American Taxpayers In the Crosshairs Again

We Canadians sometimes like to believe American taxpayers have it great thanks to vastly lower tax bites. Well, not so much as you might imagine.

America's taxpaying public are a prey species at the moment, stuck smack in the crosshairs of a government that has trimmed their ranks, an economic elite that has been set free, and a predatory economic nightmare that may soon be added to their "to do" list.

The George w. Bush regime has been a faithful friend to America's rich. It began with exempting the "investment class" from much of their traditional tax liability, shifting that burden instead to the remainder, the wage-earners. That was followed up with tax cuts for the wealthiest of those wage-earners, who also happened to be the nobility of the investment class. The burden they slipped also shifted to the middle- and working-class stiffs who were, as the nutjobs say "left behind."

Now with America teetering on the brink of a massive recession those tax cuts for the rich have shown themselves to be anything but "manna from heaven" bringing wealth and prosperity to all but John McCain and the Republicans remain insistent on making them permanent.

But wait, there's more. In the name of defunding government, Bush has been running massive deficits propped up by borrowed, foreign money. The money goes out the door just as fast as it comes in, the IOU's get deposited in a special room reserved for the kids and grandkids of the working- and middle-classes. That's business as usual.

But wait, there's more. Every decade or so, a group of prominent American rentiers go on a fiscal raid on the scale of a Genghis Kahn. They rape and pillage the countryside and then disappear as quickly as they arrived leaving nothing but disaster to show where they had been. That's when the government has to step in with emergency relief, typically borne on the backs of taxpayers, to settle things down, punch the reset button, and await the arrival of the next wave of Huns.

Think "savings and loan scandal" or the "dot.com bubble" or today's "subprime mortgage scandal." Enormous wealth is supposedly created, entered on the books, backed by millions of little people and then, in an instant, wiped out. Think Charles Keating, Bernie Ebbers, "Kenny Boy" Lay, Jeffrey Skilling and then put their faces on all those ancient, terra cotta warriors unearthed in China.

The Savings & Loan scandal of the late 80s, early 90s was, for it's day, "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time." $160-billion of depositors' and investors' wealth was wiped out of which $124 was made good in bail outs by the government, i.e. the America taxpayer. A few, like Charles Keating, went to jail but many more just walked away with a lot of loot. Enron/Worldcom are more recent but they ended up much the same although not with similar bailouts. By then it was good enough that employees and small-time investors just had their financial integrity shattered. Now we're into the subprime mortgage and associated fiascos and hold on to your hat, if, as an American taxpayer, you're lucky enough to still have one.

Paul Krugman, writing in today's New York Times, warns that America's mortgage meltdown could massively dwarf the Saving & Loan or Enron/Worldcom collapses. Think of a cross-section of an old grenade. It has a fuse that is stuck right in the middle, surrounded by a sphere of high-explosive, all of it held in place with a metal casing. When the pin is pulled, the fuse explodes, detonating the surrounding explosive that causes the metal casing to break into lethal shards that fly out in all directions in search of victims.

In today's America, warns Krugman, the subprime market of $200-billion is the fuse planted in the midst of an $11-trillion, potentially volatile, mortgage market main charge.

"One consequence of the crisis is that while the Fed has been cutting the interest rate it controls - the so-called Fed funds rate - the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that's sure to worsen the economic downturn.

What's going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing "significant collateral damage to market functioning."

A report released last Friday by JPMorgan Chase was even blunter. It described what's happening as a "systemic margin call," in which the whole financial system is facing demands to come up with cash it doesn't have. (A financial joke making the rounds, via the blog Calculated Risk: "Who is this guy Margin that keeps calling me?")

The Fed's latest plan to break this vicious circle is - as the financial Web site interfluidity.com cruelly but accurately describes it - to turn itself into Wall Street's pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.

Some observers worry that the Fed is taking over the banks' financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down - there are $11 trillion in U.S. mortgages outstanding - it's a drop in the bucket."

Will American taxpayers, at the end of the day, find themselves saddled with this one too? Are they going to be used to bail out America's banks and financial institutions? By the way, just what happened to their Social Security contributions over the past three decades? Oh yeah, their government, that's now conveniently broke, wrote them IOUs for that. What a relief!