With the credibility of the free-market ideologues

destroyed by the crisis and the pressing need for relief

for working people, there's an opportunity

to demand far-reaching reforms that will benefit

the majority who are suffering in this recession

The Worst Financial Crisis Since the Great Depression [Source]

The U.S. government is scrambling to keep the worst financial crisis since the 1930s from turning into an economic catastrophe.

To solve the problem, the conservative Bush administration has thrown its free-market ideology overboard to carry out the greatest government intervention in the economy since the Great Depression.

The aim is to stop the world financial system from collapsing completely--something it came dangerously close to doing during "Black September."

Already, the U.S. has carried out the biggest nationalization of financial institutions in history.

The five independent Wall Street investment banks that existed at the start of 2008 are gone, owing to mergers, bankruptcies and regulatory changes.

And that's just the beginning. If Treasury Secretary Henry Paulson has his way, the U.S. will commit $700 billion in taxpayer money to buy up the bad debts of the banks and other financial institutions. In reality, the cost could run to hundreds of billions dollars more.

If enacted, Paulson's proposal, when added to the costs of earlier interventions, means that the government is so far on the hook for $1 trillion--equivalent to the cost of the Iraq war, now the longest U.S. military involvement in any war other than Vietnam.

For Corporate America, the crisis isn't only economic, but political and ideological as well.

After more than 30 years of preaching that the free market solves all problems and telling workers that they had to sink or swim on their own, big business is running to the government for a massive bailout.

Whatever package is finally approved, it will be done at workers' expense--and the political impact of this crisis will shape U.S. politics and society for many years to come. Here, SocialistWorker.org answers your questions about the crisis.

- - - - - - - - - - - - - - - -

TREASURY SECRETARY Henry Paulson is pushing for a bailout for the banks worth $700 billion. How is this supposed to work, and who's going to pay for it?

Paulson's plan is, as Nation writer William Greider put it, a "historic swindle." But even that description doesn't fully convey the scale of this attempt to foist the costs of this crisis onto the backs of working people.

Leave aside for a moment all the financial jargon from Corporate America, their spin doctors and the media.

The basics of the crisis are straightforward: Workers' wage increases in the 2000s haven't kept pace with the rate of inflation. That's because virtually the entire increase in national income since the recession of 2001 went to capital instead of labor.

So to maintain their standard of living, many workers borrowed money against their houses with mortgage refinancing or got adjustable-rate mortgage with teaser low interest rates.

In turn, Wall Street bought up these mortgages and packaged them into securities, to be sold off to big investors.

When workers could no longer pay, their mortgage foreclosure rates increased, and the value of these mortgage-backed securities started to fall.

This set off a chain reaction among big banks, which forced them to admit the scale of bad mortgage-related debt that they had kept hidden.

Now, the banks are running to the government for help in offloading all this toxic debt. Paulson, the former CEO of the investment bank Goldman Sachs, is all too willing to oblige.

Essentially, he wants dictatorial authority to spend $700 billion any way he wants in buying up bad assets from U.S. financial institutions, as well as foreign-owned banks with substantial U.S. operations.

His plan would allow him to operate without any oversight from Congress, and with immunity from any lawsuits related over his decisions.

The utterly undemocratic nature of this scheme is outrageous enough. But the rest of Paulson's proposal is even worse. Rather than create a government agency that would come under public review, Paulson would hire Wall Street companies to buy and manage these assets.

In other words, the same people who caused this catastrophe would rake in many millions of dollars in fees in exchange for their services.

Then there's the question of how much the Treasury Department will pay for these assets.

Merrill Lynch recently was forced to sell off mortgage-backed securities initially valued at $30.6 billion for just 22 cents on the dollar. Will the government pay more for similar assets?

And what happens when Treasury turns around and tries to sell those same assets? Will it sell them for less than it paid for them, and stick taxpayers with the loss?

Basically, the answer is yes.

To see how it works, look back at the history of the Resolution Trust Corporation (RTC), created by Congress in 1989 to bail out bankrupt savings and loans.

The RTC bought up savings and loan banks as well as their real-estate assets, then sold them off on the cheap to banks and other investors, who picked up institutions and property for a fraction of their worth.

The losses were borne by the taxpayers to the tune of $124 billion, plus interest.

The proposed rip-off in Paulson's plan is vastly greater, not only due to the sums involved, but the nature of the assets to be bought up.

At least the RTC was purchasing functioning banks and bricks-and-mortar real estate. Paulson's plan, however, calls for buying up mortgage-backed securities and other investments of dubious value.

A large percentage of the assets he wants to buy are so-called derivatives--that is, securities tied to the value of another underlying bond or other security.

Much of this paper--perhaps hundreds of billions of dollars worth--is essentially worthless. That's why some critics are calling Paulson's plan "cash for trash."

And like the RTC, Paulson's Treasury and its Wall Street hirelings would sell off as many of the assets as they could. This would allow the banks to buy back the same assets that they sold to Treasury, but at a lower price.

The taxpayers would have to eat the losses, and would remain stuck with the worst of the toxic debt.

It boils down to this: Workers whose productivity gains went straight into profits during the economic expansion are now being forced to cough up $700 billion to the same banks that are foreclosing on their houses, denying them student loans and driving up unemployment by tightening credit to business.

Free-Market Meltdown

Letting the free market run its course has created the worst financial crisis since the 1930s. Why should the same people who created this catastrophe be allowed to continue to run the financial system, and pull down hundreds of millions in executive compensation?

If the government could take over AIG with a warrant to buy 80 percent of its stock, why not do the same with loss-ridden banks, and use the funds to rebuild a rational banking system?

There's also any number of things the government could do to aid those facing foreclosure or a spike in interest rates on adjustable-rate mortgages.

The government could use Fannie Mae and Freddie Mac to stop foreclosures. The U.S. government now controls most mortgages in the U.S., and could end that crisis now.

What's more, the government could refinance mortgages to provide 30-year loans at reasonable rates of interest--but at the current market value of their homes, rather than the inflated prices of the boom.

But the banks have been lobbying intensely against any such move. They're willing to accept a higher rate of foreclosures as long as they can keep squeeze money out of hard-pressed homeowners.

None of this is being seriously discussed in Washington. But with the credibility of the free-market ideologues destroyed by the crisis and the pressing need for relief for working people, there's an opportunity to demand the far-reaching reforms that will benefit the majority who are suffering in this recession.