Monday, 09.29.08
It Failed
Alex Wong/Getty Images
Why There's No Deal Yet
26 September 2008
Joshua Green doesn't think Henry Paulson understands how Congress works.
Why We Need a Bailout
23 September 2008
Democracy is not perfect, and one of its many imperfections is that voters tend to be ignorant. I don't mean to be insulting. There are, after all, perfectly rational reasons for this ignorance. In a republic of 300 million, the chances of an individual vote affecting a national outcome are slim, and it makes little sense for the individual voter to invest scarce resources in learning about complicated issues, like health care or foreign policy or, just to pick another subject at random, the economy.
A few hours ago the House of Representatives defeated the bailout bill. It was close, 228 to 205. And it was just about completely unexpected. The lead story in this morning's Wall Street Journal was "U.S. Seals Bailout Deal." Former Treasury Secretary Larry Summers -- no socialist, he -- had a piece in this morning's Washington Post ("A Bailout Is Just a Start") that treated the legislation as a fait accompli. The lead editorial in the same paper was titled "The Deal is Done." I'm pretty sure one of the Post's headline writers is regretting his word choice.
It is rare that a consensus at one level -- among policy analysts, journalists and professional economists -- is so thoroughly bucked by the mechanisms of democracy. This is not to suggest that the professional consensus is entirely comfortable with the bailout, or that the bailout doesn't impose real budgetary and moral hazards. But it is to suggest that the failure of the bailout is no great credit to democracy.
It's simple: The Republican and Democratic congressmen who voted against the bill were responding to angry constituents who thought of the bill as nothing more than a gift horse for the rich -- on CNN a moment ago a reporter said such constituents were phoning in "a hundred to one" against the bill. The congressmen who serve these constituents are afraid of losing in November, and they are pandering with shameless zeal and reckless abandon. Witness Republican Jeb Hensarling's unconvincing claim that the bill would put us on "the slippery slope to socialism," or Darrell Issa's peculiarly vivid argument that it would amount to "a coffin on top of Ronald Reagan's coffin."
Those angry constituents might be right, and their congressmen might be right to cater to them. But I doubt it. They might be laughing all the way back to Congress, but they sure as hell won't be laughing all the way to the bank.
And democracy is a fickle thing. I would imagine there to be a great deal of overlap between voters who complain about the long arm of the federal government and voters who complain about the plummeting value of their pensions. If that's the case, some of those No votes won't even be laughing their way back to Congress.
(51)
Can you please point me toward the 100 leading economists who urged the defeat of the bill? I remember seeing 100 leading economists who "agree with the need for bold action to ensure that the financial system continues to function" and urged that we hold hearings. But then again I'm just an idiot.
Posted by
Conor Clarke 
|
September 29, 2008 6:53 PM
"It makes little sense for the individual voter to invest scarce resources in learning about complicated issues, like health care or foreign policy or, just to pick another subject at random, the economy."
Well, if that's the case, you can cancel my subscription to your magazine because apparently I'm not smart enough to understand a complicated issue.
Contrary to what you've written here, I'd argue that it's a shame that the Congress only listens to their constituents when they're up for election. Whether the American voter is right or wrong doesn't matter. What does matter is that our elected representatives listen to us, which seems to be what they have done here. In short, there are plenty of reasons to support the bailout bill, but "Congress knows best" is certainly NOT one of them. We should always, without exception, hold our elected representatives accountable to the people.
I don't know about 100 leading economists 'urging the defeat' of Paulson's Plunder but there have been plenty of economists dubious about the bailout, the terms settled upon in Congressional negotiation and its likelihood to, um, solve our looming economic problems.
I am probably about as erudite and well-informed as any non-professional pundit could be. I am extremely over-educated. Only about one percent of the population has as much formal education as I have. I am not an uninformed voter spoiling democracy when I say that I am unconvinced that any plan presented by the chuckleheads still nominally in power in this administration could be a good one. They have not given us any good deals yet and they have degraded our country in countless ways. Without being an economist or any kind of expert, I am resolutely certain that no matter what catastrophe unfolds, the human race will survive it.
When empires fall, things hurt. When abrupt, negative change presses us, it is human to be fearful.
Maybe what we need is collapse. Maybe if we slide into collapse, the human race will be forced to do things better. We have enough resources on the planet for all to have basic needs met. Maybe global catastrophe will prod us to change.
After the most devastating forest fires, new life emerges. After Katrina decimated New Orleans, life went on. True, Katrina is not a good example because our government never did any of the things it could have done for Katrina. Does anyone doubt that if all the folks who lost their homes and their way of life after Katrina had been rich that the government would have thrown some bailout money at them?
We need to completely realign how we allocate the resources of this planet.
Everything is always in divine order. I don't want all systems to collapse. Honest. But I don't trust the chuckleheads in the White House, Paulson or Congress either. I know, I lknow that are the only leaders we have. Well, maybe it is time for some tough bouncing. And, geez, I can't believe I am about to write this, because I am a lifelong leftie, and I sure as shit aint a Christian but maybe there is something to this endtime baloney.
Imagine a raging forest fire that seems to destroy all life within its wake. Then life returns. New life begins right away. And no matter hot hot the fire, it never destroys all of life. There are tiny orgamisms and buried seeds.
The seeds of the human future might be embedded in the catastrophe that Paulson's Plunder seeks to avoid. Maybe we ought to act like the firefighters in a blazing forest fire: they have small tent-like structures that they pull over themselves and they let the fire wash over them, they are protected by this tool/tent (I don't know what to call it).
Let us all hunker down, resolve to be kinder in every moment of our lives, to share what we have with those who need it.
And let's see our elected representatiaves behave the way I was taught they should behave in my civics textbook back in Chicago when I was a kid in grade school in the sixties. I was taught that our elected representatives acted like "Mr. Smith Goes to Washington", I was taught that Congressman acted courageously on behalf of the COMMON good. The folks who voted for Paulson's Plunder? They want to stay in office more than they want to act on behalf of the common good. Maybe after the catastrophe that Paulson and Bernanke tell us is coming (they have not been right yet about anything). . . maybe some real leaders will emerge after the fire.
Don't mi
I contacted both of Florida's senators and told them to vote "No!" on the bill, fully expecting that the voice of the American public -- which has risen up in rage against wasting at least $700 billion on a lost cause -- would not have any impact upon the so-called democratic progress because Congress more often than not serves the interests of the bankers, investors and corporations rather than the people.
I watched the vote today and was absolutely astonished and extremely pleased to see that the bailout package was defeated. I am inclined to contact Florida's representatives and senators again and insist that the bailout remain defeated.
So the stock market collapsed today. Wasting $700 billion to $2 trillion would have only delayed this outcome. An economy built upon debt, greed, hyperconsumerism, and waste cannot survive for very long on a planet which has 6+ billion humans, especially when there about 2 billion who seem to want to emulate the stupidity of the Americans.
Capitalism has failed. Capitalism is dead. Capitalism is as dead as communism.
Americans have been living off debt for decades. Now the bill has become due. Americans will become impoverished. Such is life. Nothing lasts forever.
I am in favor of Americans becoming impoverished. Life is more than wealth, shopping, McDonald's and morbid obesity. Life is more than driving an SUV and owning a McMansion and a dozen flat screen televisions.
Does anyone really believe that the demise of capitalism is a tragedy? Something much worse is approaching. The Earth cannot sustain 6+ billion humans forever. The last and greatest bubble to burst is the human population bubble.
This shall occur in the 21st century and it will make the collapse of the global economy appear very much like a day at the beach. Humankind needs to live differently upon the Earth, otherwise humankind will not live at all.
Tree Fitzpatrick:
How dare you even insinuate that something like the failure of the federally-mandated and guaranteed levee system that flooded New Orleans was somehow deserved by the people who fell victim to it. Or that that relates in any way to this situation other than the continuing impotence of American government to address anything that is truly wrong in this nation.
And how dare you WISH for disaster! Do you not for a moment recognize that that disaster could befall you and your loved ones? You would rather an education through devastation than armoring yourself with a little bit of prudence and reason?
You are truly no better than the disaster capitalists currently ruining this country from the right! Your attitude is just as nihilistic and short-sighted. And I won't join in your gleefully destructive attitude by wishing harm upon you - I will simply engage in the magical thinking that there are smarter folks than you representing the best interest of my nation (although recent events haven't exactly borne that magical thinking out).
To the editors,
A problem of democracy is that most voters are ignorant? Wow. That's a big statement coming from someone this longtime reader of the magazine and this site has never heard of.
I'm sorry, but who is this contributor and on the strength of what credentials is he offered the opportunity to hold forth so grandly? The post reads like an undergraduate exam essay, and a not particularly good one at that.
While I wouldn't make the counter argument for a fee, I really don't see the purpose in dealing a sidelong blow to the whole of the American people, especially when, let's face it, the current crisis is something that even most investment professionals and economists readily admit they don't fully understand.
And isn't the issue not democracy per se but the political process in which voters, ignorant or not, may be a part of the problem but surely not the root cause this post seems to imply they are?
I suggest that this close vote was defeated by the very left and very right, while the moderate middle of both parties supported the bill. This is a shining example of decades of gerrymandered districts giving us extremists of both parties in safe districts. My own Congressman, Thad McCotter of Michigan, cited the Bolshevik revolution and their promise of bread to the masses as a trade off for freedom, evidently implying these are comparable circumstances.
Suggestion to Conor Clarke- investigate where the aye and nay votes fit along the political spectrum.
Mr. Clarke presupposes that if people were more informed, they'd support this bill. That's a bold and arrogant position on which to make this bill's failure a signal of democracy's failure.
Gosh, David M. at 7:16 PM, that's a pretty serious vision. Too bad you weren't around to help Pol Pot implement his.
What we have here is a major marketing failure on the part of the Bush administration and others associated with this plan. Last week, what Bernanke and Paulson told senior Congressional leaders scared the bejeezus out of them. But they haven't effectively made that case to rank-and-file members, much less to the public. (It's also stunning how ineffective the press has been about communicating the ramifications of inaction.)
Now this plan may not be perfect. Over time, a better approach could be crafted and enacted. But something must be done now. And regardless of what is done in the end, it will involve a "bailout" in the sense that the financial industry will be better off than it would without action. But so will the rest of us.
What happened last week was extreme pressure on money market funds that tend to invest in generally safe assets. A few of them had invested in securities associated with Lehman and when those securities went bad, the associated funds "broke the buck." Other funds began hoarding cash and fleeing to ultra-safe securities to cover possible redemption requests. This wasn't an idle concern - over the first half of the previous week, somewhere around $8 billion was withdrawn from money market funds, whereas somewhere around $144 billion was withdrawn in the first half of last week. Thus, we were facing a run, or at least the prospect of a run, on money market funds.
Who cares?, you ask. Well, beyond the fact that lots of people hold money in these types of funds and expect them to be pretty safe, money market funds tend to support very standard forms of funding used for everyday commercial activity. This is no longer the possibility that you might not be able to get a mortgage, rather it's the possibility that your employer may not be able to fund its operations. Employers, who often rely on short-term commercial paper (to make payroll, buy inventory, etc.) that is generally held by money market funds, cannot fund their operations without accessing such financing. As money market funds fled to cash and Treasuries (often with a nominal yield near zero!! and a negative real yield after accounting for inflation - they were literally putting money in their mattress where it wouldn't lose value) and the value of commercial paper plummeted in the resulting fire sale, there was the danger that standard forms of commercial lending would dry up. This would impact big companies that issue commercial paper, but would also affect mom-and-pop stores who rely on other forms of commercial lending to fund their operations. Hence, we have a clear real effect of this financial panic on the broader economy.
How the hell does this plan correct this problem? Well, it doesn't directly. Rather it attempts to remove the concern that someone, like a money market fund, will be stuck in a relationship with someone else who holds "Lehman paper" and may go under. Until you correct the mistrust and fear that prevents financial firms from engaging with one another, you can't unclog the system. Because the root cause of the problem lies with the mortgage market and associated securities, that seems the most natural place to attack the problem.
I'm not saying this is a good plan. In fact, I'm still not quite sure how it would be implemented (and I'm pretty sure Paulson doesn't really know either). But you need a start, and the threat in the broader market for commercial lending suggests a need to do something. Soon. We may have experienced a respite as the markets wait to see if Congress gets something done, but the problem will rear it's head again. I already know of companies who are having problems with their financing and are drawing on "rainy day" lines of credit. If the commercial paper market collapses entirely or these lines of credit are withdrawn, the ramifications would be catastrophic.
Hello Buddha,
"that's a pretty serious vision. Too bad you weren't around to help Pol Pot implement his."
Eh ... this is the future which humankind has chosen for itself. It is not a pleasant future nor is it the future which you were promised, but it is the future that you are going to get.
If you spend your life smoking, you cannot blame everyone else when you get lung cancer.
If a species trashes its one and only planet, it has no one else to blame except itself for all the suffering which it will experience.
The collapse of capitalism is only the beginning of sorrows. Nature isn't going to handle humankind in a merciful manner in the 21st century.
Wait a little while and you will see for yourself exactly how bad things can become on an overpopulated planet when there aren't enough resources to satisfy 6.7+ billion people's needs and wants.
As Bernanke aptly said, "There are no atheists in foxholes and no ideologues in financial crises."
I beg your pardon? The economy craters and all of a sudden it's OUR fault -- the ONE time our legislators take heed of their constituents' wishes? Because they paid SO much attention when we begged for regulation, and help for distressed homeowners, and help for Katrina victims, right? Because they listened when we begged them to stay the hell out of Iraq, or to cut W's funding? One financial black hole at a time is enough, wouldn't you think?
I submit that democracy in this country has been on life support equipment for far too long already -- which you would know if you'd been paying attention.
By the way, my representative, Tim Bishop (D-NY) voted yes -- and I will be voting for someone else in November.
To Whom It May Concern:
While I can sympathize with the emotions expressed by some of the previous commentators, I believe they are unwarranted. The article written by Mr. Clarke is rather moderate despite its admittedly elitist perspective.
The major criticism leveled against this editorial is its condescending language, which many of the reader believed insulting. However, the author nowhere states that all opponents of the bailout are ignorant, simply much of the popular opposition is. His argument is a classic intellectually elitist one against "mob rule," not against reasoned disagreement. To reiterate, Mr. Clarke wrote that voters tend to be ignorant and their officials tend to be panderers, not that every person who disagrees with the bill is falling for the same irrationality.
I do disagree with some of the concepts espoused in this editorial. For example, Mr. Clarke states that a weakness of democracy is that its voters can be ignorant. It's a rather shallow statement; is Mr. Clarke implying that the citizens of a kleptocratic dictatorship are better informed? I assume he is implying that ignorance is more influential in a system where ignorant people can vote, but the syntax is still poor enough to leave its point too vague for usefulness.
Of course, I also feel Mr. Clarke did not sufficiently recognize the intelligent opposition to the bailout. But, as an educated person, I hardly feel resentment. His article was an intelligent, if not somewhat elitist, opinion on the unfortunate vicissitudes of our democracy, and, if we intellectuals are so passionate and so emotional as to be insulted by an article that does not explicitly address us, then I believe we are falling victim to the same irrationality endemic among Mr. Clarke's ignorant voters.
Sincerely,
Nathan Allen
Intellectual and High School Student
Egad, sorry. I promise this is the last time I try an argument like this!
fwiw, I should distinguish between two claims that I do a bad job of making clear in the post. I do think there's plenty of informed and honest opposition to the bailout. (and since I don't have a phd in economics I can't claim to be able to parse it all.) But I do think most of the opposition IN CONGRESS is based on electoral fear, not empirical scrutiny. that's an observation based on watching the vote unfold this morning and listening to the various justifications offered.
if there's a broader defensible point (and maybe there isn't) it's simply this: a bill's electoral merit is not the same as economic merit. (in this case I might be wrong in my interpretion of both. but i hope not.)
I don't presume to suppose the motives of the legislators who opposed this bill, but their reasons given on the instant-news outlets this afternoon were certainly weak. Nonetheless, I believe that result was in the best interest of the nation. To take an irrevocable action on the basis of little information and less deliberation cannot be the right answer.
Don't be so defensive, Conor.
I would argue that the fundamental problem is that no one has effectively communicated the need for a "bailout." We're left with the feeling that Wall Street barons are getting to keep their ill gotten plunder, but we don't see how it matters for us.
Believe me, it does matter for all of us. That point just needs to be made more effectively. Not just the fact that it does matter, but how and why. Explain to your readers how this financial crisis could affect them (other than reference to the Dow.) If we do nothing and everything melts down (not just the Dow), people need to understand how that outcome arose. Everything in the press just refers to claims of "dire consequences of inaction," but no one seems to understand what that means or how it would happen (other than reference to "complicated" securities.)
It's not that people are stupid. They're ignorant (and there's an important - and non-judgmental - difference, as a professor once told me.) And the press, as the main source of information about this for most people, isn't performing its role very well.
This is just a horrible argument, so horrible that I tend to agree with manyhighways that maybe my increasingly dear dollars would be better spent elsewhere than on this magazine. I bought a subscription to the Atlantic for in-depth analysis. All you offer here is an unsupported assertion that voters who disagree with you must therefore be morons.
Honestly, Mr. Clarke, what role do you think our "representatives" are supposed to perform? They are subject to the will of their constituents. That is what their purpose is. If we the voters disagree with the votes of those who were elected to represent us, we have a duty to ourselves and to our country to vote those same people out. After all, they are not elected to make decisions for us; they are elected to make them on our behalf. This is a representative republic, Mr. Clarke, not a delegatory dictatorship. Believe it or not, there is a difference.
As for the 100 economists who opposed the fast-tracked bill, it was actually 200. Here they are:
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm
Paul Krugman said it best... "We are a banana republic, with nukes"
The list of economists that Patrick posts involves a pretty impressive bunch. But note that they do agree, in their preamble, that something must be done. Recognizing the nature of politics and the logistics of Congress (they'd recess now if they could), pass something now, and amend it after the election. Tweak the existing bill, but get something through now. The admirably pure approach that these economists support has to confront the reality of Congress. If the Congress leaves on Friday without passing anything... (I'm inclined to say "God help us all," but find that overly melodramatic.)
To Whom It May Concern:
As a corollary to my previous comment, Mr. Clarke's argument has been attacked for two of his opinions; one, that action, even if a little haphazard in nature, is necessary, and two, that he has an incorrect and offensive interpretation of republican government.
The first argument is well-reasoned. Impetuousness should not be encouraged no matter the circumstance. However, prudence to the point of overwhelming hesitation is as equally disastrous as decisive stupidity. The following may be cliched, but the strategist Sun Tzu wrote that prudence is a virtue, but prudence to the point of inaction is damaging. I concur with Mark in that a failure to intervene in our current economic crisis will have dire consequences for all Americans. Today's further economic downturn should be evidence enough that we are still in economic free fall.
I also have that sense of justice and retribution possessed by many; Wall-street executives have brought this fate upon themselves: why bail them out? No matter how gratifying it is to see those reckless businessmen fail, it is absurd to stand on the sidelines and point at ruin and assume that you're not affected. As the economy decays, what will happen to the banking system? To the loans that Americans can receive? To the international investment community? To our currency? When the stock market crashes, we all crash; not just those who deserve it. The revised 700 billion dollar plan might have saved the rich, but it also could have saved our economy.
Of course, that's not even the argument Mr. Clarke is making. He is not arguing over the specific merits of the economic plan; he is arguing over ignorant voters and pandering politicians. And in that case his point is well-taken. Those who have commented tonight, I'm sure, have suitable reasons to oppose the bailout plan; I myself found it highly objectionable. However, I think Mr. Clarke is within his bounds to suppose that the representatives who voted for the bill had more superficial and furtive reasons for opposition.
Finally, a commentator argued that Mr. Clarke has grievously misunderstood democracy to the point of insult. It is that commentator, not Mr. Clarke, who has a basic misconception of the purpose of representative government.
The reason why our government is not a direct democracy is not because of superficial organizational problems; it is because the common people, in the eyes of the founders, are prone to overly-irrational decisions that should be separated from decision making. Mr. Madison argued in his Federalist Papers that the decisions of the irrational masses could not formulate governmental positions; however, they had to be empowered lest the system proved tyrannical, so their opinions would be diluted by, yes, representatives. By republican theory, representatives should not betray their constituents; however, they are actually expected to defy the will of the people when necessary. Therefore, Mr. Clarke shows no misunderstanding; the representatives are expected to rise above the people's clamor in times of crisis as opposed to pander to their sensibilities.
Now, I don't necessarily agree with republican theory. However, it is simply foolish to factually chastise an author when it is, in fact, the author who is correct on the definition of American representative republicanism.
I believe they conclude their preamble as follows: "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." If this legislation is a mistake, it would only take the banks a short period of time to--for lack of a better term--capitalize on that mistake. Amendments thereto at a later date would be useless.
Actually, Patrick, I think that their preamble ends with "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:"
To this part:
"(those) who voted against the bill were responding to angry constituents...such constituents were phoning in "a hundred to one" against the bill...congressmen are pandering with shameless zeal and reckless abandon."
Are you KIDDING me? By definition these men and women are Representatives. Just whom and what do you believe they represent, if not their constituents, angry or otherwise? Since when has responding to voters' articulated demands become "pandering?" These are not opinions voiced passively in a poll. These people are taking action - and given the numbers, it's probably the first time many have contacted a congressperson.
If you think ALL of these people are ignorant, then part of the blame goes to Congress for doing a piss poor job of articulating what exactly is in this bill, how it's going to help, and explaining all of the other options that were considered before deciding on this ridiculously expensive welfare package.
Voters have power because we're on the brink of an election and Congress is forced to listen. So listen! Oversight, re-regulation, bankruptcy law reform, aid to home owners - these are just some of the things voters want. You'd have to be ignorant not to understand that.
Maybe the voters of America are too educated? With the easy availability of information through the internet it is now easier than ever to gain access to said information. Hence we have a more informed electorate. I have tried to read this bill and I dare anyone to try to make sense of it. This piece of legislation was rushed through without much thought. Who knows what the consequences will be if/when this is ever enacted. Also, do we really want the very Congressmen and Senators who allowed Fannie to act so recklessly involved in trying to fix this problem? I am a strong believer of the free market. Unfortunately, it was perverted by the unchecked fraud of the chief executives and officers of Fannie Mae. If you will take the time and search back you will find out how a great deal of this problem arose.
For some reason everyone expects that voters are suddenly informed about a complex financial issue that they not even economists can fully grasp. This deal has been characterized in the increasingly loud Lou Dobbs-esque "populist" press as a bailout for greedy wall streeters. Nobody has done a good job explaining the necessity of this, foremost the president and his subordinates who don't realize they have no political capital left whatsoever.
No, voters haven't discovered a long-lost economic insight, and no Republicans haven't decided to give up selfish political interests in favor of helping the country. And hell is still hot.
Sometimes Congress must do things that are politically unpopular, which this bailout is to say the least. That's why we elect representatives, people who can do the necessary research to govern a complex world. We are ignorant, and our ignorance and knee-jerk distaste for a sad bill such as this is about to destroy the economy. I'm tired of hearing it from the right and the left personally. All of a sudden lawmakers have discovered the interests of constituents, at exactly the wrong time.
I am one of the 200 or more economists that signed the appeal. I am also a long time reader of this magazine and I do find the tone and content of Mr. Clarke article maybe borderline offensive but, certainly, without much internal coherence. Doing "something" does not imply doing something wrong, nor something at random just because it fits Mr. Paulson's plans. While the many economists signing the appeal may disagree on details, we believe that the plan, as it stands, is not a very wise and socially useful idea.
Personally, I believe the following measures would be a lot more useful: 1. Require banks to raise more capital. To do so the current shareholders and executives will have to relinquish some power and allow other banks and investors to enter as shareholders and have a say in the management of the bank. This requirement forces banks to sell off their risky securities to be replaced with safer securities. 2. Forgive debt in exchange for equity. That is those who are owed money by the bank are required to accept instead a share of the firms stock. This gets around the lemons problem because it does not force banks to liquidate good or bad securities. The cost of this scheme falls on the bond-holders: however, if the banks go bankrupt, they will be on the hook anyway. Zingales argues that debt forgiveness schemes have worked for resolving financial crises in the past. 3. Buy foreclosed houses for the value of the mortgage. Although the actual cost of the Treasury plan is difficult to compute, since it is hard to know the value of securities we will wind up owning for $700 billion, this we know will cost $150 billion. An important benefit of this approach is that it avoids the lemons problem entirely. A drawback is that it does not do anything about securities that are in trouble due to the possibility of future losses rather than present losses. It also leaves the government owning houses rather than securities. 4. Force an orderly winding down of the housing based derivative market. It is likely at this point that a large fraction of the contracts currently alive have turned into empty gambles, in which one party is unable to pay. Markets are already operating in this direction as the number of outstanding CDSs suggest, but the process might be aided by an impartial arbiter.
These are just my, and my colleague David K. Levine, ideas and they are not necessarily perfect. But they are something alternative, instead of nothing.
In democracy one may want to avoid ruling through panic, be it military or economic. Allowing an open and well informed public discussion to occur before undertaking a momentous decision would have spared us a mistaken war five years ago, and may spare us a mistaken economic plan today.
The Republican Party has written its own obituary.
The latest polls show a plurality of voters already supporting a stabilization bill. This vote has given the Republicans ownership of a deteriorating economic situation.
It couldn't happen to a more deserving set of folks....
Being a smart-ass by calling common people "ignorant" to denounce democracy as insufficient for the managing of your country is the easy, lazy option to take, which appeals to certain groups over the short term for obvious reasons, but which brings to the fore the stupendously hopeless, and ultimately self-defeating conception you, and people like you, hold vis-à-vis your world, your country, and the way you believe governance should occur. In short, it’s a cop out. The easy, obvious excuse. The weak mans view.
A few points:
If since 1900, democracy – opposed to small random groups of people - had decided when the U.S. wars, it is likely that the U.S. would not be disliked as much as it is today, and that it would be or become part of the multi-polar world which is increasingly emerging, though which now the U.S., in the 21st century, will have no significant part in. Normal people don’t like or encourage war.
In case you haven’t realised – apart from the English, who themselves only cling to the U.S. in a futile attempt to hang onto 20th century-style power (and NO, I do not mean military power – I mean POLITICAL power), no politicians or countries can take at face value what the U.S. proclaims; the international community does not trust the U.S. – it has lost credibility, full stop, end of story, its too late to change now; too many mistakes and lies. The emerging powers humor the U.S. only because they hope to prevent the crazy kid from convulsing into a psychotic fit of aggression. This is not something to be proud about, by the way.
In the 21st century, economic power outweighs military power (sorry).
One of the most important challenges in 21st century societies (and yes, by that I mean every country on Earth), crucial to building up wealth, respect and prosperity, is to cultivate (through education) a highly educated multilingual citizenry, encapsulating a broad range of learned skills with a deep knowledge of politics, sociology, culture and, above all, science and mathematics.
If a citizenry isn’t capable in this fashion, blame poor governance – not democracy.
Oh, and by the way.
You should be happy the Congress voted Nay. Pumping more U.S. $ into the markets is only going to quicken the collapse of the dollar. You can't fix inflation with inflation, unfortunately. What most people seem very unwilling to accept is this: things are going to get horrible economically for the U.S. - whether this bail out plan passes or not. That is unavoidable. The trick is two pick an option that will lead to the least amount of economic hardship for the U.S. over the long-term.
http://www.youtube.com/watch?v=H-F89sIDDVI
It's not news that the masses are often stupid. The Nazi party became the largest party in the German parliament in the early 30's, thanks to democratic elections. Hamas recently came to power in Gaza, if I'm not mistaken, through a democratic process. Ever read "Julius Caesar?" The promise of democracy is that government will act in accordance with the will of the people. There's no guarantee that the people are particularly wise.
This will only be a temporary fix. Due to the Community Reinvestment Act, banks and other financial instutions have to keep making more of these sour loans. Basically we are only putting a quisck fix to a long term problem. Doing the same thing over and over again and expecting different results is the definition of...?
Calling common Americans ignorant is a bold move, Conor. I dont know your life story; but, I think you may have gotten away with alot of comments in the past because very few people really cared about what was going on politically. Ignorant people have been out doing their jobs as firemen, policemen, waitresses, soldiers, teachers, and so on. Notice what most Americans do: they serve. They get daily, often immediate evaluation of their job performance. They wake up, they work, do a couple of hours of recreation, and go to bed. Slowly, steadily, their daily living has become more and more expensive. Gas prices, home heating/cooling, food prices, and educational costs have all gone up. Ignorantly, they kept plugging. After seeing their savings spent on everyday living, they started to notice; then they were "given a bone" with the stimulus check in the spring. They then went back to work. When gas prices went over $4.oo a gallon and the bailouts of Wall street companies started, they kept working. Then a couple of weeks ago, they started to pay attention to the elections coming up in Novemeber. And guess what the common ignorant person found: 700 billion dollars going to be given to "Fat Cats" by their representatives. The key word here is given. Maybe this is a misperception by ignoramous folks; but, that is what it looks like. Contrary to what the fringe political right and political left think; and contrary to what the entitled elite and the people in the entitled welfare state think; the commom ignorant middle class do not have any choice, but to work and cling to old fashioned American values. Unlike many of the elite in America that have been what is called "credit rich": Cash is King. This is all the have. They rent a home, own a junky car, dont have a money market or a 401-K, and along with their primary job they make some money "on the side." (non-taxable black market) So, they dont care about some guy living in New York or Washington that thought it was wise to put their retirement money into the stock market(remember Greenspan, "irrational exuberence"). Or some guy that is going to lose his $50,000 car, credit card, or $250,000 town home. They dont care if someone cant get a loan. They have not been able to get a loan for some time. The ignorant can say, "let them eat cake" just as well; or should I say, "let them eat beans and rice." They think the elite can go out and work, too. It is what they do everyday. And that is what they told their congressman this last week. Dont blame the ignorant for not being fiscally responsible. What said the Depression era folks: Save your pennies, dont waste anything, invest in gold, invest in T-bills, and work hard. They told us that the government did not help them really until after WWII. If you want the ignorant folk to buy into your bailout. Lower their gas prices through "drilling now", give them another stimulus check, offer them those worthless houses that have been foreclosed on, and make ethanol out of anything but food sources to lower food prices. If the "informed" people can get the "ignorant" people these things in a bailout plan; it will pass congress. Oh, and Conor; I'm sure as an informed American that you are aware that the stock market will eventually go back up; so, you can make your money back.
Y'know people all over the world crave for a US that was admired as a role model, rather than hold a reputation for being militaristic in both deed and, (for not all but many), thought.
Fact is amongst your politically polarized society, there remains a significant cohort that holds the values and behaviour that epitomize all that is ugly about the west and despised by the rest. (In no particular order: Obesity, SUVs, guns, warmongering, saccharine images found in US advertising and much of it's media)
A the disaster before us is entirely of successive US government's doing - that is rather than to evolve regulation to maintain control over changes in the financial landscape, it DEregulated instead!! Allowing self-regulation of a profession deeply competitive and unaccountable is tantamount to installing the fox as hen house guard.
Trouble is, I have no confidence in the American system to provide not only a solution to this mess, but to ever be able to significantly re-invent itself and ensure that this sorta thing WILL NEVER HAPPEN AGAIN!!
Damn I'm annoyed!!
I am very disapointed to see the ignorance posing as the informed. The statement democracy has failed clearly displays your flaw. Whether you like it or not the majority has the final say.
As for the idea that the bailout was a good idea, so was the recently failed Hubbel Telescope that wasted 2.5 billion conservatively.
Our government spends our money as if it had no value at all.
All on good ideas and intentions...
No worries my Aussie friend... We may be at an incredibly annoying impasse, but the one thing the USA can do is innovate. This credit freeze will be solved once the banks are forced to sell their bad paper (whether they get 20 cents on the dollar in the open market or 80 cents from the gov't in a new bailout is up to our dear leaders in congress). Some banks will unfortunately fail but the majority will survive and go on lending and compounding. Once the hysterics are over, we will make it through these tough times and perhaps be better because with the chaff separated.
Bravo for American democracy. Bravo for conservatism. Bravo for caution. Bravo to Adrian 7:56 PM:
"I really don't see the purpose in dealing a sidelong blow to the whole of the American people, especially when, let's face it, the current crisis is something that even most investment professionals and economists readily admit they don't fully understand."
it was actually 150+ economists that signed the letter rebuking the bailout. The article ran on Bloomberg news among others.
The purpose of the bailout is for companies to reverse auction their illiquid assets and offload them to American taxpayers. The reason they are illiquid is because they are not worth anything. They are going to all of a sudden become strong assets once the govt gets a hold of them. The housing market is crashing because the market has determined they are priced too high. Let the market run it's course.
It's interesting: Americans are fair weather capitalists. We want capitalism until we don't.
Ignorant!!!! What are your qualifications, Mr. Clarke, that enable you to deem your knowledge so superior to that of the average American????
If anyone is ignorant, it is you for failing to see what this bill really represents. There's not one element in this bill that addresses the root cause of our economic problems. It merely absolves the responsible parties (Wall Street) of any of the consequences of their actions. There's no guarantee once the banks get their ransom money, that they will begin lending. There is no guarantee that the bill will unfreeze credit markets (not to mention that the banks are largely responsible for freezing them in the first place!). Once the banks understand that they will not be able to plunder the American taxpayer, they will begin lending again since they will see no other way to survive.
Credit is not an American value, free markets are. You are the ignorant one, Mr. Clarke. Quit aiding and abetting the plundering of our good nation in the name of the powerful few!
A clarification for my above comment: the illiquid assets will NOT become strong assets.
In direct response to Conor's article: his argument is the defeat of the bailout bill, as a result of the representatives listening and voting as their constituents told them to, is no great credit to democracy. In other words, Conor's idea of democracy has nothing to do with exercising the overwhelming will of the people.
A clarification for my above comment: the illiquid assets will NOT become strong assets.
In direct response to Conor's article: his argument is the defeat of the bailout bill, as a result of the representatives listening and voting as their constituents told them to, is no great credit to democracy. In other words, Conor's idea of democracy has nothing to do with exercising the overwhelming will of the people.
I say let it fail. Sometimes things need to fail. Disasters create new growth. People survive. A lot of what has happened has been the fault of regular people -- overspending, no savings, wasting money on "stuff" (see George Carlin), happily spending live in a suburban bubble while the government does whatever it wants, while business leaders do what they want.
Let it fail. Call your Congressman and Senator today and tell them 'vote no'.
c'mon people........any student of political philosophy knows that a main, if not the main, flaw of democracy is the potential for an "uninformed" majority, and/or their effect on elected representatives. whether or not such is the case with regard to the bailout plan is arguable, but certainly mr. clarke can't be skewered for pointing out the possibility.
either way, if democracy is to have value it will be derived from its people. so let's put that power to the problem at hand: by turning our thoughts to detailed solutions to this financial crisis rather than passing judgments on solutions others have proposed or those who report it as news.
rmg
Oh, it's at times like this that I like to ask myself, "what would Edmund Burke think?" Fortunately, there's a ready answer to that question from his rightly famous Speech to the Electors of Bristol:
"Your representative owes you, not his industry only, but his judgement; and he betrays, instead of serving you, if he sacrifices it to your opinion. . ."
To be fair to Mr. Clarke, the point about voters' "ignorance" is a relevant one. I'd have chosen a different, less explosive and judgmental word ("under-informed" or "unsophisticated" perhaps), but the elitist critique of democracy is not less relevant for being so ham-handedly put by him. It is an obvious and very real problem
But the remarkable thing in yesterday's vote--which is lost in Mr. Clarke's almost sympathetic-sounding lament of elected officials' running for electoral cover--is how many of them appear to have not grasped that democracy, especially in times of crisis, requires them sometimes NOT to listen to their constituents, at whatever peril to their reelection prospects.
I suppose this presupposees that those who yesterday voted "no" actually see the merit behind the bailout but refuse to stand up for it in the face of voter opposition. But if that is NOT the case, then it strikes me we have an altogether different problem: that that many (230-some) of the elected representatives of the people are no wiser than their constituents and fail to see the very high cliff our economy is about to walk off.
Burke spins anew in his grave.
I see your Edmund Burke and raise you Adam Smith:
"The proposal of any new law or regulation of commerce which comes from this order [merchants and businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." -Adam Smith, Wealth of Nations, (1776)
White House spokesman Tony Fratto said: "We think the mechanisms in this plan were the best to deal with the crisis that we are facing. The core of this plan we think will solve the problem; it was big enough and substantial enough in terms of what we were trying to do... So this plan really needs to get done to give the Treasury Secretary the tools he needs to prevent our economy from slipping... The facts are that America's credit system is broken and it will be broken until we take the steps to fix it."
Vague statements such as this are the typical fodder that comes out of Wahington ? no substance and less detail. What, exactly, has happened that requires massive amounts of public money? Who is to blame? Have they broken any laws ( besides a seccasion of common sense?) ? Why is it now the taxpayer?s problem? How is a trillion dollars going to ?fix it?? Will this be enough, or are we expected to throw good money after bad if this bailout fails? What will occur if the bailout does not happen? Are we just delaying the inevitable or truly dodging a bullet? What are we buying for a trillion dollars? Will we lose or stand a good chance to gain?
The Bush administration has a credibility problem. We were lied into a war whose cost may now exceed $3 trillion and 4,000 killed, to say nothing of anything else. And for what? It?s a war over recources, and I need not say which one. The wreckage from his presidency will be felt for decades to come. Several viewpoints from people who do not have huge fortunes at stake are circulating on the web. The following is from Joseph Stiglitz, author of ?The 3 trillion dollar war?(www2.gsb.columbia.edu/faculty/jstiglitz/) :
?The champagne bottle corks were popping as Treasury Secretary Henry Paulson announced his trillion-dollar bailout for the banks, buying up their toxic mortgages. To a skeptic, Paulson's proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing and recombining risk. This "cure" is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar. There is, however, an alternative explanation for Wall Street's celebration: the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands--called the American taxpayer. The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of the information asymmetry that played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains. And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers' exposure. But not so this time. The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was supposed to assure us? There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing. The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense. The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.? This one from http://www.thenation.com/doc/20081006/greider titled
Paulson Bailout Plan a Historic Swindle
?Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner.
Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: "The joyous reception from Congressional Democrats to Paulson's latest massive bailout proposal smells an awful lot like yet another corporatist lovefest between Washington's one-party government and the Sell Side investment banks." A kindred critic, Josh Rosner of Graham Fisher in New York, defined the sponsors of this stampede to action: "Let us be clear, it is not citizen groups, private investors, equity investors or institutional investors broadly who are calling for this government purchase fund. It is almost exclusively being lobbied for by precisely those institutions that believed they were 'smarter than the rest of us,' institutions who need to get those assets off their balance sheet at an inflated value lest they be at risk of large losses or worse." The scandal is not that government is acting. The scandal is that government is not acting forcefully enough--using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own--cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed. Only with these conditions, and some others, should the federal government be willing to take ownership--temporarily--of the rotten financial assets that are dragging down funds, banks and brokerages. Paulson and the Federal Reserve are trying to replay the bailout approach used in the 1980s for the savings and loan crisis, but this situation is utterly different. The failed S&Ls held real assets--property, houses, shopping centers--that could be readily resold by the Resolution Trust Corporation at bargain prices. This crisis involves ethereal financial instruments of unknowable value--not just the notorious mortgage securities but various derivative contracts and other esoteric deals that may be virtually worthless. Despite what the pols in Washington think, the RTC bailout was also a Wall Street scandal. Many of the financial firms that had financed the S&L industry's reckless lending got to buy back the same properties for pennies from the RTC--profiting on the upside, then again on the downside. Guess who picked up the tab? I suspect Wall Street is envisioning a similar bonanza--the chance to harvest new profit from their own fraud and criminal irresponsibility. If government acts responsibly, it will impose some other conditions on any broad rescue for the bankers. First, take due bills from any financial firms that get to hand off their spoiled assets, that is, a hard contract that repays government from any future profits once the crisis is over. Second, when the politicians get around to reforming financial regulations and dismantling the gimmicks and "too big to fail" institutions, Wall Street firms must be prohibited from exercising their usual manipulations of the political system. Call off their lobbyists, bar them from the bribery disguised as campaign contributions. Any contact or conversations between the assisted bankers and financial houses with government agencies or elected politicians must be promptly reported to the public, just as regulated industries are required to do when they call on government regulars. More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss--their situation is too dire--but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms.
?.and this one, among other points, dicounting Buffet?s point of view:
http://www.thenation.com/doc/20081006/greider3 titled
Show Us the Money
?Taxpayers should wake up the politicians and ask them to tell Wall Street: "We want the same deal Warren Buffett got." The Omaha billionaire announced he is playing White Knight to Goldman Sachs by investing $5 billion in the endangered investment house. What a big-hearted guy. Buffett is an old-fashioned capitalist who invests in companies for the long term and I am a big admirer. But Warren Buffett did not get to be a billionaire by committing public-spirited acts of charity. He plays to win. So his deal with Goldman Sachs is carefully wired to produce gorgeous returns for Buffett's Berkshire Hathaway. Upfront, he gets a 10 percent ownership stake in preferential shares that will pay a 10 percent dividend--even if Goldman's stock price keeps falling. But Buffett also gets the right to buy $5 billion in common shares at below the market price. So if Goldman flourishes in these hard times, Buffett will win big as its stock price soars. To sweeten his chances, the Omaha sage quickly announced that he endorses the $700 billion bailout plan proposed by Treasury Secretary Paulson. Let's follow the bouncing ball. Buffett puts some of his capital at risk on terms that are smartly protected from loss. Then Buffett urges the taxpayers to put their money on the line too. Only the taxpayers don't have any deal. They are the naked investors in this drama, asked to put up many billions to rescue Wall Street firms with nothing more than a vague promise it will save the Republic. I am reminded of the oldest rule in the financial business: "Get it in writing." Warren Buffett's intervention provides a clarifying moment because it demonstrates what's wrong with the bipartisan bailout Congress is preparing to authorize. There's nothing illegitimate in what Buffett accomplished. The overlapping terms and contingencies he secured for his capital are standard practice in Wall Street deal-making. Investment bankers work out the fine print and put it in enforceable contracts or the deal doesn't happen. Hank Paulson was a star in that world. When he left as chief executive to become Treasury Secretary in 2006, Goldman awarded him $110 million in cash to cover remaining stock options and restricted stock, in addition to $51 million to repurchase family shares. These payments were on top of the approximately $500 million in Goldman shares Paulson sold when he joined the government. Doing hard-nosed deals in the Buffett style is essentially what the federal government should be doing now--bank by bank--as it intervenes to rescue the financial system from ruin. In our situation, the public treasury is the White Knight because private capital is afraid to play. The federal government has all the leverage it needs to demand very stern terms. That includes demanding an equivalent equity stake in banks or brokerages it assists, but also the power to impose explicit commandments and prohibitions on how these rescued firms must behave. The threat that banks will refuse to play is a meaningless whine from the banking industry. If bankers find a better deal from private lenders, they should take it. Otherwise, they are down the tubes. The underlying power relationship in this crisis has been artfully obscured by the bailout sponsors because they decline to explain clearly what the bailout really is intended to accomplish. First, they said it was to restore calm in markets. Then they said it was the rotten assets centered in mortgage securities. But the problem is more accurately described as the great deflation of Wall Street's illusions--inflated prices, profits, deals, commissions and bonuses. You name it, they ran it up to stratospheric levels. Now the dream is dying and values are falling, but have not yet hit bottom. To put it more concretely, the banks and investment houses have lost massive amounts of capital--a hole that is real, not psychological. Maybe $1 trillion, possibly twice that. We can't say exactly, because the banks have still not come clean and because assets in bank portfolios continue to lose value as housing prices continue to deflate. The great capital losses mean Wall Street is sure to get smaller--a lot smaller--with fewer firms, less leveraged deals based on inadequate capital and a general retreat from its domineering role in economic life. Personally, I believe a smaller Wall Street will be good for the country, part of restoring balance to the damaged economy. In any case, it is folly for Washington to imagine that it can--or should--simply replenish Wall Street's great loss. That essentially is what Paulson's blanket bailout attempts to do--restore conditions to "normal" by buying up the bad assets from banks at inflated prices. In other words, supply the missing capital that private lenders won't provide. Good luck with that. The real goal for government intervention should be to manage Wall Street's inescapble downward adjustments in ways as peaceable as possible. Stabilize the shrinking financial system so it will keep the the real economy going, that is, insure that credit and capital flows continue, while Wall Street is gradually cut down to normal size. There is real pain in that for everyone, but the objective is concrete and manageable. At center stage are the big, bad players--the mega-banks and some others--who took the extreme risks and are now conveniently described as"too big to fail." If that's so, then one goal of government should be to make them get smaller, either through market forces or by lawful edict. The public likewise needs a new federal agency to manage the deal-making--something like the Reconstruction Finance Corporation during the New Deal--and determine which major banks can be cleaned up and stabilized, which ones cannot. The objective is not to save everyone--that is not what the nation needs--but to wind up with a broadly balanced financial system, chastened by new rules and ready to serve the rest of us, rather than eat us alive.?
Ignorance, unlike stupidity and foolishness, is not a permanent condition. We, the taxpayers, will be footing the bill for the Iraq fiasco for decades to come. The same crew is lining us up for another fleecing. NO to the bailout in its current form.
Acorrding to the Pension Research Council (!pdf), fewer than 13% of Americans workers rely on pensions as their primary retirement plan.
White House spokesman Tony Fratto said: "We think the mechanisms in this plan were the best to deal with the crisis that we are facing. The core of this plan we think will solve the problem; it was big enough and substantial enough in terms of what we were trying to do... So this plan really needs to get done to give the Treasury Secretary the tools he needs to prevent our economy from slipping... The facts are that America's credit system is broken and it will be broken until we take the steps to fix it."
Vague statements such as this are the typical fodder that comes out of Wahington ? no substance and less detail. What, exactly, has happened that requires massive amounts of public money? Who is to blame? Have they broken any laws ( besides a seccasion of common sense?) ? Why is it now the taxpayer?s problem? How is a trillion dollars going to ?fix it?? Will this be enough, or are we expected to throw good money after bad if this bailout fails? What will occur if the bailout does not happen? Are we just delaying the inevitable or truly dodging a bullet? What are we buying for a trillion dollars? Will we lose or stand a good chance to gain?
The Bush administration has a credibility problem. We were lied into a war whose cost may now exceed $3 trillion and 4,000 killed, to say nothing of anything else. And for what? It?s a war over recources, and I need not say which one. The wreckage from his presidency will be felt for decades to come. Several viewpoints from people who do not have huge fortunes at stake are circulating on the web. The following is from Joseph Stiglitz, author of ?The 3 trillion dollar war?(www2.gsb.columbia.edu/faculty/jstiglitz/) :
?The champagne bottle corks were popping as Treasury Secretary Henry Paulson announced his trillion-dollar bailout for the banks, buying up their toxic mortgages. To a skeptic, Paulson's proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing and recombining risk. This "cure" is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar. There is, however, an alternative explanation for Wall Street's celebration: the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands--called the American taxpayer. The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of the information asymmetry that played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains. And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers' exposure. But not so this time. The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was supposed to assure us? There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing. The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense. The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.? This one from http://www.thenation.com/doc/20081006/greider titled
Paulson Bailout Plan a Historic Swindle
?Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner.
Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: "The joyous reception from Congressional Democrats to Paulson's latest massive bailout proposal smells an awful lot like yet another corporatist lovefest between Washington's one-party government and the Sell Side investment banks." A kindred critic, Josh Rosner of Graham Fisher in New York, defined the sponsors of this stampede to action: "Let us be clear, it is not citizen groups, private investors, equity investors or institutional investors broadly who are calling for this government purchase fund. It is almost exclusively being lobbied for by precisely those institutions that believed they were 'smarter than the rest of us,' institutions who need to get those assets off their balance sheet at an inflated value lest they be at risk of large losses or worse." The scandal is not that government is acting. The scandal is that government is not acting forcefully enough--using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own--cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed. Only with these conditions, and some others, should the federal government be willing to take ownership--temporarily--of the rotten financial assets that are dragging down funds, banks and brokerages. Paulson and the Federal Reserve are trying to replay the bailout approach used in the 1980s for the savings and loan crisis, but this situation is utterly different. The failed S&Ls held real assets--property, houses, shopping centers--that could be readily resold by the Resolution Trust Corporation at bargain prices. This crisis involves ethereal financial instruments of unknowable value--not just the notorious mortgage securities but various derivative contracts and other esoteric deals that may be virtually worthless. Despite what the pols in Washington think, the RTC bailout was also a Wall Street scandal. Many of the financial firms that had financed the S&L industry's reckless lending got to buy back the same properties for pennies from the RTC--profiting on the upside, then again on the downside. Guess who picked up the tab? I suspect Wall Street is envisioning a similar bonanza--the chance to harvest new profit from their own fraud and criminal irresponsibility. If government acts responsibly, it will impose some other conditions on any broad rescue for the bankers. First, take due bills from any financial firms that get to hand off their spoiled assets, that is, a hard contract that repays government from any future profits once the crisis is over. Second, when the politicians get around to reforming financial regulations and dismantling the gimmicks and "too big to fail" institutions, Wall Street firms must be prohibited from exercising their usual manipulations of the political system. Call off their lobbyists, bar them from the bribery disguised as campaign contributions. Any contact or conversations between the assisted bankers and financial houses with government agencies or elected politicians must be promptly reported to the public, just as regulated industries are required to do when they call on government regulars. More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss--their situation is too dire--but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms.
?.and this one, among other points, dicounting Buffet?s point of view:
http://www.thenation.com/doc/20081006/greider3 titled
Show Us the Money
?Taxpayers should wake up the politicians and ask them to tell Wall Street: "We want the same deal Warren Buffett got." The Omaha billionaire announced he is playing White Knight to Goldman Sachs by investing $5 billion in the endangered investment house. What a big-hearted guy. Buffett is an old-fashioned capitalist who invests in companies for the long term and I am a big admirer. But Warren Buffett did not get to be a billionaire by committing public-spirited acts of charity. He plays to win. So his deal with Goldman Sachs is carefully wired to produce gorgeous returns for Buffett's Berkshire Hathaway. Upfront, he gets a 10 percent ownership stake in preferential shares that will pay a 10 percent dividend--even if Goldman's stock price keeps falling. But Buffett also gets the right to buy $5 billion in common shares at below the market price. So if Goldman flourishes in these hard times, Buffett will win big as its stock price soars. To sweeten his chances, the Omaha sage quickly announced that he endorses the $700 billion bailout plan proposed by Treasury Secretary Paulson. Let's follow the bouncing ball. Buffett puts some of his capital at risk on terms that are smartly protected from loss. Then Buffett urges the taxpayers to put their money on the line too. Only the taxpayers don't have any deal. They are the naked investors in this drama, asked to put up many billions to rescue Wall Street firms with nothing more than a vague promise it will save the Republic. I am reminded of the oldest rule in the financial business: "Get it in writing." Warren Buffett's intervention provides a clarifying moment because it demonstrates what's wrong with the bipartisan bailout Congress is preparing to authorize. There's nothing illegitimate in what Buffett accomplished. The overlapping terms and contingencies he secured for his capital are standard practice in Wall Street deal-making. Investment bankers work out the fine print and put it in enforceable contracts or the deal doesn't happen. Hank Paulson was a star in that world. When he left as chief executive to become Treasury Secretary in 2006, Goldman awarded him $110 million in cash to cover remaining stock options and restricted stock, in addition to $51 million to repurchase family shares. These payments were on top of the approximately $500 million in Goldman shares Paulson sold when he joined the government. Doing hard-nosed deals in the Buffett style is essentially what the federal government should be doing now--bank by bank--as it intervenes to rescue the financial system from ruin. In our situation, the public treasury is the White Knight because private capital is afraid to play. The federal government has all the leverage it needs to demand very stern terms. That includes demanding an equivalent equity stake in banks or brokerages it assists, but also the power to impose explicit commandments and prohibitions on how these rescued firms must behave. The threat that banks will refuse to play is a meaningless whine from the banking industry. If bankers find a better deal from private lenders, they should take it. Otherwise, they are down the tubes. The underlying power relationship in this crisis has been artfully obscured by the bailout sponsors because they decline to explain clearly what the bailout really is intended to accomplish. First, they said it was to restore calm in markets. Then they said it was the rotten assets centered in mortgage securities. But the problem is more accurately described as the great deflation of Wall Street's illusions--inflated prices, profits, deals, commissions and bonuses. You name it, they ran it up to stratospheric levels. Now the dream is dying and values are falling, but have not yet hit bottom. To put it more concretely, the banks and investment houses have lost massive amounts of capital--a hole that is real, not psychological. Maybe $1 trillion, possibly twice that. We can't say exactly, because the banks have still not come clean and because assets in bank portfolios continue to lose value as housing prices continue to deflate. The great capital losses mean Wall Street is sure to get smaller--a lot smaller--with fewer firms, less leveraged deals based on inadequate capital and a general retreat from its domineering role in economic life. Personally, I believe a smaller Wall Street will be good for the country, part of restoring balance to the damaged economy. In any case, it is folly for Washington to imagine that it can--or should--simply replenish Wall Street's great loss. That essentially is what Paulson's blanket bailout attempts to do--restore conditions to "normal" by buying up the bad assets from banks at inflated prices. In other words, supply the missing capital that private lenders won't provide. Good luck with that. The real goal for government intervention should be to manage Wall Street's inescapble downward adjustments in ways as peaceable as possible. Stabilize the shrinking financial system so it will keep the the real economy going, that is, insure that credit and capital flows continue, while Wall Street is gradually cut down to normal size. There is real pain in that for everyone, but the objective is concrete and manageable. At center stage are the big, bad players--the mega-banks and some others--who took the extreme risks and are now conveniently described as"too big to fail." If that's so, then one goal of government should be to make them get smaller, either through market forces or by lawful edict. The public likewise needs a new federal agency to manage the deal-making--something like the Reconstruction Finance Corporation during the New Deal--and determine which major banks can be cleaned up and stabilized, which ones cannot. The objective is not to save everyone--that is not what the nation needs--but to wind up with a broadly balanced financial system, chastened by new rules and ready to serve the rest of us, rather than eat us alive.?
Ignorance, unlike stupidity and foolishness, is not a permanent condition. We, the taxpayers, will be footing the bill for the Iraq fiasco for decades to come. The same crew is lining us up for another fleecing. NO to the bailout in its current form.
Ever since Reaganomics was instituted, the benefits of America's economic growth have accrued to the most wealthy. When W. Bush became president and his tax cuts were approved, an even greater share of America's economic growth went to the very wealthiest segment of the economy. There was very little trickle down of the prosperity, which was the theme of the ideology sold to to the electorate. The electorate has been accused of being ignorant by Mr. Clarke, but the electorate knows they have not shared in the fruits of the economy for almost twenty-five years, and the electorate knows that the fianance industry has reaped much of the prosperity of the past twenty-five years, and the electorate knows that bailing out the finance industry will not lead to their greater prosperity and a greater share of the economies wealth. The electorate may be ignorant enough to elect W. Bush twice, but it is not so ignorant to save a segment of the economy that has no intention of sharing any of its wealth with the rest of society.
Hey kids, you can complain about the "ideological" implications of this bailout as much as you want, but note that my previous factual description of the nature of this crisis (as opposed to all of the condemnations of "greedy capitalists" or calls to "screw em all") have been supported by Joe Nocera's article in the NY Times (http://www.nytimes.com/2008/10/02/business/02crisis.html?hp). If the possible problems that this article describes are the outcome that you want, then more power to you. But don't take your ideological objections out on the rest of the country.
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Ignorant? Really? Were the more than 100 leading US economists who urged defeat of this bill also ignorant? How dare you! Democracy is unlikely to fail simply because Americans are unwilling to bail out the idiots who made bad bets on Wall Street. I do not believe that democracy means the govt should bail out bad businesses--if anything that is counter to democracy. You are an idiot, and ought to be fired. Maybe you can get a job in govt--there seems to be a lot of people like you there.
Posted by Doug Schneider | September 29, 2008 6:25 PM