Why the Wall Street bail out plan is bad-3: More doubts

I have described before how the subprime mortgage debacle lies at the root of this mess. But how did it come about that mortgage lending, once the most conservative and transparent and regulated of banking practices, became the basis of a massive shadow economy in which trillions of dollars flowed around, free from any oversight? And what is the government bailout meant to do?

The foundations of the mess lies with the neoliberal deregulation policies that began under the Carter administration and was enthusiastically followed by every subsequent administration of both parties. The driving idea behind all this loosening was that the banking and investment sector was being shackled by too many regulations and too much oversight. The protective firewalls that had been put up between banks and investment houses following the excesses that led to the Great Depression were targeted. It was argued that if the banks were freed from these onerous restrictions, capitalism would bloom.

Since Wall Street executives have always formed the core advisory group around any government (and currently are deeply enmeshed in the Obama and McCain campaigns) and also have strong ties with the congressional leadership of both parties, it was not hard to persuade the government to loosen the restrictions that had been put into place following the last debacle of the financial sector during the Great Depression of 1929.

The same Wall Street types who put into place the conditions that caused the current mess are now the ones who claim they are the ones who can solve it. They are trying to panic everyone into accepting a plan that will rescue themselves from their own actions by passing the cost on to us.

Since the main problem now is that all these banks and investment firms are being dragged down by having on their books all these mortgage-based securitized investments whose value is doubtful (to the extent that they can even figure out its value), what the rescue plan seeks to do is to use taxpayer money to buy these possibly worthless investments at values far more than they are worth, essentially taking these liabilities off the hands of the banks and putting them in the hands of taxpayers. It is like going to a garage sale and paying original list price for the junk that is being sold.

While this is clearly a good deal for the banks and Wall Street, rescuing them from the consequences of their bad decisions by letting them unload their bad debts and giving them a huge infusion of cash, what is in it for the taxpayer? As far as I can see, very little. We greatly increase the national debt and the interest on that debt (which will eventually have to be paid in the form of higher taxes) while getting ownership of assets whose value is unknown. The only possible bright spot is that these doubtful assets may, over time, rise in value. But that is a big gamble, and I would not be surprised if there are also conditions in the agreement that will take such profits (if they ever materialize) and give it back to the banks. After all, what these people seek is to entirely privatize all profits while having the taxpayers pay for all losses.

Economist Paul Krugman, comparing this plan with the savings and loan bailout of the 1980s, explains clearly why he thinks this is a bad plan and should be rejected. (Incidentally, John McCain was implicated in that earlier influence-peddling scandal, as one of the infamous ‘Keating Five’.)

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.
. . .
Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

In fact, as Atrios points out, the plan seeks to give the Treasury extraordinary freedom from any oversight. They have added wording that says: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

In other words, Paulson is telling Congress to just give him the money to do what he wants. The Treasury Secretary, like many of his predecessors, is from Wall Street (he spent three decades at Goldman Sachs) and thus is sympathetic to the plight of this particular group. They are his base.

William Greider, in a must-read article, writes that we are currently witnessing an attempt to pull off one of the biggest swindles of modern times:

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?

If Wall Street gets away with this, it will represent an historic swindle of the American public–all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called “responsible opinion.” If this deal succeeds, I predict it will become a transforming event in American politics–exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion.

He quotes others in support of his thesis that what is being proposed is an insider deal:

Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: “The joyous reception from Congressional Democrats to Paulson’s latest massive bailout proposal smells an awful lot like yet another corporatist lovefest between Washington’s one-party government and the Sell Side investment banks.”

A kindred critic, Josh Rosner of Graham Fisher in New York, defined the sponsors of this stampede to action: “Let us be clear, it is not citizen groups, private investors, equity investors or institutional investors broadly who are calling for this government purchase fund. It is almost exclusively being lobbied for by precisely those institutions that believed they were ‘smarter than the rest of us,’ institutions who need to get those assets off their balance sheet at an inflated value lest they be at risk of large losses or worse.”

Greider points out that the government, if it were truly acting in the interests of the people, has a lot of power to use the crisis to reform the system:

A serious intervention in which Washington takes charge would, first, require a new central authority to supervise the financial institutions and compel them to support the government’s actions to stabilize the system. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own–cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government’s orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed.

Only with these conditions, and some others, should the federal government be willing to take ownership–temporarily–of the rotten financial assets that are dragging down funds, banks and brokerages.

Right now it looks like the Congress is getting ready to cave in to this deal in exchange for only some purely symbolic concessions like limits on executive compensation. The fix seems to be in. Only strong public opposition will prevent this giveaway of public funds to the very people who caused this crisis.

POST SCRIPT: Intelligent Design trial talk

Judge John E. Jones, who presided over the Dover intelligent design trial in 2005, will speak today from 5:00-6:00 pm in Strosacker Auditorium, followed by half and hour for questions.

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