Why the Wall Street bail out plan is bad-1


I wrote last Friday of the reasons behind the current financial mess. Over the weekend, as everyone is aware by now, the US government issued a plan to put up a huge amount of money (initially about $700 billion but likely to grow to well over a trillion) to bail Wall Street out of the financial difficulties caused by its own greed and recklessness.

The public and the Congress are being stampeded with ‘the sky is falling’ rhetoric into giving the Treasury Secretary Henry Paulson a blank check, with no oversight and almost no reforms, to dole out money to his cronies in the financial sector so that they can continue the reckless practices that have led to the present situation. We should not forget that Paulson spent almost his entire career (over three decades) at Goldman Sachs, one of the investment banks at the center of the current mess.

Paulson says he wants a ‘quick and clean’ plan approved by the Congress. To translate, ‘quick’ means he wants Congress to approve the plan immediately without looking too closely at it, and ‘clean’ means he does not want them to demand accountability and reforms in return for shelling out taxpayer money to the very firms and executives who caused this crisis.

The bankers themselves want taxpayer money with no restrictions at all and even want to prevent the courts from having any jurisdiction in the matter, which strikes me as an open invitation to swindle.

Paulson, Ben Bernanke (head of the Federal Reserve Board), and George W. Bush are acting as if there are only two alternatives: giving Paulson this blank check or a collapse of the global financial markets. This is false. Even within this short time, economists have been able to come up with possible alternatives, as has senator Christopher Dodd. I am not endorsing these alternative proposals by any means. I don’t think they go far enough in providing regulatory oversight. But the point is that alternatives exist, more proposals can be created, and all should be discussed when such a large amount of money is involved.

The Paulson plan is a bad plan and should be opposed. Paulson, Bernanke, and Bush are saying that the necessary reforms and oversight can be added later after the crisis has passed, but only a sucker would accept that deal. Once the administration and the Wall Street firms get their hands on the money, you can be sure that they will fight any reforms tooth and nail. It is only now, when they are over a barrel and desperately seeking relief, that Congress has any leverage at all to get the needed reforms enacted.

We need to be wary of false compromises. After all, the leadership of both parties and the Bush administration are almost all bought and sold by Wall Street interests and they have every intention of capitulating to the demands of those interests. They will look for a way to do so while seeming to represent the interests of ordinary people. So we will hear loud grandstanding talk of needing to cap executive salaries (which those executives can easily circumvent) and some crumbs thrown to those whose homes have been foreclosed, while ignoring the fact that the real need is re-regulation of the financial markets, to put back in place those features that prevent executives at these banks and other financial institutions from acting like high rolling gamblers using other people’s money. All this talk of a possible financial apocalypse is meant to steamroll those few people who oppose what is likely to be a blatant rip-off of taxpayers.

Major legislation that is rushed under panic conditions (whether real or simulated) almost always leads to bad results because the authors of the legislation use the rush to stealthily advance their covert agendas. For an example, we need go no further than the abominable USA PATRIOT Act that was rushed through in the wake of the events of September 11, 2001 under conditions of fake panic and which has resulted in the massive violations of citizen rights and protections that were once taken for granted. Or the Iraq war authorization act that was stampeded through Congress because of fake panic created that Iraq was building a nuclear bomb. We know how well those turned out. The plan for the federal bailout of Wall Street has all the signs of being a repetition of those two events.

To get a scale of the amounts currently involved, see this exchange between the hosts of the PRI program Marketplace. The ‘credit default swap’ market referred to is a rough measure of the amount of money that was swirling around in the subprime mortgage dealings.

BOB MOON: OK, I’m about to unload some numbers on you here, so I’ll speak slowly so you can follow this.

The value of the entire U.S. Treasuries market: $4.5 trillion.

The value of the entire mortgage market: $7 trillion.

The size of the U.S. stock market: $22 trillion.

OK, you ready?

The size of the credit default swap market last year: $45 trillion.

KAI RYSSDAL: That’s a lot of money, Bob.

Yes, sirree, Bob, that is a lot of money. And all of it in a shadow economy, without any supervision by the government.

If there was any doubt as to who runs the country and for whose benefit, this episode should remove them, because both the Democratic and Republican parties colluded to create the conditions which gave rise to the current crisis and now both are colluding to save their rich supporters from the consequences of their actions.

What we clearly have now is government of the rich, by the rich, and for the rich.

POST SCRIPT: Religious nuts

Recently John McCain and Barack Obama were interviewed separately by Rick Warren, pastor of the Saddleback evangelical megachurch. Jackie Broyles and Dunlap from Red State Update engaged outside the forum with protestors from the Westboro Baptist Church, a group that is so viciously and irrationally antigay that I sometimes wonder if they are actually a bunch of performance artists, cleverly playing a prank on all of us.

I have written before that humor and ridicule is the best way to deal with such people, and Jackie and Dunlap seem to share that view.

Comments

  1. bob says

    Just to make sure people are aware – some attempts were made priot to this year to cut the problem off.

    In 2003 the White House wanted to add oversight to Freddie and Fannie. The New York Times reported that Barney Frank said that there is no crisis with Freddie and Fannie.

    In 2005 the White House tried again. The UPI reported that Harry Reid was unwilling to endorse the plan because it would make it more difficult for home ownership to expand.

    In 2006 Schumer argued for less regulation in the financial markets.

    It is clear that some attempts were made prior to this year. It seems that Republicans were happy with letting the free market roll and Democrats didnt want to do anything that might make home ownership more difficult and as a result make them less electable.

    For me, I think the problem lies in an economy that needs credit to expand as well as having a signifcant portion of growth based on creating money out of thin air. Gold standard any one?

  2. Jared says

    Gold standard won’t fix the problem. There are major problems with making all wealth relative to how well we extract a metal from the crust. Particularly one that has so many uses.

    Might as well have a “Rhodium standard” or a “Water standard”.

    If you want a good synopsis of “Gold Standard” worship in relation to the great depression, I suggest reading “Freedom From Fear” By David M. Kennedy. It’s a general history text on the American presidency from 1928-1945, and the gold standard is one topic that is covered in the first few hundred pages.

  3. Amanda Bealmear says

    I’m against the $85,000,000,000.00 bailout of AIG.

    Instead, I’m in favor of giving $85,000,000,000 to America in
    a Stimulus Dividend.

    To make the math simple, let’s assume there are 200,000,000
    bonafide U.S. Citizens 18+.

    Our population is about 301,000,000 +/- counting every man, woman
    and child. So 200,000,000 might be a fair stab at adults 18 and up..

    So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

    My plan is to give $425,000 to every person 18+ as a
    Stimulus Dividend.

    Of course, it would NOT be tax free.
    So let’s assume a tax rate of 3 0%.

    Every individual 18+ has to pay $127,500.00 in taxes.
    That sends $25,500,000,000 right back to Uncle Sam.

    But it means that every adult 18+ has $297,500.00 in their pocket.
    A husband and wife has $595,000.00.

    What would you do with $297,500.00 to $595,000.00 in your family?
    Pay off your mortgage – housing crisis solved. Make mortgage payoff mandatory.
    Repay college loans – what a great boost to new grads
    Put away money for college – it’ll be there
    Save in a bank – create money to loan to entrepreneurs.
    Buy a new car – create jobs
    Invest in the market – capital drives growth
    Pay for your parent’s medical insurance – health care improves

    Remember this is for every adult U S Citizen 18+ including the folks
    who lost their jobs at Lehman Brothers and every other company
    that is cutting back. And of course, for those serving in our Armed Forces.

    If we’re going to re-distribute wealth let’s really do it…instead of trickling out
    a puny $1000.00 ( “vote buy” ) economic incentive that is being proposed by one of our candidates for President.

    If we’re going to do an $85 billion bailout, let’s bail out every adult U S Citizen 18+!

    As for AIG – liquidate it.
    Sell off its parts.
    Let American General go back to being American General.
    Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.

    Here’s my rationale. We deserve it and AIG doesn’t.

    Sure it’s a crazy idea that can “never work.”

    But can you imagine the Coast-To-Coast Block Party!

    How do you spell Economic Boom?

    And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned
    instantly in taxes to Uncle Sam.

    Ahhh…I feel so much better getting that off my chest.

    Kindest personal regards,

    Birk

    T. J. Birkenmeier, A Creative Guy & Citizen of the Republic

    PS: Feel free to pass this along to your pals as it’s either good for a laugh
    or a tear or a very sobering thought on how to best use $85 Billion!!

  4. Jody says

    It’s a mess. Now that the plan has passed, I’m hoping for the best. Whatever that is. In the meantime, I found this hilarious song about the bailout. Anything to lighten up a grim topic: Bailout song

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