Thursday, December 4, 2008

Dean Baker and the Economic Right Stuff

If there is a more delightfully rational and straightforward economist around than Dean Baker of the Center for Economic and Policy Research, somebody needs to tell me. I don’t write much--I wish I could make myself do it more. But reading Baker’s stuff makes me want to package his ideas and analysis and get it out to a wider audience. My reliance on Dean for economic and political truth is so complete, I would be roadkill without him.

“Paulson and Bernanke spread the wealth around” is a recent and useful example of Dean’s thinking. He observes that when Barack told Joe the Plumber that he favored tax increases on incomes over $250,000 in order to spread wealth, the loudest responses were critical and adverse.

But, Dean writes, “fortunes will be made or lost depending on how this bailout money is used. For example, Secretary Paulson just agreed to lend another $20 billion of the Treasury's bailout money to Citigroup.

“In addition, the Federal Reserve Board agreed to guarantee up to $300 billion of presumably bad assets. This is an enormously valuable guarantee. If Citigroup had to arrange a comparable guarantee in the private market, it would almost certainly pay more than $30 billion a year.

“This decision sent Citigroup's stock soaring. In the week since the bailout was announced, Citigroup's stock more than doubled, adding more than $25 billion to the company's capitalization. (The government could have bought the bank outright with the money it lent to Citi.) This is great news for Citigroup's shareholders, who would be holding almost worthless stock if Mr. Paulson had not been so generous.

“Paulson's decision was also good news for Robert Rubin and other top executives at Citigroup. If the government had not stepped in, Citigroup would almost certainly be in bankruptcy and most of its highly paid executives would likely be out on the street.

“Creditors of Citigroup also benefited. If Citigroup went into bankruptcy, their loans would be frozen for a period of time while the court determined what percentage of Citi's debts could be paid. At the end of this process, many creditors would only receive back a fraction of what they are owed.

“The fact that money is being redistributed doesn't make it wrong to bail out Citigroup or any of the other companies now being aided by the various Fed and Treasury funds. We need to keep the financial system functioning. However, there is every reason in the world to be concerned about the extent to which these policies may be enriching the wealthy and well-connected at the expense of the rest of us.

“In the case of the Citi rescue, there was no obvious reason why the shareholders should not be wiped out. They understood (or should have) that when they bought shares of the company that they could lose their whole investment if the company was poorly managed and went bankrupt. Similarly, there is no obvious reason that the management that wrecked Citi should not be thrown out and replaced with a more competent and lower paid team.”

There is more of Dean, lots more at Be sure also to check out “Paper wealth and the economic crisis.”

Dean may not have a prime place in the rolodexes of power, but journalists and commentators need to rely on him more often. Ordinary folks already can and do.

No comments:

Post a Comment