. . . 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 financial collapse. Show all posts
Showing posts with label financial collapse. Show all posts
Given the recent exceptional popularity of "Living Outside the Box; From Thoreau to Ferentz," August 9, 2010, if that's the blog entry you're looking for you can find it here.
Entertainment, Social Commentary and Public Policy (bought to you by FromDC2Iowa.blogspot.com*)
Harry Shearer is one of those guys in Hollywood who has excelled at virtually every form of creative endeavor -- with the possible exception of re-painting the Sistine Chapel.
The fulsome coverage of his career in Wikipedia describes him as "an American actor, comedian, writer, voice artist, musician, author and radio host." That scarcely does his creative and prolific career justice, but it does give you a simplistic sense of its variety and reach. "Harry Shearer," wikipedia.org. And see his Web site.
Among other things, he is a sensitive observer, and critic, of the American scene. As such, he is a contributor to the hundreds of years of involvement of entertainment in general, and music in particular, in the cause of social commentary and "activism" -- which is just another word for "democracy." The Sixties -- both the 1860s and the 1960s have been such times, with the hidden messages in Spirituals, and less well-disguised approach of the "Smothers Brothers Comedy Hour" in the 1960s, John Stewart's "Daily Show" today, and Pete Seeger seemingly having been singing forever.
Another example, provided by Harry Shearer, and all too effectively hidden within his creative outpouring in my view, is a little song he wrote, recorded and released October 6, 2009, about the financial collapse in general and Goldman Sachs in particular. In it, he succeeds in explaining both what was going on, and the attitudes of those engaged in it -- which seem to me to bear at least some similarity to those exhibited in the ten year old movie "Boiler Room" (2000) and 1987 film "Wall Street" (from which the video clip, above, of the Gordon Gekko (Michael Douglas) "greed is good" speech is taken).
The song is not exactly today's news, "more's the pity," and that's a part of my concern. Goldman Sachs' role in the global financial collapse from which we have yet to emerge -- like the BP's pollution of the Gulf of Mexico -- are seen by the corporations involved, as well as the media, as a "public relations" challenge. The solution? (1) Produce and televise some slick commercials proclaiming your sincerity and sorrow, and perhaps pay to underwrite some CPB programming. (I once proposed the best way to fund public broadcasting would be for the Department of Justice Antitrust Division to file more law suits, because every time it filed one the corporate defendant inevitably got its face out there as a "good guy" by funding a PBS or NPR program.)
(2) Just wait it out; ultimately the public (and their representatives) will forget about it, having shifted their focus to a more current crisis.
Music, humor, films, and other forms of entertainment can stand and fight that tendency. (I recently watched a "Boiler Room" DVD again.) And Harry Shearer's "Mr. Goldman and Mr. Sachs" lively tune and lyrics keep running through my mind long after I've forgotten exactly what it was the New York Times' stories and editorials detailed about the firm's abuses.
The song is available from YouTube.com, iTunes and Amazon for 99 cents, and I recommend you give it a listen.
Its energized beat and bouncy and irreverent delivery can't be communicated by the lyrics alone. But here they are anyway, to give you a sense of the message. [If Harry Shearer wants me to remove them from this blog entry I will, of course, do so. But with no advertising on my blog, I have nothing to gain by making them available, and anyone who was a potential purchaser of the song before should be more, rather than less, likely to be so now. And if you find, and can correct, any errors in my transcription please put them in a comment on this blog entry.]
So here it is, . . .
"Mr. Goldman and Mr. Sachs" Harry Shearer
When Mr. Goldman met Mr. Sachs Business ran on railroad tracks The world was simpler, you can't forget When Mr. Sachs and Goldman met
Said Mr. Goldman, "For years and years, Our guys have got the most between the ears" Said Mr. Sachs, "Let's unhook some reigns, And find new ways to profit off our traders' brains"
Spinning gold out of flax, Mr. Goldman and Mr. Sachs
Spinning gold out of flax, Mr. Goldman and Mr. Sachs
"Up to the Clintons," says Sachs with glee, "Our former chief now runs the Treasury" Slapped Mr. Goldman to Mr. Sachs, "Everything's OK, we can relax"
"We're blowing bubbles," Mr. Goldman crowed, "We making money out of money owed" "On Wall Street our names should be up on plaques," Bubbled Mr. Goldman to Mr. Sachs
Balls so big they stretched the slacks Of Mr. Goldman and Mr. Sachs
Balls so big they stretched the slacks Of Mr. Goldman and Mr. Sachs
"The century's turning," Mr. Sachs opined, "Our new kind of trains boggle the mind" Bragged Mr. Goldman with a toss of his head, "One of our guys runs the New York Fed"
Noted Mr. Sachs as the market soared, "We're totally wired in each department and board" "We regulate ourselves, the wind's at our backs," Said the jolly Mr. Goldman to a blithe Mr. Sachs
Their regulators are really claques, For Mr. Goldman and Mr. Sachs
Their regulators are really claques, For Mr. Goldman and Mr. Sachs
Said Mr. Goldman to Mr. Sachs, "This sly little system is showing some cracks" Mr. Sachs to Mr. Goldman said, "We got it covered, go back to bed"
The hustle’s urbane Mr. Sachs recalled, "We may get a haircut, but we won't go bald" "Any bailout move will be comfy and lax," Mr. Goldman was reassured by Mr. Sachs
"Bear Stearns went down," Mr. Sachs told his friend, "And Lehman Brothers met a harsher end" "Merrill Lynch was sold off by a fax," A dour Mr. Goldman told Mr. Sachs
"It's time," Mr. Goldman said, "to pull some rank" So presto, said Mr. Sachs, "We'll become a bank" "We'll be covered by the payers of tax," Exhaulted Mr. Goldman to Mr. Sachs
Mr. Sachs explained, "We're insured by AIG" Mr. Goldman responded, "That's fine with me" "Our risky bets will be paid off in full," Said Mr. Goldman, more than ever a raging bull
"Unemployment is rising," Mr. Goldman observes But their partnership is still riding on nerves "Profits in the billions, ignore the attacks," Says a flush Mr. Goldman to a flush Mr. Sachs
Spinning gold out of flax Mr. Goldman and Mr. Sachs
Spinning gold out of flax Mr. Goldman and Mr. Sachs
Spinning gold out of flax Mr. Goldman and Mr. Sachs
Spinning gold out of flax Mr. Goldman and Mr. Sachs
Spinning gold out of flax Mr. Goldman and Mr. Sachs
And now to return to what some will consider the more mundane approach to economics policy, consider these excerpts -- and the column in its entirety: Froma Harrop, "Regulation Made Canada Fat and Happy," creators.com, August 12, 2010 (copyright by the Providence Journal and reprinted in numerous newspapers around the country):
Suppose the U.S. government had posted a budget surplus in 12 of the past 13 years. Suppose not a single major American financial institution had failed or needed a government bailout. Suppose the U.S. economy grew at an annual rate of 6.1 percent in the first quarter of this year, rather than at 2.7 percent.
Wouldn't that make you happy?
These cheering economic indicators happen to be reality in Canada. They did not come about because Canadians are more virtuous or they don't have subprime mortgages (they do) or they didn't keep interest rates very low (their rates were much like ours). What Canada had was a civic culture that wanted government to regulate financial activity.
What we have is an elite willing to risk everyone else's economic security to enable a few hotshots to win big at the casino of recklessness and fraud — while maintaining a variety of taxpayer backstops to reduce their risks. The joint never gets closed, also thanks to the large numbers of ordinary citizens trained to holler "socialism" every time the government tries to set a ground rule. A satanic belief in the rightness of free markets to punish the unsophisticated almost halted the creation of a Consumer Financial Protection Bureau. . . .
So how are Canadian businesses doing these days relative to ours? It's true that the Standard & Poor's index of 500 large U.S. companies has done pretty well this year. But the Toronto exchange's index of large-cap Canadian stocks did 27 percent better.
Periodic booms and busts don't have to be Americans' fate. Some people get very rich off them. But for ordinary folk, slow and steady wins the race. Support for letting government install some speed bumps to enhance their financial stability has left Canadians fat and happy. We could live the same way.
As we reflect upon Wall Street's role in our global economic collapse we have options: we can sing about it, laugh about it, cry about it, or read and write public policy analyses and essays. Unfortunately (to return to singing about it), as in "you can't win, you can't break even, and you can't get out of the game," Simon and Garfunkel clarified our situation in "Mrs. Robinson,"
Sitting on a sofa on a Sunday afternoon Going to the candidates debate Laugh about it, shout about it When you've got to choose Ev'ry way you look at it, you lose
"And that's," as Walter Cronkite used to say, "the way it is, Saturday morning, August 14, 2010" (unless, as Ms. Harrop informs us, you move to Canada). ["Walter Cronkite," wikipedia.org ("Cronkite is well known for his departing catchphrase 'And that's the way it is,' followed by the date on which the appearance is aired.")] _______________
* 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. -- Nicholas Johnson
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?
Unprecedented: Two Consecutive "Hats Off" Awards to Press-Citizen
Yesterday's Press-Citizen editorial earned it a "Hats Off" journalism award -- in this case "civic journalism" in the best tradition of putting the interests of readers/taxpayers ahead of the interests of government subsidized businesses. Editorial, "Center to Open Without Public Assistance," Iowa City Press-Citizen, September 15, 2008, p. A9. See Nicholas Johnson, "Taxpayer Rescue," September 15, 2008.
I don't know if anyone's put lipstick on the Sheraton, but it's sure had its snout in the trough more than once. It (and its predecessors) squatted down over Dubuque Street, promising to at least keep a walkway open. Now it wants to seize more of that City property for its own -- without paying taxpayers a dime -- while asking us to pick up at least half the cost of the remodeling necessary to complete this land grab.
Since neither the City nor the University is prepared to do anything meaningful to cut back on the downtown drunkenness, with all of the attendant consequences that predictably flow from our surfeit of bars and illegal sales to underage patrons, the hotel has also reasonably requested that it be permitted to close off the walkway after 11:00 p.m.
The common sense resolution? Permit the post-11:00 p.m. closure. Deny the narrowing of the walkway and the movement of taxpayers' money to the hotel's bottom line. That's what the Press-Citizen is proposing. Will the City Council have the courage to take this course? Watch this space and see.
Financial Crisis: How We Got Here, Where We're Going
And there are significant lessons here for this year's presidential election, and regulation generally.
As I've often conceded, when it comes to servicing their major campaign contributors (big corporations and the wealthiest 1/2 of 1%) George Wallace was right: "there's not a dime's worth of difference" between Democrats and Republicans.
Having said that, the Republicans are both more comfortable, and skilled, at doing so. Democrats never have been very good at "Republican light."
President Reagan summed up the ideology: "government is not the solution; government is the problem." An unregulated market is the consumer's best friend. "Deregulation" and "re-regulation" are heralded as the rising tide that will lift all boats. "Get the government off our backs" -- unless it's about to put money in our pockets -- they say.
Well, in my view the consequences of unrestrained and unregulated greed and selfishness have left in their wake in our economy and society what Hurricane Ike left in its wake in Galveston.
This financial collapse is just one example. The collapse of coal mines on miners is another. The growing disparity between the wages of workers and those of CEOs is another. The examples are endless. Just look around.
I don't think either McCain-Palin or Obama-Biden are inclined or able to return our country to sanity with regard to business' excesses. I just think the Democrats will be marginally better, and that the margin is well worth our voting for.
As Story and Andrews report:
"During the Depression, Congress separated commercial banks, which take deposits and make loans, from investment banks, which underwrite and trade securities. The investment banks were allowed to do business with less oversight, while commercial banks operated with tighter supervision.
"But after Congress repealed those Depression-era laws in 1999, commercial banks began muscling in on Wall Street’s turf. As the new competition whittled down profit margins, investment banks used more of their capital to trade securities and also began developing financial derivatives to fuel profits."
On a lighter note . . .
. . . if you haven't yet seen the September 13 NBC "Saturday Night Live" routine that's all over the Internet, take five minutes to watch:
[Credit: Tina Fey and Amy Poehler, NBC "Saturday Night Live" Source: http://entertainment.msn.com] With a whole lot of common sense, courage and a sense of humor we'll get through all this.
