I’ll never forget the grim visage on the face of my patient who had just lost his job of 28 years. He successfully fought back the tears as he described how he had no chance of finding another job that paid close to his previous salary level, even though he had two kids in college.
This patient comes to mind as we are about to witness the fourth taxpayer bailout of American’s financial elite in the past 15 years. Nobody bails out the middle class and working poor when they lose their jobs. They are forced to fend for themselves, competing for jobs that pay $8 an hour without pension or health benefits. But now a coalition of brokerage houses and international banking conglomerates – the financial elite – is asking our politicians to lend money to failing Asian economies to rescue their bad investments.
Asian politicians have made the same discovery as American politicians: The best way to remain in power is to fulfill today’s promises by handing down debts to future generations in the form of bonds. The financial elite have invested heavily in these bonds. The problem is the over speculated Asian countries are unable to pay these bonds back.
Enter the International Monetary Fund (IMF). The IMF is a coalition of industrialized nations that pool their resources to aid developing countries while helping industrialized nations with short-term crises. Forty percent of its revenue comes from the United Sates. Unfortunately, the IMF doesn’t have nearly enough money to bail out Asia. In fact, Congress refused to authorize a piddling $3.5 billion for the IMF. It is estimated that the bailout of South Korea is going to cost more than $60 billion and Japanese banks have more than $900 billion in nonperforming loans.
The seeds of this mess began in the early 1980s when American banks lent billions of dollars to any Latin American country that walked in the door. When independent economists pointed out that these countries lacked the cash flow to repay these loans, Walter Wriston, then chairman of Citicorp, responded, “Countries can’t go bankrupt.”
Well, they can and they did. When Latin American countries threatened to default, instead of letting the banks suffer the consequences if their imprudence, our politicians gave the bill to our children and grandchildren by issuing taxpayer-backed bonds to bail them out. Even the interest payment on these bonds were guaranteed for a period of time.
Unpummeled by market forces, the financial elite returned to their errant ways, lending money to any real-estate developer that could slop together a proposal. This created the savings-and-loan scandal of the late ‘80s. Again, future generations of taxpayers were into hock an estimated half-trillion dollars. The vast majority of irresponsible lenders kept their profits leaving a small tip to the politicians in the form of campaign contributions.
It didn’t end here. When the value of the Mexican peso started to tank in 1994, the Mexican government issued bonds, some paying 55 percent interest. Banks and brokerage houses gobbled up these bonds, knowing full well those U.S. politicians would bail out Mexico if it threatened to default. They were not disappointed. President Clinton dipped into an emergency fund that lent Mexico over $20 billion. The Wall Street Welfare State laughed all the way to the bank, with many investment bankers raking in seven-figure bonuses.
We will soon be hearing apocalyptic warnings about how if Asia is allowed to default; there will be a spillover to the American stock market (which incidentally has quadrupled in value over the past 10 years. So what? Sixty percent of the American people do not have a nickel in the stock market. Why should they and their children be forced to subsidize it?
With an election year coming up, anyone challenging an incumbent – Republican or Democrat – will make his opponent work up a sweat if he or she makes this unfair bailout an issue.
Our financial elite should stop whining and take it on the chin.
One of my colleague’s patient brought this article to his office. It was printed in the Hartford Courant in the late 1990’s. I had forgotten I had written it. It is chillingly accurate.