Labor Advocate Online

The Toxic Debt Crisis
Needed: A Big United Labor Credit Union
by Bill Onasch

In my American History class at Ruskin High School we spent about five minutes on the great Wall Street crash of 1929 that was soon followed by numerous bank failures, an epidemic of home and farm foreclosures, and massive business failures and curtailment. We were taught not to worry about any similar future recurrence. Lessons had been learned, regulations, such as the Glass-Steagall Act of 1933, were now in place, guaranteeing such crisis would never again cause so much misery.

Mr Wentworth wasn’t so far off. The financial system regulations installed in response to the Great Depression were probably sufficient to prevent another collapse on the same scale, in exactly the same way. But, about two decades after I graduated from Ruskin, Jimmy Carter ushered in a new era of deregulation that set the stage for a tinkering with those safeguards my teacher found so reassuring.

The first major financial incursion came during the “morning in America” days of Reagan with the passage of the Garn-St. Germain Depository Institutions Act in 1982. It dealt with Savings & Loans–special banks then limited to offering low interest deposits that could only be used for home mortgage loans.

The new law allowed these “thrifts” to promise higher interest rates on deposits. With this expanded capital they were now permitted to make commercial and consumer loans as well for homes. For the first time, S&Ls could now borrow funds from the Federal Reserve Bank. And, to inject a little spice in to what had historically been a rather bland side dish on the financial menu, the new bill also removed restrictions on loan-to-value ratios. At the same time, the Federal Home Loan Bank Board regulatory staff was greatly reduced by budget cuts–thanks to intervention by powerful Senators, such as those who became known as the Keating Five.

To use one of Jim Hightower’s favorite phrases, this was a case of “hogs in the creek.” Speculative, and sometimes fraudulent, real estate and commercial ventures went sour and S&Ls–especially in Texas–started failing left and right. All told, between 1986-1995, over 1,000 S&Ls, with total assets of over 500 billion dollars, failed--overwhelming the government agency insuring deposits. Congress had to establish the Resolution Trust Corporation to liquidate the assets of hundreds of S&Ls. Part of their work included a suit against the President’s brother, Neil Bush, Director of the Silverado S&L–who settled for 26 million, paid a 50,000 dollar fine, and accepted a ban from banking.

At the end of the day, tax-payers had to shell out 124.6 billion dollars to clean up the S&L mess. That’s a big chunk of change and was a major contribution to the ballooning budget deficits of the Reagan/Bush I years. Still, it was a crisis limited to one sector, not systemic. But--the deregulators were just getting started.

Citicorp–now Citigroup–was a prime mover in gaining repeal of depression era Glass-Steagall with the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. Sponsored by top Republicans, it passed congress with huge bipartisan margins--90-8-1 in the Senate, 362-57-15 in the House–and was signed by President Clinton. Author Phil Gramm is currently Senator McCain’s top economic consultant. Clinton’s Treasury Secretary, Robert Rubin, is now Senior Financial Adviser to Citigroup–and appears at Senator Obama’s side during press conferences dealing with the current crisis.

Democratic presidential candidate Sen. Barack Obama, D-Ill. flanked former Council of Economic Adviser head Laura Tyson, left, and former Treasury Secretary Robert Rubin, answers during a news conference in Coral Gables, Fla., Friday, Sept. 19, 2008, following a meeting with his economic advisers.
Robert Rubin on right

The 1999 law swept away the firewalls between commercial banks, investment banks, insurance companies, and auditing firms, put in place after the 1929 crash. It authorized new financial tricks for old institutions such as mortgage-backed securities, collateralized debt obligations, and structured investment vehicles, that we keep hearing about in conjunction with what was once thought to be just the subprime crisis.

Crooks, such as at Enron and WorldCom, slipped past the lowered barriers like a worm attacking an unguarded Windows computer. Tens of thousands of workers lost jobs and life savings as a result. But it wasn’t just con men thinking they were the smartest guys in the room that brought us to the financial state that has grabbed everyone’s attention today.

The growth of pension funds and money markets over the past few decades accumulated vast amounts of capital. Decades of dominating the “Free World” has bred hubris in America’s ruling class. They are prepared to take ever increasing risks--with other people’s money--to bolster profit rates that have been declining.

Through scams like the housing bubble they created fictitious capital--leaving very real debts ruining millions of lives. Now they demand working class tax-payers take over the “toxic” (uncollectible) debt that can no longer be hidden from investors. Each successive news story I read hikes the cost of this “bail-out through nationalization.” While congressional Democrats are purported to have agreed to a commitment of 700 billion some experts estimate an ultimate trillion dollars will be required–equivalent to half of the entire Social Security Trust Fund.

But there’s no guarantee that the bail-outs stop with this astronomical figure. On the contrary, the Big Three automakers–after outsourcing and offshoring hundreds of thousands of jobs–are holding what’s left of the industry hostage to getting massive federal “loans.” They want fifty billion and will almost certainly get at least twenty-five.

Both parties have rallied around whatever rescue plan de jure put forth by Treasury Secretary Paulson and Fed Chair Bernanke. So has AFL-CIO president John Sweeney,

“There's broad agreement that government bailouts of financial giants Fannie Mae, Freddie Mac and AIG had to happen to stave off national and even global economic catastrophes.”

John Sweeney

Brother Sweeney blames everything on “Bush/McCain economics.” He believes he has found a savior,

“But one person—Barack Obama—is talking about applying much zeal to fixing the real economy. He knows and is fighting for what America needs to turn around and get back on track. He knows that real people in the real economy have been in a crisis for a long time. He understands that nationalizing loss while abandoning the middle class is not the answer—that we need an immediate response to the economic crisis afflicting middle America.”

Brother Sweeney seems to have selective recall. Workers have indeed been in a crisis for a long time–including when the father of NAFTA, Bill Clinton, was in the White House and when his Treasury Secretary was Robert Rubin, now guiding the zealous Senator Obama.

Certainly we should be opposed to “nationalizing loss.” But the demand for nationalizing the financial system has long had a proud place in American working class heritage. I recently ran across the 1912 Socialist Party platform that Gene Debs ran on. It included a call for,

“The collective ownership and democratic management of the banking and currency system.”

Eugene V Debs

This demand seems even more relevant today in order to avoid another Great Depression–and to get the hogs out of the creek.

I have to admit I’ve never much liked banks. I keep all my inconsiderable funds in the United Labor Credit Union. The ULCU is owned by its members. We elect the management and decide basic policies. None of us expect to get rich from dividends. The main goal of the deposits is to provide sound loans to those who need them.

This micro-example of the principle expressed in Debs’ platform could and should be a template adapted to replace the greed and waste that marks the present system. We should tell the ruling elite,

Don’t worry about the toxic debt. We’ll take it–along with everything else. We think we’ve got enough sweat equity to justify our action. We’ll give you a fair severance package and don’t let the door hit your backside on the way out. We’re confident we can run a system that keeps the money flowing and invests in society’s needs, as determined democratically, instead of further enriching the already super-rich.

September 20, 2008

About the Author
The webmaster of the website is a paid-up member of UAW Local 1981—the National Writers Union. During the 70-80s, while employed at Litton Microwave’s Minneapolis operations, he was elected to various positions in UE Local 1139, including Shop Chairman and Local President. In 1980 he took a union leave from the plant to work on a successful UE organizing drive at a Litton runaway plant in Sioux Falls, South Dakota. When Litton began shutting down its four Minneapolis plants Onasch was selected to be a worker representative in a Dislocated Worker Project administered by Minneapolis Community College—where he became a member of the Minnesota Education Association. Returning to his home town of Kansas City in 1989, he soon began a 14-year stint as a Metro bus driver. During that time he published a rank and file newsletter, Transit Truth, chaired a union Community Outreach Committee that organized public protests against cuts in transit service, helped organize a privatized spin-off at Johnson County Transit, and served a term as Vice-President of ATU Local 1287. He has also been involved in US Labor Against the War and the Labor Party since those organizations were launched and represents Midwest chapters on the Labor Party Interim National Council.

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