Robert Zaller: If This is Capitalism, Bring on Socialism
Wall Street died in 2008. Every major bank and investment house on the Street was, as they say of unlucky homeowners, underwater. Their putative assets were exceeded by their debts and collateral obligations; and since they were all entangled like snakes, none could extricate itself from the common fate. The system went into cardiac arrest - that is, trading and borrowing ceased. Not only did no one know the value of anyone else's assets (the precondition of all economic exchange), but no one could know the value of their own. This was partly because every firm had so-called toxic assets on its books that had been grossly and fraudulently inflated, partly because in many cases debt had been concealed in spin-off holding companies or by "creative" accounting. Thus the cash value, both of assets and liabilities was suddenly in doubt. Of course, the assets did have underlying material value; they related to actual property and productive capacity but since no one trusted the face valuation of any given asset, or the liabilities that offset it, no one would buy or accept it. In consequence, money lost its value as a medium of exchange, which is the only value it has. On a long weekend in September, private liquidity evaporated. The American economy was poised to collapse....
The federal government applied electroshock treatment. As the capital reserve as last resort, it poured hundreds of billions of dollars into the system, backed not by full faith and credit, but force majeure. When in a state of emergency, the government can do or seize anything, including homes and banks....
U.S. Treasury Secretary Henry Paulson attempted a takeover of the government itself by a bankrupted Wall Street. Paulson pulled a number out of a hat, $700 billion. He said nothing less would do to avert a complete financial meltdown. He not only demanded of Congress the power to spend this money as he and he alone saw fit, but to preclude any future accountability of the way it had been spent.
This was surely as close as America has ever come to a coup d'état. Paulson did not get everything he sought, but he did get the money, and he did get to spend it. Even wartime presidents, such as Lincoln and Roosevelt, had never wielded such breathtaking authority. For a short while, Paulson was an American Caesar. The actual president, George W. Bush, simply stood aside. Fortunately, his administration had only four months to run. Six weeks later, a new government was elected, and Paulson began to brief his successor-designate.
Who was Henry Paulson? He was the former head of Goldman Sachs, Wall Street's largest investment firm, a man who had amassed a personal fortune of $700 million. By no great coincidence, Goldman Sachs turned out to be the principal beneficiary of Paulson's largesse, not so much by direct subvention as through the bailout of AIG, the insurance giant to which Goldman was joined at the hip. Goldman was able to buy up other firms' assets at bargain basement prices, and for awhile stood as virtually the only survivor on Wall Street - at least, the only one not on direct life support....
If that is capitalism, then bring on socialism, the sooner the better. But even capitalism is too good a word to describe the current debacle. Call it pure predation instead.