Financial Bailout Plan: What Does It Mean for Capitalism and Democracy?

For four shining days last week, it appeared that America was still a representative republic—of, by and for the people. The week opened with the House of Representatives defeating the $700 billion Wall Street bailout by a vote of 227 to 206. But the Senate, the more aristocratic house of the bicameral legislature, quickly drafted its own bailout bill and passed it by a vote of 75-24. Then on Friday, while populists were still celebrating Monday’s bailout defeat, the bigger and badder bailout bill was passed by the House and quickly signed into law by President Bush.

How did it happen so fast? How did we go from beating back this colossal transfer of wealth to an even worse version of the same bill becoming law just four days later? And what does the bailout’s passage mean for the future of capitalism and American democracy?

What Does the Bailout Mean?

First, the specifics of the bill. The general idea is that the federal government will buy up “$700 billion worth” of “illiquid” securities, thereby “stabilizing” the financial and credit markets. The “$700 billion” must appear in quotes because the securities have much lower value on the open market, which is why they’re “illiquid.” And while apologists for the bailout claim that the federal government actually stands to make money as a result of Friday’s legislation, the fact of the matter is that, if this $700 billion “investment” had any legitimate potential to be profitable, private entities would be more than happy to supply the capital.

But the bailout bill that President Bush ultimately signed does much more than just transfer $700 billion from the American taxpayer to millionaires and billionaires on Wall Street: it also grants the federal government unprecedented powers. For example, there won’t be another bailout bill any time soon, and not because this one will have worked so well. One of the provisions of this bill allows the Secretary of the Treasury to use public funds to buy up any financial asset he wants—without congressional approval. All he (or, in the future, she) needs to do is “notify” Congress.

Think about this for a moment: there will be no more debate. The next time a bailout is “needed,” Henry Paulson or his successor can be like Nike and just do it. The Federal Reserve already had that power, but it was reaffirmed in the bailout bill. Thus, not only was wealth transferred from the middle class and poor to the rich as a result of this bailout, but power was also transferred from the legislative branch—that branch most accountable to the people—to the executive branch and the Federal Reserve.

Why Did the Bailout Pass?

The original bailout bill was just three pages in length. The one that passed on Friday was several hundred pages long. In addition to added powers being given to the executive branch, the new bill was greased with enough pork to build a million bridges to nowhere. And of course, the pork was directed at those House members who had voted no on Monday but were of fungible-enough integrity that a little lard thrown their way could easily sway them. It worked, as the vote went from 206 for and 227 against, to 263 for and 171 against—a swing of 57 votes.

Another cause of the bailout’s easy passage: Barack Obama, a supporter of the bailout, called on black legislators and urged them to change their no votes to yeses. It should be noted that Obama’s top contributor is Goldman Sachs, and that Citigroup, JP Morgan, UBS and the now-bankrupt Lehman Brothers are also in his top ten. But if voters want to express their disgust with the bailout, they’ll have to look outside of the two-party system, since John McCain and Sarah Palin support the bailout and oppose laissez-faire just as steadfastly as Obama-Biden.

What Was the Immediate Impact?

When the bailout first failed, the Dow Jones Industrial Average fell by a record 777 points. Financial pundits were nearly universal in blaming the House’s brief showing of fiscal restraint as the cause of the market’s woes. But when the new bill passed the Senate on Wednesday night, the markets crashed on Thursday, with the Dow falling by 3.2% and the S&P and NASDAQ faring even worse. And then on Friday, after the House passed the bill, the Dow swung from +3% to -1.5%, and the S&P and NASDAQ also turned gains into losses.

For the week, the three major indices lost 7.3% (Dow), 9.4% (S&P) and 10.8% (NASDAQ)—these are all much greater than the one-day losses of Monday. Clearly, the failed bailout wasn’t the cause of the market’s decline, as the bill’s successful passage caused stocks to drop even further.

Where Do We Go From Here?

This is a critical time in American history, in which we must reevaluate what it means to be a democratic republic built on the principles of private property and free enterprise. As one Republican congressman put it, what we really have now is “capitalism on the way up and socialism on the way down,” meaning that we let corporations privatize profits in good times and then socialize losses when times are tough. What’s more, we allow our representatives to thwart the popular will and redistribute wealth from their constituents to their campaign financiers, while the mainstream media mis-reports and distorts all along.

Libertarian columnist Bill Huff characterized the recent events as a “run on the state.” Much like a “run on the bank,” when people race to withdraw their deposits before a bank goes belly up, Huff says the bailout is the last ditch effort for the rich and powerful to extract wealth from the federal government before it goes bankrupt. With the national debt soaring this past week, and the Federal Reserve expanding the money supply at an unprecedented pace, one has to wonder when people are simply going to refuse to accept U.S. dollars anymore. And when that happens, then what?

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