2:00 p.m. Extra: Here's a link to, "Draft Proposal on Financial Rescue Legislation," Office of Speaker Nancy Pelosi, September 28, 2008, 12:23 p.m., and a section-by-section summary of the 42 sections of the 106-page proposed bill.
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?
Many of my favorite radio programs come from the BBC World Service.
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. . . .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.
[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.
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. . . .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.
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.
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?
Just some thoughts about Wall Street's casinos.
