Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Gender, Race, and the Bailout (Cali NOW)From the blog of California NOW:As we all know, the $700 billion bailout plan failed in the House of Representatives yesterday, sending stock prices plummeting. Both Democrats and Republicans voted for and against the bill, with many different and even conflicting reasons behind their votes. However, one fact stands out: looks like the congressfolks who voted for the bailout plan received, on average, 54% more money from banks and financiers than those who voted against it. Now Congress has gone back to the drawing board to try to work out a compromise, and although there are many theories on how that may look, nothing concrete has been determined yet. Wouldn't it be nice if someone had come up with a rescue plan that worked from the bottom up, to help the little people rather than the fat cats? Well someone did, and that someone is Cynthia McKinney, Green Party candidate for President. Here's another take on what a progressive bailout would look like. For many of us, the recession isn't something we can look at as preventable, because it's happening right now. There's a pretty good chance that the economy is going to keep getting worse for many of us, regardless of the eventual bailout plan. This is especially true in California, because the long-overdue state budget was based on economic figures that failed to take into account the slowdown of the economy. According to the National Women's Law Center, "Women feel the impact of economic insecurity and rising food, energy, education, and health care costs more deeply than men – and see government as a key to the solution." Women are also more at risk of foreclosure, because they have a higher share of subprime loans. And speaking of subprime loans, there appears to be an attempt by conservatives, led by Ann Coulter, to shift blame for the crisis away from deregulation and company greed, and towards the real victims, the homeowners who were encouraged to take out risky loans for which they were unqualified. Tied into this is a clearly racist angle. "If only," the thinking seems to go, "responsible companies hadn't been forced to give loans to immigrants, Latin@s, and African Americans!" There's just one problem with that logic: most of the subprime loans did not go to people of color. Just like blaming welfare on people of color, when most people on welfare are white, the racism in the new "analysis" of the financial crash has a lot of popular appeal. We see the same tactic in the recent proposal of Louisiana state Rep. John LaBruzzo to pay low-income women to be sterilized. Read the rest of the blog posting. Labels: bailout, financial crisis, gender, Henry Paulson, race Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why One Congressman Voted Against the BailoutRep. Maurice Hinchey (D-NY) made several important points in his explanation of why he voted "no" on the bailout:* The bill would have given $700 billion to the same administration that got us into this mess in the first place; * Even Bernanke says that only $150 billion or so will be needed over the next 6 months or so, so why not let a new administration formulate a longer-term plan? * There are other pressing needs in this country that should come before bailing out "Wall Street powerbrokers who got greedy and took advantage of the system." Read his full statement here. Labels: bailout, Ben Bernanke, congress, Maurice Hinchey Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bailed Out or Outfoxed? (Robert Zevin)This is an Investment Policy Memo from Robert Brooke Zevin Associates, Inc., a socially responsible investment advisor. It is from Sept. 26th, but still salient. Hat-tip to Arthur MacEwan.Secretary of the Treasury Paulson has offered a dramatic new rescue plan. Most Americans hate it. Stock markets love it. When the plan was carefully leaked last Thursday, it produced what was probably the biggest two day advance ever in global stock market prices. Since then stocks have soared or swooned at each indication that the plan might or might not be approved. Meanwhile outside the world of angry citizens and perpetually optimistic stock market investors, events have unfolded at a frightening pace. On Wednesday, while Congress was debating whether to advance $250 billion to the Paulson plan, the Federal Reserve had lent over $400 billion to banks, investment banks and money market funds in an effort to prevent the collapse of any of these institutions. This was more than double the troubled week before and about 20 times the average amount in the first half of last year and before. And this does not count the money the Fed and other central banks have poured into the monetary system with temporary or permanent purchases of securities. Banks have stopped lending to each other or to anyone else. Businesses with existing lines of bank credit are taking all the cash now before the bank can change its mind, led by General Motors which took down all of its $3.5 billion line of credit. Bank deposits are stagnant and banks have been unable to refund their short term borrowings which have been shrinking at the rate of $50 billion per week. The true value of the mortgages and other loans owned by the banks has been declining as default rates rise, buyers of risky assets disappear and foreclosure sales drive down the price of homes and other collateral, sometimes, as in California last month, at a rate already steeper than in the Great Depression. Many banks find it nearly impossible to raise more capital and are hoping to avoid writing down their loans to true values, which would seriously reduce, sometimes eliminate, their capital safety cushion. The real economy has entered a serious recession. It seems too late, it may have been all along, to avoid an extended period of slow or negative growth with an on going process of paying down debts and driving down the prices of assets to do so. It may even be too late to avoid a credit system melt down, similar to the Great Depression. Economists from Milton Friedman to Ben Bernanke have employed a device economic historians call a counter-factual. In other words they ask what would have happened in the early 1930’s if the Federal Reserve had not allowed banks to fail. And they purport to prove that the Great Depression would have been only another brief recession. Now the counter factual is the fact: so far central bankers and other government agencies have avoided failures in which depositors, or now also money market fund investors, have lost any money. But so far this real world experiment is not conforming to the theory. The force of debt reductions, lending reductions and forced sales of assets that drive down their prices, has been more than enough to cripple the money markets and send the U.S., Europe and Japan into recessions. There is still no doubt that governments have the power to avoid a general collapse of banks or destruction people’s money. This is what the Paulson plan was supposed to accomplish. But, it is seriously flawed and not just by its instant unpopularity. The sad truth is that banks have far more than $700 billion of bad loans on their books not only in mortgages but also credit card debt, car loans, and various exotic instruments invented in collaboration with coporate America, hedge funds and private equity. The only way the Paulson plan could deal with this magnitude would be to sell the first $700 billion of bad loans that it bought and use the money to buy as much again, and again and probably again at least once more. If the Treasury could sell the loans that easily then clearly the banks could do it themselves and the problem would not exist. Worse still, if the Paulson plan buys troubled mortgages at their fair value, this will trigger a wave of write downs for the selling banks and all other banks holding similar assets, thus adding to the stress on banks instead of alleviating it. If the Treasury paid more than the loans were worth, it would be stuck with them and the taxpayers would be stuck with a loss, all for an exercise that would not seriously reduce the current danger. Like his earlier plan to have the banks get together and form a new entity to which they would contribute money and then sell their bad loans, the Paulson plan clearly contains more Wall Street hype than genuine hope as befits a former head of Goldman Sachs. If it is adopted and fails, it will be even more difficult to get additional money from Congress to finance a better alternative. The best way to solve this problem would be for the Treasury to buy a special preferred stock in all troubled banks that would be designed to be liquidated at a profit after the crisis has past. This could give the banks another $700 billion of capital, which would add about seventy percent to their current capital. This might enable them to write down their bad assets by about 25% and then go on to make new loans to households, businesses and each other. Unlike the Paulson plan this is an approach that has been used successfully in the U.S. in the 1930’s and in Sweden and Japan in the 1990’s. Why won’t Bush, Obama or McCain embrace this efficient and effective solution, sure to get better results at far less cost to taxpayers? Government ownership of the banks is Socialism. And being soft on Socialism is the political equivalent of being soft on Iran or North Korea. Another solution which also has a far better chance of succeeding is for the government to deal directly with distressed home owners, offering them new mortgages at lower rates or for longer terms in an amount sufficient to pay down much of the existing mortgage or perhaps to liquidate it at a fraction of face value. This would solve another problem in the Paulson plan in which the government would end up owning mostly mortgage backed securities which usually represent only partial ownership of the underlying mortgages. This in turn would prevent the government from actively promoting renegotiation of mortgages rather than foreclosures. In addition, this plan would directly support the prices of homes by cutting off the flood of foreclosures and forced sales, thus eliminating the principal force that is causing higher defaults and lower values for the banks’ mortgage portfolios. It has been endorsed by the registered anti-Socialist conservatives including several economists at the American Enterprise Institute and the distinguished Martin Feldstein, chairman of Ronald Reagan’s Council of Economic Advisers. So why isn’t this alternative on the Washington radar screen? It is clearly a political winner. Perhaps it has to do with election year calculations in the close and high-stakes presidential race. Perhaps bankers still think they can escape from this mess without recognizing the full losses on their mortgage portfolios. Perhaps the genial Washington bi-partisan approbation of wealth and distrust of the poor, stays the hand that might provide succor directly to the poor borrower at the expense of the campaign contributor’s bank. The bottom line is that we are at a sorry and dangerous pass. The momentum of debt contraction and price declines for houses and commodities seems to have a self-perpetuating momentum. The implosion of credit markets and financial institutions is accelerating. Recession is underway. And political deadlock has re-emerged in strength, caused in part by narrow political interests and in part by the stand off between an angry electorate and a rich donor base, each snarling from opposite sides at a very frightened Congress and executive branch. This is unquestionably a very bad and dangerous environment for common stocks. We have reduced common stock holdings in all of our accounts to much less than half of a normal position, except where tax considerations were too large. In most of the portfolios we manage cash is now the largest portion. We have invested in money market funds and short-term notes with careful attention to safety issues. We also maintain our favorable view of high-quality bonds. Inflation is likely to extend its recent decline which is good for bonds. While the U.S. government will be increasing its borrowing, the amount of private debt will decrease at an even greater rate. As always, our first commitment is to avoid losses rather than take risks for big gains. Our performance in the current quarter has not lived up to this standard. But we think our clients are now well positioned to most of any future losses in global stock markets or low quality securities. Labels: bailout, financial crisis, Henry Paulson, Robert Zevin Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Political and Financial Bedlam (William Greider)This is by William Greider of The Nation, from this morning's Boston Metro.All of the political leaders blessed the deal, but the House of Representatives spit it out anyway. The political bedlam in Washington is as real as it gets. The party leaders will probably try again. I doubt they have the energy or courage to renegotiate the terms in any serious way. A majority of Democrats voted for the measure, but most Republicans took a walk. They will be scolded for being “irresponsible.” But I doubt the public will agree. In all of elected Washington, representatives are closest to the people and they know a vote for this outrageous measure is going to end the careers of some colleagues — maybe many of them. This time, the dissenters can claim principle and say they are voting with the folks, while also voting to save their own hides. It adds another deep shock to the system, both in politics and economics, but what an invigorating moment for democracy. The financial bloodbath will continue, but unless the deal on the table changes significantly, Henry Paulson gets to decide who lives and who dies. The former investment banker from Goldman Sachs would be empowered as treasury secretary to play savior or grim reaper, the liquidator who essentially pulls the plug on some banks and financial firms or the man who rescues them from ruin. This is still a massive bailout of imploding Wall Street, financed with the public’s money. And it is still a massive crapshoot for the American people. If the billions from Washington somehow restore temporary calm and balance to global financial institutions and markets, then the usual cheerleaders will proclaim the “system” has worked. Most Americans, I predict, will not join the cheering. Too much destruction lies ahead. Congress did not step up and assert the full emergency powers of government in this epic crisis, that is, take temporary control of the entire financial and banking system. This rescue plan remains essentially voluntary. A new federal agency will be needed to supervise and enforce the bailout. The government will have to assert its powers forcefully, because by then it will be obvious the “voluntary” approach helped some losers to become winners, but it neglected to save the country. William Greider is The Nation magazine’s national affairs correspondent. Labels: bailout, financial crisis, William Greider Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Time to Start WorryingThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.I'm scared. After the stunning rejection by the House of Representatives of the revised bailout bill, financial markets throughout the world are tanking. As I write, Tokyo is down four percent, and Latin American stocks dropped a jaw-dropping thirteen percent in Monday's trading. The Dow lost 777 points, its largest one-day decline ever, and oil is trading at levels unseen since nearly last year. Meanwhile, US bond yields are dropping fast, but the dollar is trading at four-month lows versus the Japanese Yen, and gold is back over $900 an ounce. Meanwhile, tottering banks worldwide are being bailed out by governments or are scrambling to save their skins. And despite huge central bank infusions into global money markets, banks refuse to lend to each other, and the only debt anyone will by is that issued by the US government, which is finding itself increasingly indebted by orders of magnitude every week. If banks don't start lending to each other soon, the economic effects of the crisis are going to start cascading, as investment (especially that involving debt, which, after all, has been the predominant form of investment for some time by far) and consumption plummet, and what savings are available are drawn down. Tuesday will be quite a day in Europe and here in the US, and, due to a religious holiday, Congress won't reconvene to possibly consider another bill until Wednesday and Thursday. I was opposed to the bailout bill, and, for what it's worth, duly sent emails to Congress encouraging its defeat. But I always assumed the revised bill would pass. Now that it hasn't, I feel a kind of disorientation the likes of which I haven't felt since September 11th, 2001: no kidding. Our economy requires restructuring of the most fundamental sort, and if we on the left were seriously in the game, I would be almost enthusiastic about the crisis: it could present an historic opportunity to do what needs to be done, though that would require serious, perhaps even heroic, sacrifice. But this is clearly not even close to being the case, and all I see from the defeat of the bill is, in the worst case, a whole lot of pain, most of which will fall on working and middle class people, if the economic crisis cascades in the manner I suggested above. In the best case, a new bill will be renegotiated, but House Republicans will now have to sign on, which means it's certain the new bill will be worse than its predecessor. Then there's another pretty awful alternative, that of a bill cobbled together after things have got so bad, so fast, that some Republican voters will overcome their fears of creeping socialism just to keep their bank deposits intact and pensions being paid. And that may involve either the kind of power transfer to the Treasury Department the first revised bill did at least something to address, and that would be after a certain amount of irreversible pain will be made virtually inevitable, involving job losses on a scale not seen for decades, considerable asset writedowns, or even a redoubling of subprime-type mischief through large scale credit-card defaults. It's a terrible shame that the world financial system is structured so that an attempted--and not necessarily successful, not by a long shot--bailout of it is the price we have to pay to save our own skins. I would be thrilled, as I said before, to trash the whole, rotten thing. But we don't have the political power to do this yet. And given that void, if the crisis escalates, others, who are at present more powerful, and more dangerous, will certainly step in. Americans are both largely apolitical and, increasingly, resistant to suffering any degree of pain that is visible on a large scale. This means that it's hard to say what might happen politically if this crisis really turns into something of historic significance; it's possible that the second impulse will trump the first, and that a far more humane society could arise from the crucible of crisis. But, at the moment, it appears as if the first impulse is still the dominant one. I hope I'm wrong about all this, but I don't think I am. And I'm very, very afraid. Labels: bailout, financial crisis, Henry Paulson, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Community Reinvestment Act Didn't Do ItHeard the latest joke about the current financial crisis?The Democrats did it. Actually, that's not a joke, but it's the sad excuse for one that corporate capitalist apologists are pushing. Ann Coulter even put out an entire rant with the typically subtle title "THEY GAVE YOUR MORTGAGE TO A LESS QUALIFIED MINORITY. Other lessor minds, from Rush Limbough to the Wall Street Journal, concur. The twisted thinking goes like this: in the late 1970s fair housing advocates pushed through the Community Reinvestment Act, or CRA, to stop banks from discriminatory practices like "Redlining" (the term comes from banksers who would use a red marker to mark off the minority neighborhoods on a city map to show where they refused to lend). Jim Campen discussed the act back in 1997. (The Act was reformed in 1995 and 2003). Right-wing pundits are now claiming that the law forced banks to give mortgages to "unqualified" minorities who are now all defaulting on their mortgages. Simple story, but there's one problem. It's not what actually happened. Writing on the Public Citizen's Consumer Law & Policy blog, Alan White wrote this response:
Read Alan White's full post here. Labels: CRA, Public Citizen, subprime crisis, subprime lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bailout Bill Fails in House VoteFrom the WSJ:By MICHAEL R. CRITTENDEN WASHINGTON -- A bipartisan group of U.S. House lawmakers defeated a $700 billion rescue plan for Wall Street on Monday, rejecting pleas from the Bush administration and congressional leaders from both parties of the potential dire consequences of policymakers not acting to help financial markets. The 205-228 vote against the plan sent stocks plummeting, with the Dow Jones Industrial Average down around 500 points as news of the vote spread through Wall Street. The defeat came despite House leaders holding open the vote for well beyond the 15-minute time limit, supporters were unable to convince enough members of either party to switch their votes against the proposal. The defeat is a massive setback for the Bush administration, specifically the Treasury Department, as well as lawmakers who have been working throughout the last week on the legislation in the wake of the collapse of Lehman Brothers Holdings as well as the government's bailout of American International Group Inc. and its takeover of Fannie Mae and Freddie Mac. The White House expressed displeasure with the defeat of financial-market bailout legislation in the U.S. House of Representatives, and said President George W. Bush will meet with his economic team later Monday to determine the way forward. "Obviously we're very disappointed in the outcome this afternoon," Mr. Fratto said. "There is no question that the country is facing a difficult crisis that needs to be addressed." Mr. Fratto said President Bush will meet with his team Monday afternoon and be in touch with congressional leaders. The $700 billion rescue plan for Wall Street was defeated by a bipartisan group of lawmakers in a 205-228 vote. The vote, which was expected to be tight, is a sharp repudiation of the Bush administration and congressional leaders, who warned that failure to act would have dramatic implications for financial markets and the U.S. economy. Earlier Monday, the White House said it believed it had the votes necessary for the rescue bill to pass. President Bush, who tried to rally support for the package with a televised statement early Monday, had a list of a "couple dozen" lawmakers to call before the vote, Mr. Fratto said before the vote. Labels: bailout, financial crisis, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). It's the Foreclosures, Stupid (NACA)This is an "action alert" from the Neighborhood Assistance Corporation of America. The CEO of NACA, Bruce Marks, was on the radio program Here and Now this morning explaining why he opposes a bailout; there appears to be no way to listen to the segment, but they may put up a link to it sometime at the show's site. Hat-tip to John Miller.There is one reason for the financial crisis – Foreclosures. There is only one solution – Restructure mortgages to make them affordable. Who would benefit – Everyone The above sounds very basic but we are providing One Trillion dollars to bailout major financial institutions and insurers without addressing the underlying cause of the crisis which are the millions of homeowners at-risk of foreclosure. They want to say it is too complicated and throw out terms like CDO, Leverage swaps, and others to justify giving President Bush a blank check. While we have been there, the Congress is getting ready to repeat the disastrous past. We are now committing hundreds of billions of tax payer dollars to bailout the very institutions who created the crisis. At a minimum lets use some of these funds to get the investors to do what is necessary in making these mortgages affordable. The previous bailouts of Bear Stearns, Fannie Mae, Freddie Mac and AIG have not opened up the credit markets. Despite the huge commitments of taxpayer funds they have accomplished little. In fact, Fannie and Freddie continue to refuse restructuring on affordable terms – having their owners the American people foreclosing on themselves. It is about time that we stop rewarding the companies, their management and investors who use the Idiot excuse. They continue to say that despite making millions of dollars a year, they could not have predicted the current circumstances and could not have thought of more effective mortgage lending. NACA knew eight years ago and did it the right way. Either their actions were a resulting of unbridled greed or tremendous stupidity. Either way, they should not be bailed out. Congress must not be allowed to commit the largest amount to taxpayer funds in rewarding these scoundrels or idiots – choose your description. A trillion dollar bailout is unconscionable. We are rewarding the companies whose only motivation was greed. For our tax dollars to meet the intended purposes we will purchase the most problematic loan portfolios from the most irresponsible lenders. We will also pay the highest price since that is required to provide them with the capital needed to survive. This is truly the moral hazard bearing its ugly head. The solution is right in front of us. Congress and the administration must immediately put a moratorium on foreclosures for homeowners who are owner occupants. Then through regulation, legislation and/or economic incentives have homeowner’s mortgages restructured to make them affordable for the remaining term of the loan. If NACA as a non-profit can do this, so can these servicers and investors given the appropriate legislative and regulatory requirements and incentives. Contact your politician and make your views known. TELL THEM IT’S THE FORECLOSURES STUPID. NO BAILOUT OF THE PREDATORS. MAKE THE MORTGAGES AFFORDABLE Labels: bailout, Bruce Marks, financial crisis, foreclosures, Neighborhood Assistance Corporation of America Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why Bail?--Dean BakerFrom Huffington Post, by Dean Baker of the Center for Economic Policy and Research.The Banks Have a Gun Pointed at Their Head and Are Threatening to Pull the Trigger If you have a real story, you don't have to make up phony stories. That's pretty straightforward. I've heard lots of phony stories. Much of the country's political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true. There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments. At this point I cannot identify a single good reason to do the bailout. Read the rest of the article. Labels: bailout, Center for Economic and Policy Research, Dean Baker, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Is the System We Are Saving!--KucinichA fiery Dennis Kucinich discusses the "end of industrial capitalism," and quotes Steve Zarlenga of the American Monetary Institute.In another recent speech on the House floor, Kucinich compares Congress to the Goldman Sachs board of directors. Labels: American Monetary Institute, bailout, Dennis Kucinich, financial crisis, Goldman Sachs, Steve Zarlenga Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Paulson's Panic--Stirling NewberryThis is by Stirling Newberry, from The Agonist.Hell No, We Won't Blow (it all on Paulson's Panic) Or why the bail out is a bust. I've never been prouder of the blogosphere than in the last week. The opposition to an ill-considered bailout has spread from every direction. From people insiders and outsiders, from in the popular press and in their own journals, to who knew that this was a free three martini lunch . Negotiations have not made it better. We are told, for the third time, that a deal is close, it is done, and yet, the vote slipped from today, to tomorrow. The platitudes have poured forth, but the mean nothing. There is still time to kill this bill. There is still time to do what is right. Opposition is across the political spectrum, this is not a matter of left or right, but of inside against outside. Many people have seen their political heros bow and crumble before the onslaught of insiderdom, while others have emerged from the most unlikely of places. This bill is bad policy, bad politics and bad economics. It is predicated on a lie, a lie that this one picture exposes. This is not a crisis of confidence, but a failure of management. The way to fix this crisis is not by trying to bribe the banks to keep lending, but to understand why they are not lending overnight. What does this picture mean? I will explain, but a bit of background first. Read the rest of the article. Labels: bailout, financial crisis, Henry Paulson, Stirling Newberry, The Agonist Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Emergency Economic Stabilization Act of 2008In case anyone wants to read the 110-page bailout bill, here it is, available via the Los Angeles Times.Labels: bailout, financial crisis, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Gargantuan Bailout: The SequelThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.The updated Treasury bailout plan has now been submitted to Congress, and indications are that it will pass, though it seems that many lawmakers have yet to read the bill. The bill contain important improvements on the one that was rejected last week: far more oversight over the disbursement of funds--and of the ability of the Treasury Secretary to dispose of these funds--curbs on participating firms' CEO pay, equity investment for the public in exchange for the lifeline, and aid for besieged mortgage borrowers. Here are the details, courtesy of Reuters: The proposed legislation would disburse the $700 billion in stages. The first $250 billion would be issued when the legislation is enacted, while another $100 billion could be spent if the president decided it was needed. The remaining $350 billion would be subject to congressional review. Institutions selling assets under the plan would issue stock warrants to the government, a step intended to give taxpayers a chance to profit if markets recover. The plan also would let the government buy troubled assets from pension plans, local governments and small banks. In response to a clamor for limits on executive pay, no executives at participating firms could get multimillion-dollar severance packages -- known as golden parachutes. An oversight board of top officials, including the Federal Reserve chairman, would supervise the program, while its management also would be under close scrutiny by Congress' investigative arm and an independent inspector general. The government could also use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans. So is this something we can support? Given the atrocious failure of Congress to monitor any of the administration's many blatant crimes over the last few years, we should be extremely skeptical, but it is a step in the right direction, especially given the unpopularity of the administration and the clear disgust shown on the part of ordinary citizens for the idea cutting the financiers any slack. Ultimately, though, this bill has one objective, and one alone: to unclog global money markets. What can it accomplish on this score? This is the big question. The package was rushed through precisely to avoid turmoil on Asian markets which are opening now, and to prevent their spreading to Europe and the UK in a few hours time. And on this score, things don't look good, package or no. Again, from Reuters: While Washington's $700-billion bailout package is crucial in tackling the worst financial crisis since the Great Depression, doubts remain as to how it could immediately thaw the frozen money and credit market. This week's data highlight is the U.S. employment report for September but the indicator is unlikely to fully capture the massive shock to the labor market, broader economy and consumer confidence of the events of the past two weeks. Interbank money markets are experiencing historically high tensions after the collapse of Lehman Brothers, Washington Mutual and the firesale of Merrill Lynch and UK bank HBOS, while a global ban on short selling has caused trading volumes in major stock exchanges to dwindle. The liquidity crisis is spreading to the Arab Gulf, other emerging markets and Scandinavia, and the U.S. commercial paper market, a vital source of funding for many companies' daily operations, has shrunk to its smallest in almost two years. All that has backed a stampede into safe-haven U.S. government debt that has sent short-term yields to near zero as prices rocketed. "It's the most dysfunctional market I can remember in my career of 20 years," said Chris Iggo, chief investment officer at AXA Investment Managers. "It is the complete questioning of the very fundamentals of how the financial system works. The real key to everything we do is a matter of trust and there is evaporation of trust."That's why banks are not lending to each other and people are worried about the creditworthiness of debt and there's a lack of belief in the ability of equities to deliver the earnings that analysts are forecasting." This is the crux of the problem: that the crisis has gone so far beyond the US subprime mortgage sector that even extraordinary attempts to clean up that sector, some pushing the lengths of constitutionality itself, may remain seriously behind the corrective curve given the kind of financing it enabled, and which is still, in important ways--especially in the money markets--operative. And the issue of constitutionality is even becoming rendered irrelevant. Just today, news comes from the UK of the nationalization of yet another bank, Bradford and Bingley; and from the continent, the Belgian Fortis seems about to go under. Meanwhile. a deathwatch of sorts is being placed over Wachovia here in the US. It seems a mere matter of time until the US taxpayer may have to play a role in bailing out foreign multinational banks, adding even more stress on a federal balance sheet that has seen its liabilities almost double in the last fortnight or so (but everything depends on what is ultimately recoverable on the asset side). So the answer is: the plan is yet another attempt to stop the rot: we're still not out of the lows yet, as Reuters said. Perhaps it's inappropriate to close on a note of levity in the midst of all this, but one news item item this weekend was too good to let pass by: it seems hedge fund managers in the City of London have become incensed by the Anglican archbishops' of Canterbury and York denunciation of their role in the current crisis, rightly pointing out that essential pension funds of the Church of England are beneficiaries of the services of the same funds. One went so far as to assert the following: "Short selling is the pursuit of truth." As was the case of jesting Pilate, we are noe justified in wondering what this truth actually amounts to. Labels: bailout, financial crisis, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Better Bailout--Joseph StiglitzBy Joseph E. StiglitzThe Nation, September 26, 2008 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. Read the rest of the article. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Economists Question Basis of Paulson's PlanBy Neil Irwin and Cecilia KangWashington Post Staff Writers Friday, September 26, 2008; Page A01 The Bush administration's pitch for a sweeping bailout of the financial system has centered on two simple premises: that the economy could suffer a crippling downturn if action is not taken very quickly and that this action should consist of the government buying troubled mortgage securities from banks and other institutions. But many of the nation's top economists disagree with one or both of those ideas, even as many top political leaders have swung behind them. Wall Street economists have mostly endorsed Treasury Secretary Henry M. Paulson Jr.'s plan, or a variation thereof. But almost 200 academic economists -- who aren't paid by the institutions that could directly benefit from the plan but who also may not have recent practical experience in the markets -- have signed a petition organized by a University of Chicago professor objecting to the plan on the grounds that it could create perverse incentives, that it is too vague and that its long-run effects are unclear. Sen. Richard C. Shelby (Ala.), ranking Republican on the Budget Committee, brandished that letter yesterday afternoon as he explained his opposition to the bailout outside a bipartisan summit at the White House. The petition did not advocate any specific plan, including that offered yesterday by House Republicans. Economists tend to agree that the nation's economy is at serious risk as the flow of credit threatens to freeze. Just yesterday, the interest rate at which banks lend to each other rose steeply, as it has every day this week, suggesting that lenders are hoarding cash. History shows that when this happens, a broad economic crisis can follow, for instance, the Great Depression and Japan's decade-long recession in the 1990s. ad_icon "If nothing is done, the potential for these markets to seize up in a big way is definitely there," said Frederic S. Mishkin, an economist at Columbia University who was a Federal Reserve governor until last month. "When you look at the history of these crises, when things spin out of control, the cost to fix it later goes up exponentially." But many others with a deep theoretical knowledge of finance and experience in government are skeptical of the structure of Paulson's plan -- and the speed with which it has been crafted. The critics can be roughly divided into two camps. One group thinks money should be directly infused into banks, which should allow it to trickle down through the financial system to borrowers. A second group thinks the government should buy individual mortgages, thus helping ordinary Americans more directly, with the benefits trickling up to the banks. Read the rest of the article. Labels: bailout, financial crisis, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Better Plan than the Paulson BailoutIn 1992, a Swedish real estate bubble burst, creating a banking panic and freeze. The Swedish loaned banks money, but in exchange, forced banks to promptly write down bad real estate investments and issue warrants to the government. Warrants--the right to purchase stock at a preset price--gave the government bank stocks cheap. At the end of the crisis, and government sold off its shares at a profit, so the entire rescue cost less than 2% of Swedish GDP. See "Stopping a Financial Crisis, the Swedish Way" NYT Sept 22. Treasury Secretary Hank Paulson has proposed that the US Treasury spend up to $700 billion to buy out US banks' CDO's and other lousy debts. The proposal has set off a storm of protest, for good reason. If Treasury pays the distressed market price for the debts, the banks will be just as broke as before, and unable to lend. If Treasury pays much more, it will recapitalize the banks at taxpayer expense--rewarding the rich bankers who helped create the problem. There's a practical problem too: Treasury would have to value tens of thousands of bonds, making them liable to delays, mistakes--and overpaying. Wednesday night, two economists, Larry Kotlikoff and Perry Mehrling, proposed an alternative plan, in essence a clever way to implement a Swedish solution in the US. See "The Right Financial Fix" on the RGE Monitor and "Bagehot plus RFC: the right financial fix" on the Financial Times website. On Thursday, a Republican contingent picked up the plan--and to Democratic House Finance Chair Barney Frank's frustration, put it forward combined with a capital gains tax break! The KM plan works like this: Despite what we hear that "no one knows" the value of toxic bonds, there is in fact a market for them, current barely functioning at distressed prices. Holders of such bonds understandably don't want to write them down to those levels; the bonds might rise again, and a write-down might make the holders "insolvent" --that is, their debts would exceed their assets. Enter the KM plan. The Treasury would offer default insurance for the roughly five different classes or "tranches" of bonds sold in the market, ranging from the safest AAA bonds, to the worst BBB bonds. Insurance premiums would be set based on the market value of the bonds just before the crisis hit, and would range from low for AAA, to very high for BBB bonds. Buyers of insurance would pay either cash to the Treasury, or preferred stock. (Preferred stock is non-voting, but has priority in payout over common stock.) The plan would have these effects: 1. It would get the market for toxic bonds active again--quickly. 2. It would allow bond holders to insure the bonds against default, simultaneously reducing their risk and effectively writing the bonds down to market. Holders could in fact sell bonds paired with insurance policies as relatively safe investments. 3. In many cases, Treasury would lay out no cash up front. It might even take in cash payments for insurance from stronger banks. Treasury might have to make loans to weaker banks--in exchange for more preferred stock. 4. With toxic bonds either insured or sold, confidence would return, banks would resume lending. Eventually, Treasury could sell its preferred stock at a premium. Even with the crisis past, of course, the economy will take many years to recover from the waste and distortions caused by the real estate bubble. But by preventing a prolonged credit freeze, the KM plan can greatly lessen the damage--and ensure that the long-term benefit goes first to the taxpayers. But what about homeowners desperately trying to renegotiate rip-off mortgages? The KM plan, by imposing a quick write-down on mortgage-backed securities, will make it much easier for homeowners and lenders to renegotiate. Rather than a loss, reduced payments from borrowers will look to lenders like gravy. Labels: financial crisis bailout Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A U.S. Financial System of Our OwnThis is from Cynthia McKinney, candidate for president.A Gift for a Generation: A U.S. Financial System of Our Own Last week, I posted ten points (that were by no means exhaustive) for Congressional action immediately in the wake of the financial crisis now gripping our country. At that time, the Democratic leadership of Congress was prepared to adjourn the current legislative Session to campaign, without taking any action at all to put policies in place that protect U.S. taxpayers and the global community that has accepted U.S. financial leadership. Those ten points, to be taken in conjunction with the Power to the People Committee's platform available on the campaign website, are as follows: 1. Enactment of a foreclosure moratorium now before the next phase of ARM interest rate increases take effect; 2. elimination of all ARM mortgages and their renegotiation into 30- or 40-year loans; 3. establishment of new mortgage lending practices to end predatory and discriminatory practices; 4. establishment of criteria and construction goals for affordable housing; 5. redefinition of credit and regulation of the credit industry so that discriminatory practices are completely eliminated; 6. full funding for initiatives that eliminate racial and ethnic disparities in home ownership; 7. recognition of shelter as a right according to the United Nations Declaration of Human Rights to which the U.S. is a signatory so that no one sleeps on U.S. streets; 8. full funding of a fund designed to cushion the job loss and provide for retraining of those at the bottom of the income scale as the economy transitions; 9. close all tax loopholes and repeal of the Bush tax cuts for the top 1% of income earners; and 10. fairly tax corporations, denying federal subsidies to those who relocate jobs overseas repeal NAFTA. In addition to these ten points, I now add four more: 11. Appointment of former Comptroller General David Walker to fully audit all recipients of taxpayer cash infusions, including JP Morgan, Bear Stearns, Fannie Mae, Freddie Mac, and AIG, and to monitor their trading activities into the future; 12. elimination of all derivatives trading; 13. nationalization of the Federal Reserve and the establishment of a federally-owned, public banking system that makes credit available for small businesses, homeowners, manufacturing operations, renewable energy and infrastructure investments; and 14. criminal prosecution of any activities that violated the law, including conflicts of interest that led to the current crisis. Ellen Brown, author of The Web of Debt writes, "Such a public bank today could solve not only the housing crisis but a number of other pressing problems, including the infrastructure crisis and the energy crisis. Once bankrupt businesses have been restored to solvency, the usual practice is to return them to private hands; but a better plan for Fannie and Freddie might be to simply keep them as public institutions." Too many times politicians have told us to support the "free market." The unfolding news informs us in a most costly manner that free markets don't work. This is a financial system of their making. It's now past time for the people to have an economic system of their own. A reading of the full text on the Congressional "Agreement on Principles" for the proposed $700 billion bailout reveals the sham that this so-called agreement truly is. Today our country faces an economic 9/11. The problem that is unfolding is truly systemic and no stop-gap measures that maintain the current bankrupt structure will be sufficient to resolve this crisis of the U.S. economic engine. Today is my son's birthday. What a gift to the young people of this country if we were to present to them a clean break from the policies that produced this economic disaster, the "financial tsunami" that former Comptroller General David Walker warned us of so many months ago and instead offered them a U.S. economic superstructure that truly was their own. Power to the People! Cynthia McKinney McKinney/Clemente 2008 US Green Party Labels: bailout, Cynthia McKinney, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Saving the Financial System--Thomas PalleyThis is from economist Thomas Palley, from his website.A friend told me the economist Charles Kindelberger had two rules for a credit economy. Rule one was everybody should know that if they get over-extended they will not be bailed-out. Rule two was if everybody gets over-extended they must be bailed out. The U.S. economy has over-extended itself, triggering rule two. But that still leaves open how a bailout should be designed since designs are not all equal. Currently, two models are on the table. One is the Paulson model (also supported by Bernanke) that proposes government buy the bad assets of financial institutions. The other is a Buffett-style recapitalization model that would have government invest in and recapitalize banks, just as Warren Buffett has done for Goldman Sachs. The underlying problem is the financial system is short of capital owing to massive asset depreciation. This shortage is impeding provision of credit, which threatens to tank the economy by interrupting normal commerce. Read the rest of the article. Labels: financial crisis bailout, Thomas Palley Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Bailout Negotiation BreakdownThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Beyond the Elite Reality Principle? The failure of Congress to pass the Treasury’s plan to bail out the shadow banking system may portend nothing less than a fundamental shift in the American—even global—economic development, akin to that which ushered in the deregulatory, neoliberal regime after the crisis of corporate profitability and labor/social unrest of the ‘seventies. Combined with apparently considerable opposition from constituents throughout the country, lawmakers’ resistance (even discounting both grandstanding, election year politicking, and the tendency, in times of crisis, to take refuge in wacky ideologies—like Republicans who complain about the United States becoming socialist, etc.) indicates that a central force that held both Democratic and Republican coalitions together for over a generation, namely, wildly pro-business, and especially financial sector, policies that massively enrich increasingly globalized elites, largely by setting constituencies of working people worldwide against each other, and arbitraging the difference, is no longer sustainable. That conservative lawmakers/politicians, even for purely political reasons (John McCain perhaps being the best case in point) have rejected this bill, which was seen as being almost certain to pass only yesterday afternoon, shows this clearly: and our foreign creditors will just have to get used to the fact that, at least temporarily, and surely intermittently in future, even if/when a new bill is passed, the old consensus is a thing of the past. Today should be quite a wild ride on the New York and Chicago markets (foreign markets fell on the news of the breakdown), and this morning’s revelation that Washington Mutual has finally gone down in the largest bank seizure in American history, will only increase the agony. And, lest we forget, a batch of negative economic indicators were released yesterday: the overhang of unsold houses back about its highest levels for the year, durable goods crashing after the export boom of the last few months, initial claims for unemployment rising. The fact that is, despite all this turmoil, and despite the understanding amongst those of elite opinion that this crisis demanded a drastic cure that would be “better than the alternative,” ordinary people—and their representatives, long infinitely more responsive to lobbyists, often from the financial industry, and all too often to foreign ones at that—than their constituents, are just not going to accept this “responsible” bill as it stands now. Even the extraordinary silly spectacle of Secretary Paulson kneeling in front of Speaker Pelosi, and all the shouting in the White House behind closed doors won’t change that. But there is a huge danger. The thing that has ultimately held the world financial order together through thick and thin for the last generation is the unrelenting willingness (some would call it stupidity) of the American taxpayer to fork out money. This has held despite the fact that ordinary workers have had to pay for more and more, despite stagnant incomes and falling (especially state-provided) benefits, as tax rates for the wealthy and corporations have both declined, and been diverted by hugely increasing incidences and opportunities for (not to mention highly profitable, for legal and financial “wealth managers”) dodges to tax shelters throughout the world. And it has held in spite of the fact that the money has been spent on phony wars, tax cuts for the already wealthy that do nothing to provide—and may even hinder—new jobs or rising incomes, as the latter’s ideologues claimed for so long, or was increasingly used for obviously politicized activities or dissipated in a kind of conspicuous corruption that would have engaged the great Veblen himself. Foreigners have come to see this as a kind of galvanic response on the part of Americans: perhaps until now. Are we ready to hold to our rejection of the elite reality principle, and attempt, under extraordinarily difficult conditions, to create, or at least articulate, a true alternative to the health-indicator-destroying, pollution-spewing, warmongering, mind-numbing regimen most of us seem to have finally acknowledged having serious reservations about now? I wonder; and that’s why I’m signing this post. Perhaps unlike some of my comrades at Dollars & Sense, I fear that the effects of turmoil in global markets will cause the majority of even those who stood up to the bailout package and forced legislators to bend to our will at last to falter; and that eventually, either lack of political will or desperation will allow for a temporary (and it’s not sustainable, but whether or not we can take advantage of the creation of the political void to insert something better I very much doubt) resuscitation of the elite consensus, and the passage of a new, perhaps even worse package. If so, it will be a huge irony: the quest for the unrealistic maintenance of a lifestyle characterized by our addiction to cheap imports, and fueled by the debt that was profitably foisted on us by the financial industry, will trump a political will for meaningful change (please don’t confuse this with Obama’s pitiful slogan) that hasn’t found similar expression, even, in my opinion, after September 11th, for over a generation. Looking at the faces of people around me, unconcerned and bored, worries me. But then again, the bailout package failed. Aux armes, comrades! —Larry Peterson Labels: bailout, Henry Paulson, john mccain, Larry Peterson, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Boston-Area Protests against the BailoutJustice and peace organizations across the US are organizing a concerted public outcry against the Bush administration demand for a $700 billion blank check for Wall Street. As the administration did when pushing through the Patriot Act and launching the attack on Iraq, it is using scare tactics and threats to avoid public debate and Congressional oversight. But people around the country are pushing back. Today is major push - a national call-in and emergency action day to oppose the Bush bailout plan.EMERGENCY ACTIONS --PARK STREET STATION/BOSTON, today, 5:00 PM - 6:30 PM: PROTEST THE TAX MONEY GIVEAWAY TO WALL STREET Stand with your neighbors and say NO Bush Bailout! No repeat of the Patriot's Act disaster! No welfare for the rich! No taxpayer bailout for Wall Street! No support for the Bush administration's "urgent" demand for a blank check, lack of accountability and fear mongering! BRING SIGNS! --METROWEST, at Shopper's World (in front of TGIF), Rte. 9, Framingham NO BUSH BAIL OUT rally, 5:00-7:30PM. --NEWTON CENTER, Corner of Center Street and Beacon Street PROTEST THE TERMS OF BAILOUT. 5:00 -6:30PM To find or post other actions: http://tinyurl.com/3sh2cb CALLS TO OUR REPRESENATIVES AND SENATORS: ACTION ALERT: NO BLANK CHECK FOR WAR! NO BLANK CHECK FOR WALL STREET! Doesn't it seem all too familiar? Last time, it was a terrorist attack that was used to push through the Patriot Act and to launch an illegal and immoral war that has resulted in the deaths of hundreds of thousands of innocent civilians. Now the Bush Administration announces that we are on the verge of a financial meltdown and the only solution is to fork over $700 billion-with no oversight, no accountability, no transparency, no nothing-to the very people and institutions who got us into this mess. And who is going to foot the bill for this experiment? The American taxpayer. We need accountability and transparency NOW. [Statements from participating organizations:] The future of our country-our environment, our health care, our education, our roads and bridges-depends on our action NOW. (Code Pink) Call Congress today (toll-free 800-830-5738 or 202-224-3121). Tell them 'No to billions for war and billions for Wall Street!': Urge them to oppose the Bush bailout. They need to Stand up for Main Street. And Bring the troops home! (UfPJ) Demand that any bailout plan include: Mortgage assistance for those most affected by the crisis, Controls on excessive CEO pay, and Protection for ordinary taxpayers from bearing the costs of the bailout, by returning a portion of any profits made by bailed-out banks to the American people, and increasing taxes on wealthy investors. (United for a Fair Economy) Labels: bailout, Code Pink, financial crisis, United for a Fair Economy, United for Justice and Peace Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Bailout We Don't Need--Jamie GalbraithBy James K. Galbraith, in today's Washington Post:Now that all five big investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or morphed into regular banks, a question arises. Is this bailout still necessary? The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans." With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that. Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor. Read the rest of the article. Labels: bailout, financial crisis, James K. Galbraith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). McCain hasn't "had a chance" to read bailoutHat-tip to Doug Henwood of the Left Business Observer for this gem:SENATOR MCCAIN SAID TUESDAY THAT HE HADN'T READ THE BAILOUT PROPOSAL, according to Cleveland NBC station WKYC: 'In an exclusive interview he told Tom Beres, 'I have not had a chance to see it in writing. I have to examine it.' But note: The bailout proposal is only three pages long! Naomi Klein pointed out on Democracy Now! yesterday that the brevity of the bailout proposal might have been a blunder: NAOMI KLEIN: ... You know, and a lot of people have even described this Paulson plan as an economic PATRIOT Act. You know, one of the mistakes that I think they made, honestly, Amy, is how short it is. It’s just three pages, which means—you know, usually these pieces of legislation are much longer, so people don’t even bother reading them in that moment of extortion—you know, “Pass it now, or else…or else the sky falls in.” So, you know, in this case, I think they made a miscalculation. You know, there was an interesting article in Time that just came out, where they actually say that they have been working—you know, this is a quote—it says, “[Paulson] and his team [have] been working on [this] proposal for more than six months.” So, it’s quite surprising that it is as pared down as it is. It’s three pages. And the craziest thing has happened: people have read it. Regular people have read it. It doesn’t take that much time. And, you know, you read Section 8, which is just so stunning, just so bold in its demand for total and complete impunity. And that’s really what’s getting in their way, is people are reading this text, and they’re frankly shocked by it. Hear, or read the transcript of, the full interview. Labels: bailout, Democracy Now, Doug Henwood, john mccain, Naomi Klein Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More Resources on the Bailout--from IPSThis is from Chuck Collins, of the Institute for Policy Studies, and a D&S Associate:Handing Wall Street speculators an unconditional check for a $1 trillion should not happen. Any assistance should be tied to placing conditions on runaway CEO pay and on a bailout for Main Street communities. The messed up CEO pay incentive system is one major factor that contributed to the casino economy in the first place. The Institute for Policy Studies and leaders in the Working Group on Extreme Inequality have been pressing for caps on CEO pay for companies receiving assistance. However, we have strong concerns that Congress may give Treasury Secretary Paulson, a former Wall Street executive, too much power to judge whether executive pay packages at the bailed-out firms are "excessive. See our Talking Points on this subject. ACTION: STOP THE $700 BILLION BLANK CHECK Send an Email and Letter to Members of Congress. Emphasize these points: 1. No deal without clean caps on excessive CEO pay. We cannot leave it up to the Treasury Secretary to decide what is "excessive." Congress needs backbone to stand-up for what is right. 2. "Pay as You Go Bailout" -The speculators who caused the problem should pay the costs, not our children and grandchildren. Write to your members through Campaign for America's Future email and letter campaign. For more information, read: The Bailout and CEO Pay: What's 'Excessive'? by Sarah Anderson and Sam Pizzigati Tax the Speculators: A Fair Plan to Pay for Bailout Chuck Collins suggests that speculators should pay for the bailout, not the next generation. From The Nation. REPORT: "Executive Excess 2008: How Average Taxpayers Subsidize Executive Pay" This IPS report describes the five ways that taxpayers subsidize excessive CEO pay to the tune of $20 billion a year. Progressive Conditions for the Bailout By Dean Baker. What Wall Street Should Do To Get Its Blank Check Robert Reich proposes five key components. For commentary, analysis and data about extreme inequality, visit www.extremeinequality.org. To learn more about the Program on Inequality and the Common Good, visit the Institute for Policy Studies. Labels: bailout, Chuck Collins, financial crisis, Institute for Policy Studies Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Magnitude and Meaning of the Proposed BailoutA press release from the excellent National Priorities Project.What $700 Billion for Wall Street means on Main Street Northampton, MA - September 23, 2008 – The plan proposed by President Bush and Secretary Paulson for a $700 billion bailout of Wall Street is difficult for most people to comprehend. National Priorities Project, a non-partisan organization that offers research and analysis of federal spending priorities, is offering an analysis of what $700 billion means to taxpayers. “It is extremely difficult for most of us to get our minds around what this extraordinary amount of money means,” says Jo Comerford, Executive Director of National Priorities Project. “We hear every day about spending cuts to infrastructure and social services. Now the current Administration is proposing to spend more than what is currently allocated for the U.S. War in Iraq on this Wall Street bailout. It is critically important that we urge our elected representatives to take a close and careful look at the trade offs involved in their decisions.” A healthy and productive economy requires substantial investment in affordable housing, health care, education and renewable energy. Taxpayers in the United States who will be required to pay $700 billion for the Wall Street bailout should also know that for the same amount of money, they could secure the following: * 51.6 million people with health care for four years OR * 181.2 million homes with renewable electricity for four years OR * 2.9 million elementary school teachers for four years OR * 27 million four-year scholarships for university students $700 billion is more than what is currently allocated for the U.S. war in Iraq. This amount would allow us to repair all of our nations 77,000 deteriorated bridges and still have $519 billion to spend; or it would allow us to rebuild all of our nations 33,000 deteriorating schools and still have $664 billion to spend. For more analysis and trade-offs at the State and Congressional District level, please visit National Priorities Project's Trade-offs page online. Labels: bailout, financial crisis, Henry Paulson, National Priorities Project, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Jobs with Justice Letter CampaignThis is from Jobs with Justice; hat-tip, again, to John Miller.What's At Stake? Tell Congress: No Wall Street Bail-out! We need you to STEP UP! Tell Congress: Stop the Bail-out; Pass a recovery plan, instead. Now that they’ve made so much money, they say that the huge Wall Street firms, paying grotesque salaries, are "too big to fail," so a quick-fix blank check is making its way through Congress. Apparently, conservatives think our health care crisis isn't big enough to fix (and it would certainly take less than $700 billion). Apparently, the loss of millions of good jobs due to so-called 'free trade' is not a big enough crisis to fix. The disaster from Hurricane Katrina was not big enough to fix, and New Orleans could be left to fail. The looming pension crisis and the affordable housing crisis -- none of these, apparently, deserves a bail-out. For conservatives and financial elites, when working class people face a crisis, plants close or health care costs triple, the system is working. They take all the private profits, but when the bubble bursts, and they can no longer sustain their profiteering rampage... well, they're too big to fail. And who pays the bill? The CEOs are telling Congress to send the bill to working people – the very people who have been forced out of their housing, out of their jobs, out of their healthcare and out of their pensions by Wall Street’s greed. Call and write. Time is short. The site helps generate letters to members of congress: Dear [decision-maker]: Labels: bailout, financial crisis, Jobs with Justice, Step Up Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Resources for Action on the BailoutHat-tip to D&S collective member and columnist John Miller for these links.First, long-time D&S author and supporter Jim Campen is now the executive director of Americans for Fairness in Lending. This Boston-based activist group working to reform the lending industry is conducting a campaign to have the Senate include the The Credit Holder's Bill of Rights recently passed by the House approved by the Senate as any part of a bailout bill. You can send a letter to Senator Dodd, Chair of the House Banking Committee in support of this important legislation and read about AFFL's good work at their website. Second, two perennial progressive Congress people, Dennis Kucinich and Bernie Sanders, have proposed thoughtful alternatives to the Paulson-Bush bailout of the financial industry. You can co-sign Bernie Sander's letter to Treasury Secretary Henry Paulson here. You can read more about the Kucinich proposal on his website. Also check out Congressperson Raul Grijalva's Saving Family Homes Act of 2008 (HR 6116), which would would grant homeowners whose mortgages have been foreclosed the right to petition a judge to allow them to remain in the home as renters, and pay a fair market rent. Read more about this progressive proposal here. Finally, even University of Chicago finance professors are taking on Paulson's bailout plan in the name of saving capitalism from the capitalists. See Luigi Zingales's provocative article, "Why Paulson is Wrong" here. Labels: Americans for Fairness in Lending, bailout, Bernie Sanders, Dennis Kucinich, financial crisis, Henry Paulson, Jim Campen, Raul Grijalva Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Just Another Wacky Day In FinanceThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Stock markets worldwide fell again Tuesday as attempts by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke encountered considerable resistance in Congress. The gains from the announcement of the bailout plan late last week have now been more than reversed, and conditions in money markets, and mutual fund redemptions haven't improved much, if at all. So the Fed continues to pump liquidity into a system that shows no sign, as yet, of recovery. Congressional objections center on two things: the unprecedented--indeed, almost unthinkable--amount of power the Treasury's plan places in the hands of the unelected Treasury Secretary, and the amount of assistance ordinary borrowers can expect in return for the bailout. Many Republicans, needless to say, fret about an more money being spent on irresponsible mortgage-buyers, after so much has already been forked out in the heroic endeavor to bail out Bear Sterns, Fannie Mae and Freddie Mac, and now the entire shadow banking system (not to mention paying for a useless war, tax cuts for the incredibly wealthy, etc.); while Democrats worry that the plan doesn't do enough about foreclosures that could exacerbate the problem, despite all the money that's being thrown at it to keep the bankers in business. These political problems are daunting enough; but the real problem lies in the fact that there's a contradiction in the very heart of the plan as it stands now. If banks and other finance firms (and lobbyists are hard at work as I write trying to make that designation as wide as possible) sell their dud securities to the government for less than they may be worth, they may require more "assistance" to become profitable again and, more to the point, get the money markets working by resuming lending. But if they sell the loans for too much, the taxpayer will have to take the loss. And there isn't much time to settle on prices: any delay in selling these assets will mean that prices for them will almost certainly go down, which means possible ratings downgrades for the banks, which means potential attacks--though not by short-sellers, at least until they and their hot-shot lawyers can think of a way around the recent ban--on share prices, which means...yet another bailout or bankruptcy. That may be the worst-case scenario: but it's little better than the fire sales that will result if banks have to sell because the premature attempt to set a price fails. And, needless to say, the extent of losses still isn't even known yet: $700 billion never was anything but a guess (and a politically-inspired one at that). Meanwhile, hedge funds are finding themselves under fire. Many of these funds employed short-selling on a large scale, and are facing a bleak future deprived of this strategy on one hand, and, if that weren't enough, are facing serious delays being paid the money they are owed from former counterparties like Lehman Brothers. Nouriel Roubini, in a guest opinion piece in the Financial Times, thinks this is what we're in store for: The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years. Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of “convenant-lite” clauses, which do not include traditional default triggers, and “payment-in-kind toggles”, which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk. Seeing that it was the collapse of a hedge fund, Long Term Capital Management, that caused a panic in 1998, and required an historic (by the standards of the time) bailout by Wall Street firms in 1998, it's indeed possible that the bailout of the entire shadow banking system may not be enough. And remember, the situation with commercial and regional banks is also very sensitive, and will become more so as economic conditions (especially credit card payments) deteriorate. On top of this, Detroit automakers and other industrial firms are looking for bailouts and subsidies to get them through hard times. These and other worries (not to mention some pretty unusual technical considerations, as well as the impact of recent hurricanes on refineries in the Gulf of Mexico) caused oil to stage it's largest one-rise since June (and that means ever), jumping $25 a barrel to $130.00, before settling down at $120.92 (it declined again today), revealing considerable doubts amongst international investors on the Treasury plan. Congress isn't the only body that has to be sold on this. To (mercifully) sum up the two surviving investment banks, Morgan Stanley and Goldman Sachs, were permitted to change their structure to holding companies, bringing the era of independent investment banks to a close, only a fortnight after five of them stood tall on Wall Street. As holding companies, they will have to rely more on taking deposits, and submit to regulations (especially regarding reserve requirements) that investment banks didn't bother with. But this (Tuesday) morning brought yet one more little jest from fate: Morgan Stanley and Lehman both had turned to Japanese banks to buy stakes in them. Japan, the laughing stock of the banking world, and recipient of God-knows how many lectures on the superiority of the American banking model from officials, bankers (probably Paulson, no less) and pundits during the lost decades of the ‘90s and ‘00s, is now looking to expand its overseas operations by moving in where the old titans roamed. One hopes they have a better business model. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bright Greetings Dear American- -Paulson's Scam- - - - - - - - - - - - - - - - -From: Henry Paulson Date: 9/23/2008 Subject: Supper secret transaction Need you're help Bright Greetings Dear American: I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude. I am Ministry of Treasury of the Republic of America. My country has had a crisis that has caused the need for a large transfer of funds of 700 billion dollars US. If you would assist me in this transfer, it would be most profitable to you. I am working with renowned Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe. This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for reliable and trustworthy person who will act as a next of kin so the funds can be transferred. Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we transfer your commission for this transaction. After I receive you're information, I will respond with detailed information about safeguards that will be used to protect the funds. Wonderful salutations to you cherish friend from Republic of America. Yours Faithfully Minister of Treasury Paulson - - - - - - - - - - - - - - - - - - Labels: bailout, banking regulation, financial crisis, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Jim Crotty on Market MeltdownHat-tip to Emily Kawano of the Center for Popular Economics for this item:"Market Meltdown": Listen to an interview with Professor Jim Crotty, Center for Popular Economics and Econ. Dept., UMass. Amherst. Great interview with Jim on the financial meltdown, what caused it, a historical perspective, and what should be done. Short and extended versions available. Blog: Corporate Watchdog Radio Post: Market Meltdown Labels: Center for Popular Economics, financial crisis, Jim Crotty Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Is the Bailout Justified?This is a Q&A session with Mason Gaffney, professor of economics at the University of California at Riverside. (Visit his website.) Gaffney points out that banks are in their very nature highly leveraged. Bernanke and Paulson must intervene, not to save the bad guys, but to keep the whole banking system from shutting down as it did in 1932. Of course the devil is in the details. And their intervention won't work in the long run without tax and regulatory reform.QUESTION: We hear that the feds had to bail out Fannie and Freddie because of the terrible consequences of letting them fail. How much of that is real and how much is bunk? I'd have thought that if the companies go bankrupt, their stock sells for pennies on the dollar and the new owners can re-negotiate loans down to lower interest rates for people who can afford to pay something, while foreclosing and selling (cheap) those homes that had been bought on false pretenses and weren't going to be paid off at any positive interest rate. Where's the catastrophe? Am I missing something important? ANSWER: Yes, you are missing something important. Banking is a confidence game because banks borrow short to lend long, making their income on the spread of interest rates. That means they are at all times technically insolvent, so when confidence hangs by a thread the whole system can crash, even though for years it has operated smoothly. They insure all this with a cushion of capital and surplus that is a small fraction of their liabilities, well under 10%. So if a small fraction of their borrowers default it wipes out their capital and surplus, and they stop lending. When they move too much of their funds into long-term investments like buildings, plus land purchases which are even slower to pay out, their loan turnover slows down so every year they have fewer funds to finance current production. This is the case today, and it chokes off lots of productive businesses. Superficially the lower (commercial) banks avoid this slowdown by selling their assets to higher (investment) banks, but that just blows dust over what is really happening. The higher banks end up holding the bag, as now, and they collapse, as now. Since FDR, strict banking regulations held the system in check. The Glass-Steagall Act of 1933 separated commercial banks from investment banks precisely to protect consumers and commercial borrowers from the risky behavior of higher banks. Since Newt Gingrich and Rush Limbaugh and Tom DeLay took over, these regs have been repealed, including Glass-Steagall in 1999. The ensuing crash, set up by doctrinaire neocons blinded by Chicago-school economic theology and Bush imperialism, is likely to match 1929. In previous busts the U.S. Treasury could hold the final bag. Now, however, the U.S. Treasury itself is vulnerable, depending on loans from foreign nations. So we inflate the currency and devalue the dollar in a vain effort to prevent further collapse of real estate values and further seizing up of the commercial banking system. Bernanke and Paulson, no fools, are making lemonade as best one could hope. I would nonetheless fault them for cooperating with an administration that refuses to raise taxes or cut military spending and related puppet-propping subventions. We need to do what Clinton did: "reverse crowding out"--paying off government bonds to put money back into the hands of consumers and, especially, investors. Of course this leads right into income tax reform, which is more Paulson's business than Bernanke's. We need steeply progressive income and corporate taxes and an end to special treatment of real estate, oil and other natural resources. Bernanke's business should be to promote selective credit controls, especially to restrict bank lending on real estate collateral. Labels: bailout, banking regulation, Ben Bernanke, credit crisis, Fannie Mae, Freddie Mac, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The shadow banking system is unravellingA grim assessment from Nouriel Roubini of the Financial Times:Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders. Read the rest of the article. Labels: financial crisis, Financial Times, Nouriel Roubini, shadow banking system Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Laughing All the Way to the Bank?Here’s one of the zillion rumors flying around the news of the administration’s new $700 billion Wall Street bailout plan: once the U.S. government becomes the owner of all of these securities made up of untenable mortgages, it may privatize the collections process by turning around and selling the bad debt to so-called vulture funds. In the Spring 2007 issue of D&S, investigative journalist Greg Palast described these funds operating in an international context:“Vulture” is not a name I made up. It’s the label used in government circles for investors who, for a small payment, take over the debts owed by one nation to another, then use political muscle, lawsuits, forgery, or bribery to push the debtor nations to cough up payments five, ten, or twenty times the amount of the vultures’ original investment.(Of course, in the current situation it will be low-income U.S. homeowners facing “political muscle, lawsuits, forgery, or bribery.”) Trying to track down this rumor, this morning I googled “bailout” and “vulture”—and came across this gem of a headline from Bloomberg: PAULSON & CREW GIVE THE TERM ‘LAUGHING ALL THE WAY TO THE BANK’ A WHOLE NEW MEANING Of course I assumed this was someone’s take on the current bailout plan. But no—the dateline was July. Turns out there is another Paulson, this one a hedge-fund manager named John (any relation?), who made a lot of money in 2007 betting that mortgage holders would face losses, and then started a new fund “to provide capital to financial firms hurt by mortgage writedowns.” Now that the U.S. government is poised to take over that role, maybe this Paulson can teach the other one how the taxpayers can make rather than lose money on the deal. Anyway, check out the full release. Now, back to researching that rumor about vulture funds. Labels: bailout, Greg Palast, Henry Paulson, John Paulson, vulture funds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). John Miller Disscusses the Financial Crisis on the RadioJohn Miller, D&S collective member and columnist, and professor of economics at Wheaton College, was interviewed yesterday on WMBR-FM (Cambridge), on the program Radio with a View, hosted by Marc Stern and Dave Goodman. They discussed the financial crisis and Paulson's bailout plan. Click here (and then click on the link for the Sunday, Sept. 21st show) to hear the interview.Labels: financial crisis, Henry Paulson, John Miller, Radio with a View, WMBR Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Paulson Bailout Plan a Historic SwindleFrom William Greider, in The Nation:Financial-market wise guys, who had been seized with fear, are suddenly drunk with hope. They are rallying explosively because they think they have successfully stampeded Washington into accepting the Wall Street Journal solution to the crisis: dump it all on the taxpayers. That is the meaning of the massive bailout Treasury Secretary Henry Paulson has shopped around Congress. It would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses--many hundreds of billions, maybe much more. What's not to like if you are a financial titan threatened with extinction? Read the rest of the article... Labels: bailout, Henry Paulson, Wall Street, William Greider Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Sanders Comments on Economic CrisisA statement from U.S. Senator Bernie Sanders (Independent, Vt.) on the economic crisis:Mr. SANDERS. Mr. President, let me begin by concurring with Senator Brown. He raised a very important issue, and that is: In the midst of a major economic crisis, when people today--especially senior citizens on fixed incomes--are wondering about how they are going to heat their homes, how they are going to purchase the food they need--I wonder about 3 years ago, had we listened to President Bush, if we had listened to John McCain, if we had listened to the Republican leadership and we had privatized Social Security--can one begin to imagine the anxiety that would be existing all over this country in terms of senior citizens wondering what kind of retirement they would have, what kind of funding would be there for their remaining years? So thank goodness we did not follow the advice of President Bush and John McCain and the Republican leadership; thank goodness we kept Social Security strong. Yesterday I came to the floor to discuss the interconnection of the two great crises that are currently facing our country. The first, of course, is the financial crisis--the collapse of major Wall Street firms--and secondly is the very serious problem of high and volatile energy prices, whether it is $3.70 for a gallon of gas to put in your car, or whether it is very high oil prices this coming winter to heat your home. Both of these problems clearly are having a major impact on middle-income families from one end of this country to the other. Read the rest of the statement... Labels: bailout, Bernie Sanders, credit crisis, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Ownership Society We Can (Are Forced To) Believe InThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, the "plan," such as it is, is finally on the table. A three-page document outlines the Treasury Department proposal, hints of which set markets worldwide skyrocketing late Thursday and into Friday, to buy as much of the questionable (to put it politely) assets held by private banks, investment companies and insurers as is necessary (up to $700 billion, anyway; after that, Treasury will have to go to Congress for a top-up) to get banks--spooked by the pile-up of potentially toxic assets into hoarding cash with an abandon not seen since the days of the London Blitz--to each other again. Indeed, talk now is that foreign banks will be invited to sell their dud loans to the American taxpayer as well. Next week the plan will go to Congress, where legislators must amend and approve it by the end of the week, as well as expanding the budget deficit ceiling to account for all the new government borrowing. Otherwise they (many of whom face re-election) will go home to their constituencies with nothing to show for their efforts. Lobbyists are swarming all over the Washington trying to influence the outcome (with campaign cash that will no doubt be even more enticing to lawmakers in the waning days of their campaigns than it ordinarily is). The basic plan is three-fold (only the first of which is directly addressed in the proposal): first, as mentioned above, it gives Treasury (in the person of the Secretary) unprecedented powers to purchase mortgage-related assets, and also the funding to do so, up to $700 billion. The second part involves short-selling: this practice (in which shares in companies that are expected to underperform are borrowed, sold into the market before they fall in value, and then bought back on the market after any price fall, with proceeds kept by the short-seller before s/he returns the shares borrowed), which has been used by many big investors, like hedge-funds, to capitalize on the difficulties of the financial firms that we've seen threatened--or even disappear--over the last few months, has been effectively banned. Finally, money market funds (previously considered safe as cash, though without a guarantee, and which were coming under pressure last week, seeing large redemptions) will be guaranteed along the lines of bank accounts, with deposit guarantees. As the Financial Times notes, these measures will complement historic supports already put in place to expand the activities of the mortgage-lenders Fannie Mae and Freddie Mac, as well as to keep the insurer AIG solvent. So what we have here is the following: the US taxpayer will buy dodgy loans that private firms wouldn't be caught dead buying, from firms which have been hoarding cash in the fear that they'll (as they should be, in many cases) be on the hook for the losses. This, it is hoped, should have the effect of freeing up that cash, which the firms should make available to potential borrowers, rather than hoarding. This should cause demand for good assets to rise, increasing their prices to such an extent that even loans associated with the duds may come to be seen as bargains, especially if, with the passage of time, many are found to be, in fact, untainted. This will allow the mortgage market to recover, along with it a newly invigorated--and, presumably, highly re-regulated--financial sector and this will ensure recovery for the US economy, even in the face of the job losses, prolonged weakness in demand, and far higher debt the program will invariably cause. What are we to make of this plan? The biggest flaw to my mind concerns the attempt to re-start the mortgage market. This market is still, in many ways, overvalued, and any attempt to create a floor for it seems fundamentally misguided. This is all the more so when one considers that potential consumers will be offered neither the indiscriminate loan availability nor super-low, indeed nonexistent initial interest rates (partially as a consequence of all the government borrowing that's going into the bailout) that enabled much of the home price appreciation that so madly overshot the bounds of sustainability between 2004 and 2006, and still remains in that territory; and the fact that wages are expected to be stagnant (at best, given the persistently rising levels of unemployment), in the face of rising or continued-elevated general consumer price levels, and the delivery of less benefits and social services as public coffers are depleted by bailouts and the implementation of automatic stabilizers to deal with economic downturn, makes the suggestion even more unrealistic. In addition to this (as if anything else were needed), the administration has been far less active in coming up with measures that will help present mortgage-holders hold on to their homes in the face of a major economic downturn. So relief on this front cannot be expected for several months, during which time many more homes may be thrown back on the market, depressing prices. And these developments will increase the already heightened fears that US commercial and regional banks will fail, due to nonpayment of credit card and other debt, assuming all the mortgage debt is absorbed by the government. And we still don't know the extent of the mortgage-related losses; not by a long shot. If they keep piling up, especially assuming the measures to create a floor for mortgage debt don't work, the cost to the taxpayer, already struggling with higher unemployment, and even to corporations, which are seeing their unrealistic profit levels of the bubble years come back to earth, will become even more of a burden, which, in true American fashion, may be foisted on foreign lenders. But many of these countries are following the beleaguered US consumer by retrenching as global growth slows, so their willingness to absorb this debt can no longer be taken for granted. And any pullback in this regard could re-ignite the inflation we've all so effectively forgotten about. The second objection I have concerns the short-selling ban. I'm not exactly sympathetic with short sellers on a class basis, needless to say, and resent mightily the privileges regarding leverage, taxes and so on which they've amassed through the years. But, as Anatoly Kaletsky has written, the attack on short sellers has been in this case totally misdirected, and has ended up hurting potential longer term investors as well as leading to the crisis has resulted in the burden being foisted on all the rest of us. In addition, the fact that many of those who have complained so vocally about short-sellers in the last few weeks have made quite a bit of money in fees serving as prime brokers to them gives us yet another example of how surreal this crisis (and our economy) has become. One last word before summing up: in one of his characteristically incisive and timely posts, Yves Smith cites the following, highly disturbing contribution from one of her readers: I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in. In summary, then, it's been an extraordinary week: in the history of finance, it'll have to go down as a kind of "fall of the Berlin Wall" affair. A financial regimen that enjoyed unparalleled sway over much of the earth for a generation has been destroyed by its own contradictions and the abuses it built into itself. Unlike the fall of the Wall, however, there is no liberation to celebrate, and we certainly cannot be confident in the political situation to the extent that we can assume that, even in the long run, something better will come out of the situation. Labels: bailout, Henry Paulson, Larry Peterson, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
