can be found here. Learn more about Disqus on rabble.ca and your privacy here. Please keep in mind:


  • Tell the truth and avoid rumours.
  • Add context and background.
  • Report typos and logical fallacies.
  • Be respectful.
  • Respect copyright - link to articles.
  • Stay focused. Bring in-depth commentary to our discussion forum, babble.


  • Use oppressive/offensive language.
  • Libel or defame.
  • Bully or troll.
  • Post spam.
  • Engage trolls. Flag suspect activity instead.