News Release

Behind the Bailout


Chomsky, whose recent books include Interventions and The Essential Chomsky, stated: “Markets have inherent and well-known inefficiencies. One factor is failure to calculate the costs to those who do not participate in transactions. These ‘externalities’ can be huge. That is particularly true for financial institutions. Their task is to take risks, calculating potential costs for themselves. But they do not take into account the consequences of their losses for the economy as a whole. Hence the financial market ‘underprices risk’ and is ‘systematically inefficient,’ as John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalization and reviewing the substantial costs already incurred — and also proposing solutions, which have been ignored.

“The threat became more severe when the Clinton administration repealed the Glass-Steagall act of 1933, thus freeing financial institutions ‘to innovate in the new economy,’ in Clinton’s words — and also ‘to self-destruct, taking down with them the general economy and international confidence in the U.S. banking system,’ financial analyst Nomi Prins adds. The unprecedented intervention of the Fed may be justified or not in narrow terms, but it reveals, once again, the profoundly undemocratic character of state capitalist institutions, designed in large measure to socialize cost and risk and privatize profit, without a public voice. That is, of course, not limited to financial markets. The advanced economy as a whole relies heavily on the dynamic state sector, with much the same consequences with regard to risk, cost, profit, and decisions, crucial features of the economy and political system.”
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NOMI PRINS, via Celeste Balducci
Prins is a former investment banker turned journalist. She used to run the European analytics group at Bear Stearns and has also worked at Lehman Brothers and Goldman Sachs. She said today: “With another Sunday night surprise announcement, this time that Goldman Sachs and Morgan Stanley have been transformed into Bank Holding Companies, the dissolution of Glass-Steagall transcends its 1999 repeal. Rather than risk more pain while scrounging for capital, Goldman (with former CEO turned Treasury Secretary Hank Paulson’s help) has positioned itself to take capital directly from citizens, with all the benefits and federal safeguards of a commercial bank. Somewhere Senator, and former Treasurer, Carter Glass, is turning in his grave.”
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An economist, Wolff just wrote the piece “Cowardly New World,” which states: “Secretary Paulson has attempted to declare himself the most equal of pigs in our animal house economy. The Treasury seeks more than $700 billion for itself under the sole auspices of the Secretary whose management helped bring us right over the brink. I say more because unlike so many commentators, I read the proposal. It only limits Treasury to $700 billion in balances at any one time (Section 6). If they buy $700B and lose 20 percent of the principle ($140B), Treasury will just buy another $140B. That restores market confidence?”

Wolff is an instructor at the Graduate Program in International Affairs at the New School University. He is a frequent contributor to Huffington Post, Asia Times and The Indypendent.
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For more information, contact at the Institute for Public Accuracy:
Sam Husseini, (202) 347-0020; or David Zupan, (541) 484-9167