This article first appeared in the St. Louis Beacon: October 15, 2008 - The other day, one of my sisters accused me of being a socialist. This outrageous slander was rendered during the course of an otherwise civil political discussion. While I'm personally close to all of my siblings, this particular sister and I move to different universes when talk turns to politics.
Ideologically, she's two steps to the right of Louis XIV, and I may be the least dogmatic soul on the face of the planet. You can usually predict her position on a given issue by asking yourself, "How would Phyllis Schafly feel about this?" My beliefs, on the other hand, fall across the political spectrum, and I can see no compelling reason why, for instance, my opinion on capital punishment should be somehow congruent with my thoughts on collective bargaining.
Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all. — John Maynard Keynes
At any rate, I was about to rebut her scurrilous attack when I realized that she was right -- I am a socialist and have unwittingly been so most of my adult life. You see, I spent 21 years as an officer on the St. Louis Police Department and now work for the City Sheriff's Office. Though most cops would bristle at the label, we're all socialist to the core.
At the cop shop, salaries and benefits are standardized, seniority is rewarded through a graduated pay scale, health insurance is provided for by law and a fixed-benefit pension plan is in place. When City Hall gives the department a raise, green rookies and the chief of police get the same percentage. The chief, incidentally, makes only about 2 times the base salary of a veteran patrol officer.
Cops can be fired, but only "for cause" -- a provision that introduces lawyers into the process. For the most part, if you keep your nose clean, you've got a job for life. In terms of economics, the only capitalist you'll find in a game of cops & robbers is the guy the cops are chasing. In fact, when cops try to use their office to dabble in free enterprise, they usually get indicted.
Looking at the work force from this perspective, you find a lot of socialism out there. Fire-fighters, emergency medical technicians, public school teachers, judges, members of the armed forces and postal workers all work in professions where financial risk is virtually nonexistent and reward is guaranteed. In the current economic climate, these people share one commonality -- they have jobs. The pay may not be great, but it's steady.
And now, a new hotbed of socialism has been unearthed in the most unlikely of places: Wall Street. Recent events have revealed that bastion of free market enterprise to be an elaborate scheme of privatized profit and socialized loss. When times are good, the cats get fat. But when reckless speculation runs the fiscal ship into the ice berg of reality, "we the people" get to pay for the lifeboats. The AIG bail-out is a case in point.
The American International Group dealt heavily in credit default swaps. We socialists tend to be unfamiliar with exotic financial instruments, so I consulted the online encyclopedia, Wikipedia, to find out what exactly these things are. Here's what it had to say:
"A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the 'buyer' makes periodic payments to the 'seller' in exchange for the right to a payoff if there is a default or credit event in respect of a third party or 'reference entity'."
Well, that clears that up. Sorting through the convoluted gibberish, it turns out the swaps are basically insurance policies that investors can take out on securities they purchase.
Why didn't AIG simply call these instruments insurance policies? The answer to that one is easy: if these contracts were insurance, they would be regulated and AIG would have had to maintain adequate capitalization (enough money) to pay off its obligations. Swaps, on the other hand, have been de-regulated as part of our brave new free market economy. (See also Cowboy capitalism )
When the subprime mortgage market shot craps, the securities based on it became worthless. Investors subsequently began to redeem their swaps, which drove AIG to the brink of bankruptcy because it didn't have the funds to cover the paper it had sold.
Fearing a complete collapse of the global financial system -- an event that may be taking place, anyway -- the cash-strapped U.S. government advanced $85 billion to AIG to tide it over. Instead of going to prison for fraud, firm managers adjourned to an exclusive spa where they spent $440,000 of their new-found wealth to celebrate their rescue.
When news of the AIG executive holiday hit the press, politicians were duly outraged. Later the same day, the government announced an additional $38 billion advance to AIG from its newly created $700 billion bailout fund.
Q: Since most delinquent borrowers can pay at least a portion of their mortgage payment, wouldn't it have been cheaper, and more effective, for the government to simply lend distressed homeowners the difference between what they can pay and what they owe on a month-by-month basis? That way, the debtors could keep their houses and with their mortgages now current, the securities based on them would again have value, thus eliminating the need to cash in the swaps.
A: No way. Bailing out lenders is patriotic. Bailing out borrowers would be socialism.
M.W. Guzy is a retired St. Louis cop who currently works for the city Sheriff's Department. His column appears weekly in the Beacon.