Paulson and Bernanke Spread the Wealth Around

During the campaign, Barack Obama provoked a media flurry and right-wing outrage over his comment to Joe the Plumber about "spreading the wealth around." They told us that this view was contrary to the American Way, that this was socialism.

Given all the concern over Obama's ideas about spreading the wealth, it is remarkable how little attention is being given to Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke's much more ambitious effort to spread the wealth. They are putting in practice measures that swamp any plans put forward by Obama in the presidential campaign; yet, this massive government redistribution of wealth is drawing almost no attention whatsoever.

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In addition, the Federal Reserve Board agreed to guarantee up to $300 billion of presumably bad assets. This is an enormously valuable guarantee. If Citigroup had to arrange a comparable guarantee in the private market, it would almost certainly pay more than $30 billion a year.

This decision sent Citigroup's stock soaring. In the week since the bailout was announced, Citigroup's stock more than doubled, adding more than $25 billion to the company's capitalization. (The government could have bought the bank outright with the money it lent to Citi.) This is great news for Citigroup's shareholders, who would be holding almost worthless stock if Mr. Paulson had not been so generous.

Paulson's decision was also good news for Robert Rubin and other top executives at Citigroup. If the government had not stepped in, Citigroup would almost certainly be in bankruptcy and most of its highly paid executives would likely be out on the street.

Creditors of Citigroup also benefited. If Citigroup went into bankruptcy, their loans would be frozen for a period of time while the court determined what percentage of Citi's debts could be paid. At the end of this process, many creditors would only receive back a fraction of what they are owed.

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In the case of the Citi rescue, there was no obvious reason the shareholders should not be wiped out. They understood (or should have) that when they bought shares of the company that they could lose their whole investment if the company was poorly managed and went bankrupt. Similarly, there is no obvious reason that the management that wrecked Citi should not be thrown out and replaced with a more competent and lower paid team.

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In other words, we are spreading the wealth around in a really big way right now, and most of it seems to be going upward. The amount at stake in the tax increases that President-elect Obama plans to put in place is almost certainly less than $50 billion a year. The money that is being redistributed upwards through this bailout may be 20 times as much.

The politicians and media types who were upset about Senator Obama's interference in the market should be yelling bloody murder about the bailout. Their silence shows that they care nothing about the market; they only care about ensuring that money flows upward. They are fine with "spreading the wealth around" as long as it lands with those already at the top.