. . . because much of the content relates both to Washington, D.C., and "outside the beltway" -- the heartland, specifically Iowa -- and because after going from Iowa to Washington via Texas and California I subsequently returned, From DC 2 Iowa.
Showing posts with label Secretary Henry Paulson. Show all posts
Showing posts with label Secretary Henry Paulson. Show all posts
We're going to look back on the current rush to provide the second $350 billion to the banking industry as a tragic, tragic, mistake. Mark my words.
And not just my words, but those of the World Economic Forum -- an organization of some of the, as the name suggests, world's most influential economists and corporate CEOs -- the very folks you'd expect to be enthusiastic about gifts of billions from grateful taxpayers.
Don't get me wrong. I'm not going to delight in saying "I told you so" sometime on down the road. My most fervent wish is that I'll be saying "well, I sure got that one backwards." But I fear I'm right.
This is not an argument for the proposition that a trillion-plus bailout of the banking, financial, investment and real estate mortgage industries would never be beneficial at some time, under some circumstances, for some individuals and businesses -- only that it is very, very wrong to do it at this time, under these circumstances, for these individuals and businesses.
Why?
1. They caused the problem. It seems fairly clear that our dire economic circumstances are the result of individuals' decisions -- whether the consequence of abysmal ignorance or cynical and selfish greed. They are not the result of "acts of God," only the acts of executives who thought themselves to be God. That makes them undeserving of bailouts. But who cares about that if by giving these undeserving millionaires hundreds of billions of dollars our economy turns around, the currently unemployed get jobs, and evicted former homeowners are back in their houses?
2. It didn't work. Many, including this blog, predicted that the $700 billion bailout wouldn't produce jobs, put folks back in their homes, and boost the economy. Those were just guesses, even if those who offered those warnings turned out to be right. Now there are more than guesses. There is data; the results of the first $350 billion are known. Unemployment is up; the economy has continued to spiral down. Knowing that it didn't work the first time, why would we try it a second.
3. The recipients have proven they aren't trustworthy. Sure, the Congress and Treasury Secretary Henry Paulson screwed up big time. But the recipients knew what the money was for, and it wasn't for squirreling away to increase reserves, buying other banks, dividends, and executive bonuses. Having created the problem by putting their own selfish greed ahead of the public interest, we should not be surprised that, given the opportunity, they would be inclined to keep the money rather than let those billions of dollars slip through their fingers and "trickle down" to their desperate neighbors. But OK, so they fooled us once. Now why are we setting ourselves up to be fooled again? Are these really the best guys to trust with another addition to a national debt we're leaving to our grandchildren?
(For details regarding how banks are using taxpayers' money in fact, as distinguished from theory and intention -- along with criticisms similar to my own and those of the World Economic Forum regarding the bailout approach -- see the excerpts from a story in today's [January 14] New York Times at the bottom of this blog entry: "In Michigan, Bank Lends Little of Its Bailout Funds.")
4. Stop digging. "When you find yourself in a hole the first thing to do is to stop digging." Our economic problem is, in large measure, irresponsible levels of debt -- multi-trillion-dollar national debt, mortgages, student loans and credit card balances beyond our means. And just why is it that additional debt is the solution to our debt problem?
5. Conditions first, money second. Even if this were a wise and warranted strategy, and the recipients who let us down in the past were now paragons of virtue, what's the rush? "If you don't give me $350 billion by tomorrow the economy will collapse." We fell for that once. "Show me the money?" -- No, not until you show me the details, the business plan. What is it about economists and financiers and their three-page proposals for near-trillion-dollar expenditures? (Yes, like Henry Paulson, Larry Summers is also offering a three-page letter of explanation.) Who's getting this money? What are they required to do with it? What oversight will be provided? What if (again) they violate the conditions? What is a reasonable prediction, scenario, as to what is going to happen as a result of this additional national debt?
6. Exit strategy. President-elect Obama "intends to agree to Pentagon plans to send up to 30,000 more US troops to Afghanistan in order to gain time to review the conflict" -- rather than learning from the Russian experience there, and focus on designing an exit strategy. AFP, "Obama to review Afghan strategy, approve troop increase," January 13, 2009. Unfortunately, his current approach to the coming economic depression also lacks an "exit strategy" -- that is to say, a long term plan, reasonably rational on its face, that takes us beyond the current one more bailout at a time approach. Where are we headed? What are we doing and why? What is our long term strategy and how reasonable are we in thinking it will work? I don't get this from Obama, his team, or our congressional leaders.
Now here's the news, along with the World Economic Forum's concerns:
President-elect Barack Obama worked Capitol Hill, trying to persuade Democratic senators not to block a request for the last $350 billion of the bailout funds and assuring them that he is willing to use his veto power if they do so. . . . "[T]he bulk" of the remaining TARP rescue funds would be used to invest in banks and other financial institutions . . .. Many Senate Republicans, meanwhile, continued to insist that Obama's team has provided too few details about how they would use the money. Many said they are seeking a written statement detailing Obama's intentions that goes beyond the three-page letter submitted to congressional leaders Monday by Obama economic adviser Lawrence H. Summers. . . . "Members need to know how the Obama administration is going to carry out this bill -- and we need to know not just statements of principle, but what they are willing to bind themselves morally to do," said Brad Sherman (D-Calif.).
Obama is making personal calls to Democrats and Republicans to urge them to release the money, and Democratic leaders were confident that he would prevail on a matter he told them he considers the "first vote" of his administration.
To the extent there are any details, they are not encouraging. The AP reports, "Frank's bill would require $40 billion to $100 billion of the bailout money to be spent on mitigating foreclosures [$40 billion is scarcely 10% of the funds] and . . . require the Treasury Department to use nonbailout resources to increase demand for home purchases [even though, while appealing to realtors and bankers, purchasing a home now is the furthest thing from the minds of those who've just been thrown out of the home they thought they had]." (comments added) AP, "Highlights of New Bailout Proposals," January 13, 2009.
And, "Bank executives will get to fly their company jets after all. Financial institutions that get assistance through the $700-billion Troubled Asset Relief Program had faced a provision that recipients of the money would be prohibited from owning or leasing private aircraft. But Kansas is one of the nation's centers of aircraft manufacturing, and state lawmakers complained . . .. So yesterday, Barney Frank (D-Mass.), head of the House Financial Services Committee and the author of the bill, lifted the jet ban." AP, "Ban on Private Jets Lifted from Bailout Program,"Newsday, January 14, 2009.
Meanwhile, the prestigious World Economic Forum is warning that government spending, and lack of long range planning, not only contains the possibility of doing little or no good, it may even "backfire" and end up doing considerable harm:
The World Economic Forum took a grim view of prospects for the world economy this year in a report released Tuesday, warning that government spending to counter the financial crisis could backfire. . . .
But the crux of the report was a prediction that "massive" government spending to support ailing financial institutions hit by the credit crisis could sow the seeds of more problems in the future.
Although it has been widely advocated, such spending is set to fuel big deficits in several major economies including Australia, Britain, France and the United States, WEF's "Global Risks 2009" report said.
"One of the biggest risks is that short-term crisis fighting may induce businesses and governments to lose the long term perspective on risk," said one of the contributors, Daniel Hofmann, chief economist for insurer Zurich Financial Services.
Although I cannot yet find a copy of the organization's Global Risks 2009 report online, it has been providing similar warnings for years. See Global Risks 2008: A Global Risk Network Report, World Economic Forum, January 2008, and the earlier reports from January 2007 and 2006.
I hold out little hope that the industries containing some of America's most generous campaign contributors will not get their $350 billion -- and even less that it will do much good for those 305 million Americans who have taken the losses, and are bearing the hardship of the consequences of their selfish, irresponsible greed.
_______________
Excerpts from "In Michigan, Bank Lends Little of Its Bailout Funds":
The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank [Independent Bank of Michigan] . . ..
But Independent . . . is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. . . .
This is not what the Treasury Department had in mind when it started this program, saying it would give the nation’s “healthy banks” enough money to start lending again, so that people could buy homes and businesses could invest and create jobs, thereby invigorating a disintegrating economy. . . .
As of Tuesday, 257 financial institutions in 42 states had received $192 billion in capital injections from the Treasury’s Troubled Asset Relief Program, or TARP, out of $250 billion set aside for this purpose. Seven giant banks — like JPMorgan Chase and Citigroup — have received more than 62 percent of the total so far, and have gotten most of the attention. . . .
Economists say the decision by banks like Independent to use the federal money for purposes other than lending, while perhaps disappointing, is not surprising, given that the Treasury Department did not honor its plan to give the money only to healthy banks.
“It’s a matter of logic — when you are in a perilous position, like many of them are, you try to bolster your balance sheet,” said Alan S. Blinder, a monetary policy economics professor at Princeton. “But this is a real flaw in the program.”
Some banking experts are even questioning if the bailout may be doing more harm than good, in some cases, by giving banks like Independent a cushion as they struggle to fix their problems, rather than forcing them to sink or swim on their own. It could also delay mergers of weaker banks with healthier ones.
“You are keeping a lot of troubled institutions in kind of a status quo state,” said Eric D. Hovde, the chief executive of a Washington-based hedge fund that invests in the banking industry. “They can continue on their merry ways.” In Congress, anger over the management of the TARP program runs deep. Many lawmakers say that there is little oversight, and that they can see no evidence that the taxpayer money is making its way from the coffers of banks to businesses and consumers. . . .
Some lawmakers have criticized the Treasury for allowing banks to use the government’s bailout money to acquire rival banks. . . .
“A lot of the money is already out there and the inspector general needs to get up to speed on how banks are using it,” said Senator Claire McCaskill, Democrat of Missouri. “We need to make sure we get this money back and the only way we can do that is with strong oversight on how this money is spent.” . . .
Mr. [Eric D. Hovde] Hovde, the hedge fund investor who says he believes the bailout program is putting off judgment day for many banks, said his fear was that many of the banks would burn through their federal money only to face a squeeze again. And they will never have made the extra loans that the Treasury had hoped would jump-start the economy.
* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself.
[Credit: "Shady Deal at Sunny Acres," Maverick, 2nd Season, 1958. The popular early television series, Maverick, "starring James Garner and Jack Kelly, remains the most famous and widely discussed episode of the Western comedy television series Maverick. Written by Roy Huggins and Douglas Heyes and directed by Leslie H. Martinson, this 1958 second season episode depicts gambler Bret Maverick (James Garner) being swindled by a crooked banker (John Dehner) after depositing the proceeds from a late-night poker game, then recruiting his brother Bart Maverick (Jack Kelly) to mount an elaborate sting operation to recover the money." It's also the source of two oft-quoted lines: "If you can't trust your banker, whom can you trust?" and "I'm working on it." See, "Shady Deal at Sunny Acres," wikipedia.org.]
At the outset, let me make clear that I don't mean to be questioning the trustworthiness of our local bankers (notwithstanding the physical similarity between one of them and John Dehner). The "bankers" I'm talking about are those in Washington, represented by the President, his Secretary of the Treasury, those "to get along go along" campaign-contribution-receiving members of the House and Senate, and their Wall Street collaborators.
Given that they have fallen for the same "Chicken Little, 'the sky is falling, the sky is falling'" rhetoric from Bush on the economy that he used for the Iraq War,
apparently what this country needs is a Washington invasion of chiropractors to strengthen their spines.
Europe is still providing examples of how to go about this bailout responsibly.
For example, in a story of some local interest we learn that the Dutch government is bailing out the corporate parent of Cedar Rapids' AEGON USA. Associated Press, "Netherlands Gives Aegon a $3.7 Billion Bailout,"New York Times, October 28, 2008 (in this morning's Gazette as, "AEGON Gets $3.7 Billion Government Investment," The Gazette, October 29, 2008, p. B7 -- apparently Europe's "bailout" is America's "investment").
Note that the European AEGON parent has canceled dividends and executive bonuses for the rest of the year.
Note also that the government has given "Dutch Uncle treatment" a whole new meaning by simply nationalizing the biggest Dutch financial institutions, ABN Amro and Fortis.
Nor has it simply given AEGON $3.7 billion. It has acquired 750 million shares of a new class of non-voting AEGON stock which, if converted to common stock would be nearly a 50% stake in the company. It will name two members of the board. The stock will pay a minimum of 8.5% annually. And if the company ever chooses to buy them back it will cost them $5.6 billion, not $3.7 billion.
Meanwhile, here in the good old U.S. of A. it looks like Secretary Paulson is weakening on his commitment to obtain taxpayer equity in exchange for the $700 billion bailout. Meanwhile, apparently the banks are taking the money -- designed to ease the credit crisis -- and instead of using it to make loans have decided they might better enrich themselves by using it to buy up other banks at a bargain, thereby creating even larger financial institutions that "we just can't afford to let fail."
And the auto companies, having already been given $25 billion (I believe), are now back in line for whatever they can get from wherever they can get it -- a part of the $700 billion "financial institutions" bailout, the additional $25 billion auto "just for the hell of it" fund, and some $5 billion from the Department of Energy for retooling to (hopefully) begin building cars that Americans would actually like to buy.
The roughly $10 billion in government funds to support a merger would be in addition to whatever funds would be allocated under an already-approved $25 billion program to provide low-interest loans to the auto industry for retooling to make more fuel-efficient cars. . . .
Moody's Investors Service cut its GM rating on Monday deeper into junk territory on the view that GM's liquidity would continue to erode into 2009. The ratings agency also cut Chrysler for similar reasons . . ..
GM has a market capitalization of just over $3 billion based on Monday's close and roughly $10 billion of outstanding debt. Chrysler's privately held auto operations were valued at zero last week by Daimler AG (DAIGn.DE) . . ..
GM's shares have slumped nearly 80 percent this year and its market value has dropped below what it was in 1929.
Far be it from me to yield to the persuasive forces of cynicism and conspiracy, but doesn't it kind of remind you of two things:
(1) Civil disorder and riots, whether in Baghdad after our invasion or American cities 40 years ago, with store windows broken and looters running down the streets with anything that was not locked down that they can carry. Even the foxes have stopped guarding the chicken coops and opened the door to any and all to come take as many as they can carry. This Administration and their friends in Congress realize that change is most likely coming. If they intend to keep on getting they best get while the getting is good. Since when they opened the vaults at Fort Knox they discovered they were bare, and they don't want the wealthy to have to pay taxes, they've simply run up debt for our great grandchildren to pay, and then started paying this borrowed money to themselves as fast as they can between now and January 20 (Inauguration Day). Maybe not, but that's sure as hell what it looks like to me.
(2) An almost equally valuable byproduct -- certainly politically -- of this unrestrained theft from taxpayers involves one of the most effective strategies of those who would like to do away with government entirely -- except for making war (while enriching the weapons merchants). By running up astronomical levels of debt they can totally eliminate any and all "discretionary spending" by the president and Congress. Remember Bush's adviser, Grover Norquist? "To Norquist, who loves being called a revolutionary, hardly an agency of government is not worth abolishing, from the Internal Revenue Service and the Food and Drug Administration to the Education Department and the National Endowment for the Arts. 'My goal is to cut government in half in twenty-five years,' he says, 'to get it down to the size where we can drown it in the bathtub.'" Robert Dreyfuss, "Grover Norquist: 'Field Marshall' of the Bush Plan,"The Nation, May 14, 2001 (online April 26, 2001).
It's a two-fer for them: riches beyond their wildest dreams of avarice, and a political body blow to any Obama Administration. After all, what will Obama's options be? ("You can't always get what you want; but you can get what you need"? Not if "Change We Need" is "Change We Can't Afford.")
1. He can capitulate to the neocons' strategy; fail to put any of his proposals in place, and cut back even more on the few social programs that still exist, further extending the gap between rich and poor and driving America ever closer to third-world demographics.
2. He can, irresponsibly, increase the national debt beyond the $10 trillion or more that Bush is leaving for him -- and the $55 trillion of unfunded future obligations -- and just hope that the Chinese, and other peoples with greater inclination to save than Americans, will continue to loan us money.
3. He can (a) pray for an economic recovery sufficient to radically increase federal tax revenues (without increasing tax rates), using the money to both pay down debt and provide at least pilot project-level funding for new programs, or (b) increase tax rates notwithstanding the lack of economic recovery.
There may be other options, but those are the only ones that immediately occur to me.
Of course, I may be too cynical. After all, "If you can't trust your banker, whom can you trust?"
Senate Bill: Wrong Plan, Favoring Wrong People, at the Wrong Time
Look, I understand that I don't have a Ph.D. in economics or an MBA in finance. But I can smell a hog confinement when the breeze blows in from south of Iowa City, and what is floating in the hot air coming from Washington smells very similar.
I really don't like to say "I told you so." But I predicted almost step by step what was going to happen with our war in Iraq, and it has. And I don't like what I see coming down the road over the next few years as a result of what Washington thinks is a "solution" to our financial woes either.
Nonetheless, I realize that most rational readers of this blog would like to have a little more reassurance on something of this magnitude than just my gut instinct and intuition. So this morning I'm going to wheel in the support of 200 economists and another nation's much more sensible solution to an almost identical challenge.
Do we need to "do something"? Absolutely. I just don't think we ought to be doing "something" that is going to make the situation worse rather than better, and is inherently unfair in terms of whom it benefits (the excessive-risk-taking greedy bankers who created and profited from the problem, along with the excessive-campaign-contribution-taking elected officials who, in exchange, deliberately failed to regulate it) and whom it burdens (the unemployed, working poor, homeowners, and present and future generations of taxpayers).
Don't you have just a little deja vu with the rhetoric from the White House? Doesn't it sound a little like the "mushroom cloud" we were going to be witnessing if we didn't invade Iraq?
[S]ane people were rightfully a little suspicious of the plan to upright the finances of the U.S. by a $700 billion handout funded by taxpayers.
The House was rightly skeptical too, failing to pass the proposal Monday.
But George Bush skipped talking about sacrifice and buckling down in his speech promoting the bailout to the nation. He preferred to persuade us mere peons using fear, as he has in the past. The phrases he chose were dire, scary even: “a long and painful recession” and “our entire economy is in danger.”
"More banks could fail, including some in your community,” he warned. “The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically.
“And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs.”
OK, we get it. The markets are falling apart, and with such a high percentage of people with some funds in the stock market, some sort of action will be taken.
But how long will it take before an accounting of the long term cost of fixing this financial mess will occur?
I’m awaiting the politician who admits that some will be shortchanged in the public arena as billions are leveraged to stave off the crisis. . . .
The money will come from somewhere. We just want to have a more honest accounting of the situation, of who will actually suffer, who will profit by the plan, and whether it will really fix the problems of the U.S.
Even Nicholas Kristof, a solid backer of the Paulson approach, acknowledges,
"[C]ritics of the bailout have reason to be furious. It is profoundly unfair that working-class American families lose their homes, their jobs, their savings, while plutocrats who caused the problem get rescued. . . .
Congressional critics of the bailout . . . should come back in January . . . with a series of tough measures to improve governance and inject more fairness in the economy: . . . remove tax subsidies on executive pay and allow courts to restructure mortgages as they do other kinds of debt. . . .
Among the strongest critics of inflated executive pay have been Warren Buffett and the late management guru, Peter Drucker, who argued that C.E.O. salaries should peak at no more than 20 or 25 times those of the average worker. (Last year, C.E.O.’s got an average of 344 times the wages of the typical worker.) . . .
C.E.O.’s hijack shareholder wealth in ways that are unconscionable. . . . [I]f [Nabors Industries] Eugene Isenberg . . . were to drop dead one of these days, his estate would be entitled to a “severance payment” of at least $263 million — more than the firm’s first-quarter net earnings.
Last night the Senate passed -- over the opposition of a full fourth of the body (25 senators) -- a "sweetened" version of the Paulson/House bill. FDIC insurance on depositors' accounts in banks would be raised from $100,000 to $250,000, and even more tax cuts are promised, among other things.
Think about it. More for the wealthy. How many of the 600,000 workers laid off this year will be helped by tax cuts? How many of your neighbors keep so much more than $100,000 in their checking account (and are so lazy or ignorant they haven't opened additional accounts elsewhere) that they really need the reassurance that it's guaranteed up to $250,000? Are House Republicans who voted for common sense (and their outraged constituents) really able to be bought with such tarnished coin?
And with the dollar continuing to drop, please explain to me how adding even more debt (from unfunded additional tax cuts) to our current national debt of $10 trillion, unfunded future obligations of $55 trillion, Iraq future costs of $2 trillion, and Paulson's added debts of $1.3 trillion, is going to make things better for future taxpayers.
There is even more reason to vote against the Senate's plan than there was to vote against the House proposal.
So where is my support from the nation's economists? Here it is. Some 200 of them, from some of the most prestigious public and private universities in the nation. I'll provide the link if you'd like to look for your own school, but my truncated listing of all the signers -- those whose last names begin with "A" or "B" -- will give you an indication of who's on board.
And what do they think of the Paulson proposal? Not much:
To the Speaker of the House of Representatives and the President pro tempore of the Senate:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwords.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
The online letter notes, "This letter was sent to Congress on Wed Sept 24 2008 regarding the Treasury plan as outlined on that date. It does not reflect all signatories views on subsequent plans or modifications of the bill."
Here is a link to the letter, where you will find the names and institutions of the signers as "updated at 9/27/2008 6:00PM CT."
Meanwhile, as promised, here's a sampling of the names and institutions -- those whose last names begin with "A" or "B":
Acemoglu Daron (Massachussets Institute of Technology) Ackerberg Daniel (UCLA) Adler Michael (Columbia University) Admati Anat R. (Stanford University) Ales Laurence (Carnegie Mellon University) Alexis Marcus (Northwestern University) Alvarez Fernando (University of Chicago) Andersen Torben (Northwestern University) Baliga Sandeep (Northwestern University) Banerjee Abhijit V. (Massachussets Institute of Technology) Barankay Iwan (University of Pennsylvania) Barry Brian (University of Chicago) Bartkus James R. (Xavier University of Louisiana) Becker Charles M. (Duke University) Becker Robert A. (Indiana University) Beim David (Columbia University) Berk Jonathan (Stanford University) Bisin Alberto (New York University) Bittlingmayer George (University of Kansas) Blank Emily (Howard University) Boldrin Michele (Washington University) Bollinger, Christopher R. (University of Kentucky) Bossi, Luca (University of Miami) Brooks Taggert J. (University of Wisconsin) Brynjolfsson Erik (Massachusetts Institute of Technology) Buera Francisco J.(UCLA) . . .
Consistent with the concerns of these economists are those of Senator Russell Feingold:
“I will oppose the Wall Street bailout plan because though well intentioned, and certainly much improved over the administration’s original proposal, it remains deeply flawed. It fails to offset the cost of the plan, leaving taxpayers to bear the burden of serious lapses of judgment by private financial institutions, their regulators, and the enablers in Washington who paved the way for this catastrophe by removing the safeguards that had protected consumers and the economy since the great depression. The bailout legislation also fails to reform the flawed regulatory structure that permitted this crisis to arise in the first place. And it doesn’t do enough to address the root cause of the credit market collapse, namely the housing crisis. Taxpayers deserve a plan that puts their concerns ahead of those who got us into this mess.”
For the objections of other senators in the coalition of opposition see, David M. Herszenhorn, "A Curious Coalition Opposed Bailout Bill,"New York Times, October 2, 2008 ("Their concerns spanned a panorama of issues: frustration over the lack of long-term regulatory changes in the legislation; alarm that $700 billion in taxpayer money would be at risk; anger that the Treasury secretary would not be subject to more stringent oversight; skepticism that executives of firms that seek help would face limits on their pay; and dismay that such an important bill was being rushed through Congress. And, perhaps most pointedly, they expressed skepticism that the bailout proposal would be able to restore liquidity to the credit markets, prevent the collapse of additional banks and safeguard the economy from a long recession.").
There are those who say (to me, and to other critics of what Congress is doing), "Now look, I understand you're angry, that you don't like this plan. But we have to do something. You can't just oppose the only plan we have. If you don't like it so much, tell me what you think would be a better plan."
OK. And I'm about to tell you what would be a better plan.
But not before I observe that I don't really think that's my responsibility. I'm with the secretaries with more than one boss who post the sign on the wall, "Your failure to plan does not constitute my emergency." It's like the profligate friend who wants to borrow money "because otherwise the electricity is going to be cut off." And you're thinking, (a) why didn't you think about that when you engaged in that last excessively expensive bit of discretionary spending (or trip to the casino), and (b) why didn't you let me know this was coming more than the day before the shut-off is going to occur?
Those who will bear the burden of this Wall Street bailout did not create the problem. It's not their responsibility to come up with a solution.
But because they (and I) will continue to be berated by the perpetrators unless we solve it for them, here's an idea.
I.
It's not a theoretical, ivory tower approach. Not only did it work for another country -- it was actually the approach taken by Paulson with Fannie Mae, Freddie Mac and AIG! So please tell me: Why has he now suddenly abandoned this approach?
It's not as if no other country has ever dealt with a similar financial crisis, or that there is no other approach than that of Secretary Henry Paulson. The $700 billion we're talking about represents some 5% of our GDP. In 1992 Sweden put 4% of its GDP into its banks. (They had run into trouble for much the same reason as ours: "Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times," as the Times' Carter Dougherty reports, but they didn't use taxpayers' money to buy up "toxic debt." Dougherty continues:
Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.
Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.
That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well. . . .
[T]he final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated. . . .
A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.
The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.
Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said. . . .
Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.
Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. . . .
Then came the imperative to bleed shareholders first. . . . Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank . . ., the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.
The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993. . . .
[T]he agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.
Are you really going to try to convince me that there are no American "Wallenbergs" out there who might come up with similar solutions if they knew their share of the $700 billion would be accompanied by a loss of ownership? There is a "market" out there as well as taxpayer money. J.P. Morgan bought the failing Bear Stearns. "In the midst of the subprime crisis, Buffett said during a media interview in June that he sees investment opportunities in the subprime market." He just put $3 billion into General Electric. Bank of America bought Merrill Lynch when it was near bankruptcy. Wells Fargo just bought Wachovia. There have been others.
Maybe the market, alone, is not enough to pull us out of this. But shouldn't that option at least be exhausted before loading an additional $700 billion (or more) debt on our great grandchildren?
III.
Ireland has just come up with its own innovative approach (though not unprecedented, less satisfactory, and far more controversial), characterized by The Daily Telegraph as "the most dramatic and comprehensive bank bailout in Europe since the Scandinavian rescues of the early 1990s." The Irish Times, from which this quote comes, has published a summary of the response of many of the world's great newspapers to its government's essentially bank loan guarantee plan. "World View,"Irish Times, October 2, 2008. For the Financial Times' take on what's going on in Ireland this week (as well as the British government's response) see Andrew Hill, "Guarantees Go Only So Far,"Financial Times, October 2, 2008.
Now I'm not about to join those "I'm still angry," PUMA, former-and-for-always Senator Hillary Clinton supporters and "go Republican" on you. But I've always been more interested in ideas than ideology, proposals than partisanship, and when I find a Republican with a better one I'm not afraid to say so.
Though I must say it gives me some sadness to have to say, this close to election day, that I think Dr. Mariannette Miller-Meeks, the Republican opponent of my Democratic Congressional Representative, Dave Loebsack, has the better position on the Wall Street bailout. See, on her Web site, "Congress Must Set Aside Politics, Address Root Causes of Financial Crisis," September 30, 2008.
Not only do I not support everything she says, I have to candidly acknowledge I don't even understand everything she says. But I understand and agree with most of it, and offer it in the context of this blog entry as, at a minimum, one more response to those who argue that no one is permitted to dislike the Paulson approach unless they can come up with some other alternative. Well, here is yet one more alternative.
"We need to quickly stabilize the financial system with the least cost to the taxpayers. . . .
She said Congress should remove language from Community Reinvestment Act that encouraged excessive risk-taking by Fannie Mae and Freddie Mac and authorized the development of bundled mortgage debt obligations creating this morass and passing the risk onto others. Miller-Meeks advocates temporarily suspending mark-to-market accounting so that banks can stabilize their accounts instead of writing down good loans that will be repaid in full.
"Home owners who are dutifully paying their mortgages on their primary home and have been honest in their application, should be protected with new mortgage product or stabilization of the housing prices. We should penalize those responsible for the losses and keep current executives in place without golden parachutes. Unfortunately, those who benefited most are already gone from those institutions," she said. . . .
Miller-Meeks said the federal government does have an appropriate role in the crisis, including purchasing some institutions and securities at fair market value and selling them at fair market value to the benefit of taxpayers. She believes all proceeds from the eventual sale of such assets should pay down the national debt or provide a tax dividend to taxpayers. . . .
"Steve King is absolutely right when he says doing 'something' is not enough; we have to do the right thing. That means we need to approve a plan so that Wall Street won't expect a bailout every time they make the wrong decisions," she said. "To paraphrase Martin Luther King, Jr., we can't afford socialism for the rich and raw capitalism for the rest of us. Unfortunately, David Loebsack doesn't seem to understand that or the real-world challenges facing the people he's supposed to represent."
Miller-Meeks favors allowing the Federal Deposit Insurance Corporation to ease capital requirement for banks so they can ride out the current credit crunch. She also believes the Securities and Exchange Commission should modify fair value accounting so assets aren't considered worthless during a market panic and instead can be valued on the basis of their true economic value. She also favors development of a plan to let private investors fund the bailout through guaranteed recovery bonds or to set up insurance programs to ensure Wall Street bankrolls its own recovery. . . .
So there you have it. There are better ways to deal with our financial problems, at a minimum there are alternative ways that should be fully explored before rushing down the dangerous path Congress has chosen, ways that consider the plight of the unemployed and homeowners, ways that promise a little greater likelihood of a return to taxpayers, ways that don't reward those who created the problem, and ways that don't perpetuate their inclination to make short-term greedy profit by putting long-term probable risk onto taxpayers.
The route the Senate -- and perhaps on Friday (October 3rd) the House -- are taking (particularly given their role in criminally removing regulation from the industry) is not necessary and is certainly not the only, inevitable, approach; it's just the despicable approach.
What are we to make of the money changers in the temple, worshipers at the alter of "the free market," overturning their own tables, leaving the temple, and following the anti-Christ through the desert to the land of socialism?
The most relevant today -- as 100 million American families are each about to add an additional $7000 in debt by this evening to what they already owe for homes, cars, credit cards and student loans -- is this week's "Global Business" with Peter Day. The program pretty consistently offers a weekly look inside that enormous wad of chewing gum we call "business" that results in creative insights not likely to be found elsewhere in the business media.
There was a time when banks provided capital for goods and services -- people who grew things, or manufactured things, or sold things, real things you could hold as well as services to a consumer economy. Peter Day calls them "businesses which employed people and made money for shareholders and suppliers etc, and built prosperity for various owners who maybe did good things with their money." Today, he notes,
Many big banks have diluted their old primary business of lending to enable enterprise, and started investing on their own behalf in . . . foreign exchange, or warrants or options or packages of debts so arranged that the liability falls off the balance sheet and cannot readily be ascertained by outsiders. . . .
[T]these banks seem to have lost a lot of their commercial compass or moral purpose of employment or prosperity.
Their feet are no longer on the ground, in the real world.
They are run by contract employees working for annual bonuses, and profits are the only measuring stick they know.
To understand what such "banks" have created, why they are in trouble, and what needs to be done about them, Peter Day -- along with five seasoned analysts and academics (including Andrew Hilton, Director of the Centre for the Study of Financial Innovation) -- explored possible analogies for understanding and concluded that "financial capitalism" (as Day calls it) is most like the casino business.
It's just that the casino industry has done a much better job of analyzing and managing its risk.
Ownership [in "financial capitalism"] no longer carries the old burden of responsibility. The sole measure of success is the medium term returns. . . .
Businesses are not built any more, but sliced and diced and reassembled in a similar way to the toxic mortgages assembled by the banks during the sub-prime bubble.
Bubbles burst, and (as we are now learning) real people are hurt. Casinos know what the odds are, but these new international investment banks don't, despite their complex risk management algorithms.
Unlike the casinos, they are houses of cards.
Now that Iowans are betting that we can gamble our way to economic prosperity, if our casinos weren't doing such a good job of managing their risk we might someday confront their demand that unless we bail out a few failing casinos our state's economy will collapse.
Clearly, that's what the gamblers in Wall Street -- the most generous source of funding for our elected officials in Washington -- are telling America's taxpayers this morning.
I suffer under no illusion that my suggestions in this little blog will have the slightest impact on what Washington will decide today my great-grandchildren's debt should be. Nor do I represent that I have any credentialed expertise in economics or finance. But that's never held me back before.
1. "From those wonderful folks who brought you the Iraq War."
Jon Stewart's "Daily Show," last Thursday, September 25, opened with a wonderful bit comparing videos of the almost word-for-word similarity between the way President Bush explained the God-awful consequences that would flow from our not going to war in Iraq and our not giving Wall Street $700 billion.
Whatever happened to "fool me once, shame on you; fool me twice, shame on me"?
Whatever calamity it is we're about to confront, it was created on the watch of a former Secretary of the Treasury from Goldman Sachs. It is now the subject of a three-page proposal from a Presidential aide and Secretary of the Treasury, both from Goldman Sachs, that we trust them with $700 billion of our money and give it to them immediately. Shouldn't we at least consider the possibility that there may be a lot more rhetoric than reality to the "sky is falling" predictions from this crowd?
Last weekend we were told unless the problem was solved by this past Monday global financial collapse would follow. It wasn't solved by Monday, and the world's economy and stock markets continued to operate on Tuesday, Wednesday, Thursday and Friday.
Secretary Paulson said if any restraints were put on how much could be earned by the CEOs of the bailed out firms those CEOs might not agree to the plan. Think about that for a moment. How serious can this disaster be -- and how worthy the CEOs we're about to bail out -- if they're willing to go through it rather than lose the opportunity to buy another yacht?
2. Frankly, I have a lot more trust in "the market" than these "free market" ideologues recently turned socialists.
These are the folks who complain that there's a "shortage of workers." Offer pay and benefits that someone can live on and the "shortage" evaporates. "The market" will produce those workers.
"There just aren't any buyers for my house." Well, no, not when houses in your neighborhood are selling for $180,000 to $220,000 and you're asking $375,000. Lower the price and there will be buyers.
Banks have taken our deposits and instead of investing them in the local community as we assumed they were doing, they have gone off on a drunken toot on the global market, gambled them away and lost. Having lost what was our money in the first place, they now want us to cover their gambling losses and give them the money all over again. No; I don't think so.
It's not our fault they violated our trust and lost our money.
Moreover, however little their investments are worth, they are worth something. The market will respond to that worth -- and is, in fact, the most accurate way of measuring it.
Warren Buffett found something at the bottom of this barrel he was willing to pay $5 billion to buy. Bank of America picked up Merrill, Lynch. Didn't Barclay's buy at least some of Lehman Brothers? Why not let the market work?
Not the least of the problems with the $700 billion proposal is the difficulty in assessing what the taxpayers should be paying for these "toxic" assets. If we pay what Warren Buffett or Bank of America would have been willing to pay, why are we doing it with taxpayers' money, and how have the investment banks been benefited by our generosity?
If we end up paying more than market value -- either because Washington is being incredibly generous with our money, or because, without a true market, there's no real way of knowing what they are worth -- aren't we being taken to the cleaners?
The spin the last couple of days from Washington has been, "Not to worry; actually you're going to get most of this money back; in fact, you might even make a big profit."
With all respect, I think this is BS. If there's a possibility of actually making money on this transaction there's somebody out there in the private sector who will figure out a way to come up with the capital to do it. If not, don't tell me this is really a scheme to enrich my great-grandchildren.
3. Trickle up, not down.
There are three groups of people I care about in this mess -- none of which is made up of Wall Street or Main Street bankers.
I am concerned about (a) depositors, (b) workers, and (c) homeowners.
The money should go to them, and can, at a fraction of what we're going to be handling over to America's richest individuals.
(a) Bank depositors are insured, up to $100,000 per account, by the Federal Deposit Insurance Corporation (FDIC). Even if their bank fails, those funds are protected. Credit unions' members have a somewhat similar protection. With multiple accounts, or multiple banks, individuals can have even greater protection.
(b) Some 600,000 workers have already lost their jobs this year. They, and those whose layoffs may follow, are the true innocents in this mess. We should extend and expand unemployment compensation and job training programs. Beyond that, we should put in place, ready to roll out, programs like the Civilian Conservation Corps from the 1930s -- potential construction jobs for the unemployed, working to rebuild our aging infrastructure of roads, bridges, dams, hospitals, schools, floodplains, parks and other public projects. The 1930s jobs programs included writing, theater, and other opportunities for the unemployed beyond construction jobs.
(c) Homeowners who've cut back on their discretionary spending, sacrificed, and continued to make their mortgage payments shouldn't be left to think themselves fools. Those who made unrealistic, stupid commitments to make mortgage payments they had no realistic way of making will suffer a bit -- as will the investment bankers. But those who were taken advantage of, those who could make payments based on the current value of their homes (but not their inflated value) should be permitted by bankruptcy judges to do so.
Those three things would, in my judgment, do more to restore America's economy than whatever Secretary Paulson may end up getting from the taxpayers.
4. "The plan" is not "a solution."
Even the plan's advocates acknowledge they can't promise it will fix everything.
There are other financial problems coming down the line.
There's no free lunch. Not only does this put $700 billion on our great-grandchildren's credit card.
There are implications for the value of the dollar vis-a-vis the Euro and other currencies -- indeed other nations' willingness to continue to treat the dollar as the preferred international currency.
There are implications for China and other nations' willingness to continue to loan us the money to enable us to cut the taxes of our wealthiest, fund our two current wars and the world's most bloated military-industrial establishment, and now this $1.3 trillion-plus bailout of those whose greed drove them to take the short-term profits along with the long-term excessive risks for which we've now been asked to pay.
There are implications for inflation, and for the squeeze this puts on -- indeed the probable cancellation of -- very badly needed social programs of all kinds with potential to add even more to our long-term economic growth.
5. Baby steps.
If we're going to do this anyway, why do it through the Secretary of the Treasury, and why do it this weekend all in one fell swoop?
Why not use a separate agency, as was done the last time we bailed out a segment of the financial community -- the savings and loan industry -- rather than handing it over to one person (who will be leaving Washington in three months anyway)?
Paulson says he can "only" spend $50 billion a month. That being the case, why not require whoever is running this to return to Congress for no more than $100 billion at a time as we work out the procedures and monitor the results?
Got Questions? Like: Who's the latest addition to the football team's criminal record? Who said, "[I don't] care how many women the football team rapes, as long as it keeps winning"? What's the answer to "Guess who's not coming to dinner"? Which UI prof went toe-to-toe with President Sally Mason in the Press-Citizen's op ed pages? Should we really advocate for victim advocates? Congress decides the future of global financial collapse and "The Great Fountain Pen Robbery" on Wednesday, the first presidential debate is Friday, Homecoming is Saturday -- so what's happening Thursday? You'll find the answers on this morning's updated "University of Iowa Sexual Assault Controversy -- 2007-08," July 19-present.
Mattresses Enter Commodities Markets Mattress futures must be climbing about now. At least that's Bob Patton's view of our present financial dilemma: The headlines on the newpapers in the rack read "U.S. Near Financial Chaos" and "Where is our money safe?" One of the "Mattress Store" workers is saying, "Call me an alarmist, but I still say they know something we don't" as four customers are running down the street with mattresses on their heads. [Credit: Bob Patton, "Economic 'Down'turn?" Posted September 16, 2008; and Iowa City Press-Citizen.]
What they may know is that Treasury Secretary Henry Paulson has declared that his $1.3 trillion remedy must be enacted by Congress immediately, as he says, "Clean and quick."
Why have I always associated that phrase with a killing -- whether by the mafia, or the military, or of domestic animals?
Here we have another sense of a killing -- a killing being made, a killing being made by the bankers. The only folks actually being killed are us. And I don't think those killings are going to be "clean and quick." I have a sense they'll be messy and slow, perhaps going on for years and years. (See, Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008.)
On the other hand, as the Maverick episode put it, "If you can't trust your banker, whom can you trust?"
I'm not an economist -- "but I play one on this blog." So it's always reassuring when, after relying on gut instinct to think through a problem and present the results here as a blog entry, a couple of days later the "experts" in whatever area may be involved seem to be engaging in an analysis either identical to, or at least consistent with, my own.
Paul Krugman is a distinguished academic economist as well as a New York Times columnist. He is currently a Professor of Economics and International Affairs in the Woodrow Wilson School at Princeton, and was formerly Ford International Professor of International Economics at the Massachusetts Institute of Technology (from which he received his Ph.D.). He has also served on the U.S. Council of Economic Advisers. That may not mean he's "right," but it at least means he's well informed.
So take a look at his column from last Sunday: Paul Krugman, "Cash for Trash,"New York Times, September 21, 2008 ("[Secretary of the Treasury Henry] Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense. . . . [His plan] will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan? . . . [T]he financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place."). There's more to his analysis. The column is definitely worth reading.
I don't know Krugman's politics, but I do know former Speaker Newt Gingrich's politics, so for the benefit of those who might be more persuaded by an avid Republican spokesperson, this former Speaker of the House of Representatives and author of the "contract on America" thinks "what they're doing is just wrong. And I think that it's likely to fail, and it's likely to make the situation worse over time. And I think that [U.S. Treasury] Secretary [Henry] Paulson has shown almost no understanding of how a democracy operates. His initial draft would have given him $700 billion of your tax money with no oversight, no judicial review, no accountability. I mean, we're not a dictatorship." For more along the same lines see the transcript of his NPR interview and his National Review article. "Gingrich on Why Bailout Plan is 'Just Wrong,'" All Things Considered, National Public Radiio, September 22, 2008, Newt Gingrich, "Before D.C. Gets Our Money, It Owes Us Some Answers," The Corner, National Review, September 21, 2008 ("Congress has an obligation to protect the taxpayer. Congress has an obligation to limit the executive branch to the rule of law. Congress has an obligation to perform oversight. Congress was designed by the Founding Fathers to move slowly, precisely to avoid the sudden panic of a one-week solution that becomes a 20-year mess.").
Yesterday I promised "Rational Responses to Stolar and Global Finance," September 20, 2008. I may or may not have satisfied you with the rationality of my response to Stolar. But I left you hanging with regard "global finance," since other things intervened before I could get back to it.
Now I've seldom if ever been charged with being a man of few words -- "turn on a light bulb and he'll make a speech," my critics say -- but the events of the past two weeks (or has it only been one week?) have been so totally appalling that I really am close to speechless.
One can just sputter and scream, of course; but having done that what more is there to say?
I'm wishing we still had Woodie Guthrie around to sing to us about it. Do you remember his "The Ballad of Pretty Boy Floyd" (March 1939)? The last two stanzas of lyrics read:
Yes, as through this world I've wandered I've seen lots of funny men; Some will rob you with a six-gun, And some with a fountain pen.
And as through your life you travel, Yes, as through your life you roam, You won't never see an outlaw Drive a family from their home.
T. Boone Pickens has been urging us to convert our cars to run on natural gas to avoid (or at least reduce) the "transfer of wealth" represented by our purchase of foreign oil. As he notes: "Over 700 billion dollars are leaving this country to foreign nations every year . . . The largest transfer of wealth in the history of mankind."
Well, ol' T. Boone has just been one upped by Secretary of the Treasury Henry M. Paulson, Jr.
Secretary Paulson -- with the support of President Bush, candidates Senators McCain and Obama, the leadership of the U.S. House and Senate, and the urging of their campaign contributors -- is about to provide "the largest transfer of wealth in the history of the United States," $1.3 trillion, to their wealthy friends in finance, banking and real estate, ultimately to be paid by our grandchildren.
"Campaign contributors"? Yes, campaign contributors. OpenSecrets.org, which tracks this kind of thing for us by industry sectors, has calculated that the "finance, insurance and real estate sector" has been the largest single sector providing support to both McCain and Obama. (It was the leading source of Senator Hillary Clinton's contributions as well.) Massie Ritsch, "Bundlers for McCain, Obama Are Among Wall Street's Tumblers," OpenSecrets.org, September 18, 2008.
How dumb do these bandits think we are? Unlike those who play by the rules of Pretty Boy Floyd, these are outlaws who not only would "Drive a family from their home," they've already done it.
Think about it. We're roughly six weeks from a presidential and congressional election. McCain is having a tough enough time distancing himself from President Bush. He darn sure doesn't want to have to distance himself from President Hoover as well.
Nobody knows the details of what's in Secretary Paulson's $1.3 trillion proposal, or the packages of worthless debt he's offering to buy from his friends. All we know is that (a) we're going to end up paying for it, and (b) he's got a provision in there that no one can oversee or challenge what he does. He himself acknowledges he can't guarantee it will work.
Appropriately, it's a strategy comparable to the "short term gains from long term risks" strategy that the financial geniuses undertook to enrich themselves and impoverish us and create this mess. So long as we aren't dealing with the next "Great Depression" on the day we go to vote -- November 4 -- who cares what happens between then and inauguration day?
If the McCain forces had access to enough troops they could have salvaged this thing by starting a war. See, "Wag the Dog." The Iraq War is going to end up costing us $2 or $3 trillion. But we could wage a third war for far less than this $1.3 trillion bailout if we could get it over with in something between six weeks and six months -- something like the promise regarding Iraq, or the reality with Granada. The problem, as I say, is that we don't have enough troops for the two wars we're already in; and besides with two wars going on a third wouldn't give McCain that much of a bounce in the polls.
So scaring the Congress into capitulation is the best short term strategy for the next six weeks. Anything to keep Obama out of the White House.
Besides, it's a way to pay back those campaign contributors in the coin they know best.
The problem for the taxpayers is the contributors' rate of return. We're used to campaign contributors being given a 1000-to-one to 2000-to-one return on their contributions -- from us, whether as taxpayers or as consumers. That's bad enough. But the payback on this corrupt deal is more like 30,000-to-one.
A $1.3 trillion transfer of wealth from the poor and middle class to the wealthiest class has got to be a record-setting "shock and awe" attack in class warfare.
Now I'm not saying that there may not be some problems in the financial sector of our economy. I'm not even saying that this unprecedented robbery may not produce some small benefit.
But I do see a lot of hypocrisy when those who've been most vocal in advocating free, unregulated markets -- while ridiculing socialism -- suddenly welcome the latter as an alternative to free private enterprise when their going gets rough.
It really is "heads I win, tails you lose." "If I'm lucky and make a profit, I get to keep it. If I'm not, I still get to keep my profits, salary, bonuses, stock options and golden parachutes, but I don't have to worry about the losses -- because I can just hand them off to you and all the other taxpayers." It's the very sweet deal called "socialism for the rich and free private enterprise for the poor."
By what rationale should taxpayers' money be going onto the bottom line of any for profit business at any time -- whether tax breaks, TIFs, subsidies, earmarks or bailouts? But even if you can answer that one, why should businesses be rewarded by taxpayers for their greed, risky behavior and stupidity when they fail? Isn't that just going to encourage them to continue the path of "short term gains from long term risk"? Whatever happened to Secretary Paulson's observation that "Market discipline is best served when shareholders bear both the risk and the reward of their investment"?
Consider the alternatives -- and what they say about the priorities of our elected officials who are funded by this "finance, insurance and real estate sector."
How else might we have boosted our economy with $1.3 trillion?
o We could have spent it upgrading and building infrastructure: roads and bridges, hospitals and schools -- providing employment for those 600,000 who lost jobs this year, and who would have put most all of that $1.3 trillion to circulating in our economy as well as paying off mortgages and credit card debt.
o We could use it to create T. Boone Pickens' plan: convert our cars, and build the natural gas infrastructure, to run our cars on natural gas -- plus, as he proposes, getting 20% of our energy from wind.
o We could use it to virtually eliminate future economic losses from flooding by moving homes and businesses from floodplains, and converting the floodplains to parks, pastures and prairies.
o As many acknowledge, if you really want to improve our economic position in the world, invest in education: K-12, college, graduate schools, research. The economic return on the post-WW II "GI Bill" (paying for veterans' college education) was enormous. The Sputnik "Defense Education Act" boosted our students' learning and preparation.
o If you want to use it to pay down debt, or eliminate bad debt, give it to those who have the debt: provide relief to those struggling under the weight of near-usurious interest rate credit card debt, buy up their debt, or the debt of those trying to get a college education -- or who got one, now can't find a job, and are unable to pay off their debt.
Now I'm not willing to undertake the burden of demonstrating that these expenditures would be wise either. We need more savings, not more expenditures. There is no secret slush fund from which this $1.3 trillion comes. We have a nearly one-half-trillion additional federal debt (expenditures greater than income) for just this one year. We are running our government, and country, on a credit card we never pay off with loans from the Chinese. The $1.3 trillion payment will run just our current debt to nearly $12 trillion -- the long term, unfunded obligations will now be more like $55 trillion.
No, all I'm saying is that it's kind of obvious what's going on here with this "fountain pen robbery" in terms of priorities and it's shameful.
We need a third standard for evaluating when firms are "too large." The antitrust laws' standard (adverse impact on market competition), and what Congress originally intended to be the FCC standard for broadcast stations (a robust "marketplace of ideas") are no longer adequate.
The third standard? Institutions should not be permitted to become so large that the impact of their collapse on our national economy would be so severe that taxpayers must be asked to pay for their bailout.
It's not that our nation's founders didn't know better. As Thomas Jefferson once wrote, "I, however, place economy among the first and most important of republican virtues, and public debt as the greatest of the dangers to be feared."
This morning we're dealing with yet another case study of why we need this new standard: the potential $200 billion bailout of Fannie Mae and Freddie Mac, described by the New York Times as an "extraordinary" bailout that "could become one of the most expensive financial bailouts in American history."
I remember when I was involved in the Administration of President Lyndon Johnson how insistent the President was one year that the federal budget not go over $100 billion. He felt there might be a significant public and media backlash were that cap to be exceeded.
Yes, I know, there's been some inflation over the past few years; $100 billion isn't what it used to be. Still it's something of a shocker to realize that the mere interest on the national debt was $430 billion in 2007 -- over four times the entire federal budget when I was in government.
There are some basic terms here that need to be distinguished and understood, and are often and easily confused. (The details, and "off budget" expenditures, make it even more confusing; I'm not even going there -- except to note that the total, long term costs of the latest Iraq War are projected to be something on the order of two-to-three trillion.)
The "federal budget" is what the government projects it's going to spend during the next fiscal year (October to October).
A "budget deficit" is what the government incurs for a given year if the government spends more than it takes in. It's what you have during any year that you put more debt on your credit cards than you pay off.
The "national debt" is what the government has, or what keeps increasing, when those budget deficits accumulate year after year. The same thing applies to your credit cards: spend more than you pay off and your total "credit card debt" increases.
"Interest on the national debt" is what the government has to pay, just as you have to, to those from whom it's borrowed. Were it to fail to pay these interest payments -- even if it has to borrow even more money to pay the interest on its former loans -- it would result in a collapse of our own entire economy, and very likely that of Japan and European countries as well. Of course, paying interest doesn't reduce the debt; it just keeps the Chinese from refusing to loan our government the money it borrows each year to keep the country running. It's like your making large enough payments to the credit card company each month to cover the interest you owe -- while your total balance owing continues to rise.
"Unfunded obligations" are what's coming in the future that the government has no way of paying, and has no plans for addressing -- in our government's case a couple major examples are Medicare and Social Security. It would be like your taking out a second mortgage on your house to pay off your credit card debt with no realistic way to make the mortgage payments when they come due; or a low monthly payment mortgage on a house with an enormous "balloon payment" obligation down the road you have no way of paying off.
So what are these numbers?
Budget. President Bush this year (2008) presented Congress with a budget of $3.2 trillion (over 30 times what it was in my day).
Budget deficit. Whoever occupies the White House next year will inherit from President Bush a $482 billion budget deficit.
National debt.Our current national debt is about $9.7 trillion. (If you'd like to track its increase day by day check the "Debt Clock." or the U.S. Treasury page.)
Interest on the national debt, as noted above, is now well over $400 billion a year.
Unfunded obligations -- hold onto your hat -- are now about $53 trillion.
What does all this mean?
Let's start with Fannie Mae and Freddie Mac.
The bailout plan for the companies, Fannie Mae and Freddie Mac, a seismic event in a year of repeated financial crises followed by aggressive federal intervention, places the companies in a government conservatorship, much like a bankruptcy reorganization. The plan also replaces the management of the companies.
The rescue package represents an extraordinary federal intervention in private enterprise. It could become one of the most expensive financial bailouts in American history . . . [as it] commits the government to provide as much as $100 billion to each company to backstop any shortfalls in capital. . . .
Alan Greenspan, the former Federal Reserve chairman, and Lawrence H. Summers, a Treasury secretary under President Bill Clinton, along with many other critics, have long maintained that the companies were too powerful politically and financially, and that their huge portfolios posed enormous risks to the financial system. . . .
[Treasury Secretary Henry M.] Paulson has sought to avoid taking sides in the debate, but in recent months came to the conclusion that the companies’ conflicting missions of providing federally backed financing for affordable housing while serving shareholders were untenable.
“Market discipline is best served when shareholders bear both the risk and the reward of their investment,” Mr. Paulson said on Sunday.
CNN's Glenn Beck refers to our nation's unfunded future obligations as a $53 trillion asteroid hurtling toward Earth, the first impact from which is scarcely 10 years away. Glenn Beck, "The $53 Trillion Asteroid," CNN, March 14, 2008.
No one in Washington, or those headed that way, seems willing to talk about it, but the United States is headed for a severe shaking up from this asteroid. Although we are the primary target, rather than the whole of planet Earth, no country will escape the impact of our failing economy -- including our major creditor, China.
Former Comptroller General David Walker has been riding around the country on his horse shouting "the asteroid is coming, the asteroid is coming," but we either haven't heard him or can't internalize the significance of what he's saying. (Here's his July 2007 segment on CBS' "60 Minutes.")
What does this mean to my family?
If you count Mary and me, our seven children, five grandchildren and three great grandchildren, that's 17 people.
There are as of this morning about 304 million people living in the United States if you count everyone from new-born babes to the terminally ill. Divide $53 trillion by 304 million and you get a per-person share of those unfunded obligations of $174,342 per person. Multiply that by our family of 17 and you get a . . .
. . . family share of that national debt of $2,963,815!
I don't know about your family, but when I see the Chinese government's REPO Man coming up the walk to knock on the door I'm going to know that this family is in deep, deep trouble.
Talk about "our chickens coming home to roost"!
How much does your family owe the Chinese?
Isn't it about time we insist our public officials -- city council members granting TIFs as well as Congress bailing out wealthy shareholders -- heed Secretary Paulson's wisdom: "Market discipline is best served when shareholders bear both the risk and the reward of their investment.”
Now this bailout is being sold as in the consumer's best interest, making mortgages and car loans once again available at more reasonable rates and terms. It's pointed out that the shareholders of Fannie Mae and Freddie Mac have seen a real reduction in the value of their stock. True enough.
But what about the millions of profit that have already been made by the CEOs of Wall Street firms, by banks, mortgage companies, realtors; what about the future income that will now be coming their way? Those responsible for their profits -- and everyone else's losses -- aren't paying any of those costs. The taxpayers are. And that's wrong.
(Note that all we're talking about here are the "bailouts." That's only one aspect of our system of "socialism for the rich and free private enterprise for the poor." See, e.g., Nicholas Johnson, "Who's The Reason?" September 5, 2008. There are also the tax breaks, subsidies, defense contracts, tariffs, price supports, earmarks and other dozens of ways government functions to transfer taxpayer money to the political parties' largest contributors.)
It's not like this was some big surprise, like critics weren't pointing out that "their huge portfolios posed enormous risks to the financial system." Those profiting from those risks showed little concern for the rest of us until they, too, began to suffer some losses -- at which point they wanted the taxpayers to bear the risk and the loss. Once we permit firms to reach such a size that a reasonable argument can be made they cannot be allowed to fail because of the far reaching consequences for our economy it's already too late.
No firm should be permitted to reach a size such that Secretary Paulson's wisdom -- "Market discipline is best served when shareholders bear both the risk and the reward of their investment.” -- can no longer be applied.
