The British Economist John Maynard Keynes famously referred to capitalism as the “Casino Society”. What Americans are quickly learning, however, is that this gambling works according to the principle “Heads Wall Street wins, tales Main Street loses”. Very few people really understand what is going on with the bailout, but we should at least be aware of the fundamentals of what we are being asked to fund.
While the details of the meltdown that necessitated the bailout are mind numbingly complex, the core of the problem is simple. The rules regulating our financial system that had been put in place by FDR were rolled back in the “free market” euphoria that was championed first by the Republican Party and then by large segments of the Democratic Party. With the protections of the 1930′ jettisoned, America went back to the wild speculations of the 1920’s. First came the Savings and Loan bubble, then the high tech bubble, and finally the real estate bubble. This 1920’s style exuberance was followed inevitably by the 1930’s style bust we see now. While most Americans did not benefit from the party that the rich threw for themselves during these bubbles, we are now left with cleaning up their mess.
Here is how this cleanup is supposed to work. Henry Paulson, the Secretary of the Treasury and a former head of Goldman Sachs-the investment company that pushed hardest for the deregulations that led to this meltdown-is to be the “bailout Czar”. He is to use tax payer money to buy up unprofitable mortgages and other investments that the private sector no longer wants. The amount of money used in this bailout is mind-boggling. Paulson has asked for 700 billion INITIALLY, but the legislation gives him the right to come back for more. This is on top of the hundreds of billions of dollars that have already gone into bailing out Bear-Stearns, Fannie Mae, Freddie Mac, and AIG. The proposal also gives him near dictatorial powers. He will get to decide which mortgages/investments get bought out, at what price, and with what terms. All of this is to be done without any oversight by any other governmental body. Never has such economic power been vested in the hands of one man with such limited over-sight, and for so little return to the American people.
The right-wing press in an attempt to make this rape of free market principles palatable, has tried to deify Paulson.. He is a combination of George S. Patton, Adam Smith and Jesus Christ. Give him absolute power they scream or the whole economy will go belly up. Keep Congress from demanding any oversight or Civilization as we know it will crumble. Don’t ask for anything in return for this bailout, or Wall Street will refuse to take part and we will all rot in the dark.
These same right-wing commentators also claim that the government will eventually sell these assets and recover much of the money. But here is a simple point. If these assets were so valuable in the first place, why would any of these hot shot investors want to sell them? The Princeton economist and columnist Paul Krugman has pointed out that the government will be under no pressure to buy up these debts at rates unfavorable to Wall Street. If they were to do so, then the companies we are trying to bail out would lack the capital they need to go back to business. Moreover, Paulson as a Goldman Sachs alumnus will err on the side of what is good for investment banks. In essence, we have been asked to put a child molester in charge of the kindergarten. If we are not willing to send our toddlers to an overnight with Michael Jackson, then there is even less reason to trust Paulson/Goldman Sachs with such absolute economic power.
Please read the following article for the specifics of what should be done. It is fairly accessible, but here is the bottom line. First, as Kuttner points out, we should have serious oversight of this process. No putting Paulson/Goldman Sachs in charge without monitoring his activities. Second, we should get equity in the firms that are being bailed out. Simply selling the assets at some future time is not enough. The country as a whole should reap money from this bailout so that we can address the projects (reforming healthcare, fixing our infrastructure, reducing global warming, etc.) we will have to put on hold so that we can invest trillions in the financial system.
Finally, and this is the most important, we must raise hell with our Congressional representatives. After reading the Kuttner article, contact your friends and email them a copy. Then we must all call our Senators and Congress people to demand that they act according to his recommendations. The Goldman Sachs crew is trying to stampede the country into a bailout, and we can’t let them. We must pressure our representatives to serve the interests of the nation as a whole, and not just a wealthy few. If the American people are supposed to come to the rescue of the high rollers, then we should at least get some of their winnings.
Paulson’s Folly – The current Wall Street rescue plan has some serious failings. Will congressional Democrats (and Republicans) stand up to the treasury secretary?
Robert Kuttner | September 22, 2008
Treasury Secretary Henry Paulson’s $700 billion rescue plan puts the two presidential candidates in a curious position. One or both could end up voting against it, at odds with their respective parties.
There is a backlash among some rank and file members of both parties against giving Wall Street a blank check, even as most congressional leaders are reluctantly concluding that some kind of bailout is necessary to prevent a financial cataclysm. John McCain spent the week repositioning himself as a born-again populist, railing against Wall Street greed. And by Sunday afternoon, Barack Obama issued a tough set of principles for a bailout, including “No Blank Check for Wall Street;” help for homeowners; and an economic stimulus plan for working families.
Thus is the stage is set for an epic game of chicken, against a very tight deadline. Will the Democrats insist on some serious help for Main Street and constraints on Wall Street as the price of a deal? Nothing would better highlight the differences between the two parties, or better strengthen Obama’s hand. Or will Paulson reject anything other than his own approach — possibly leaving both candidates to vote against the deal?
As Paulson testifies before key congressional committees Tuesday and Wednesday, and Democrats (and some Republicans) express indignation about the one-sided character of the deal, Wall Street could shudder — leading Paulson to double down yet again and warn his critics that their hesitancy is leading the economy off a cliff. But there is more than one way to do this deal.
Hank Paulson is about the last person in America who should be entrusted with this emergency infusion of public capital — because his perspective is entirely that of the bankers who created the mess in the first place Paulson spent Sunday morning making the round of talk shows, insisting on a “clean” bill uncluttered by regulatory reforms, caps on executive windfalls, refinancing assistance for homeowners, or anything other than unprecedented authority for himself to relieve financial institutions of up to $700 billion in securities that nobody else wanted to buy. Paulson spoke as if he had all the cards.
So the key question is what conditions congressional Democrats will extract in return, and whether they will have the political nerve to fight, especially if financial markets grow more panicky with each passing day. At this writing, Nancy Pelosi seems determined to insist on a second stimulus package on the order of $100 billion, including greater relief for homeowners, but there is growing sentiment for some kind of cap on executive pay as well as more assurance that taxpayers, one way or another, will get something back.
The Democrats will be joined by some odd bedfellows. Many leading Republicans in Congress are very skeptical of this deal — though most want less bailout for Wall Street rather than more relief for Main Street. Rep. Jeb Hensarling, a Republican from Texas, told the Wall Street Journal that a number of Republican conservatives “may very well” oppose the plan. Rep. Mike Pence of Indiana said Friday, “Now’s the time for us to be dealing with the root causes of this economic downturn and not simply opening the cash window at the Federal Reserve and writing one bailout check after another.”
Speaking on CBS’ “Face the Nation” Sunday morning, House Financial Services Committee Chairman Barney Frank said he would want to add several features to the Paulson plan, including relief for homeowners, a new stimulus package, and limits on CEO compensation. Said Frank, “It would be a grave mistake to say that we’re going to buy up the bad debt that resulted from the bad decisions of these [private sector] people and then allow them to get millions of dollars on the way out…. It’s kind of hard to tell the average American that we’re going to continue to have foreclosures that destabilize neighborhoods and deprive cities of revenues they need, but we’re going to buy up the [banks’] bad paper.”
The ranking Republican on the Senate Banking Committee, Richard Shelby, appearing with Frank, sounded if anything even more radical than Frank, accusing Paulson of “lurching from crisis to crisis” and helping Wall Street, but doing nothing for the homeowner. Shelby, whose support is crucial to the plan, later issued a written statement that he “remains at this point unconvinced” of the proposal’s merits.
The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc. He plans to retain Wall Street firms as advisors to decide just how to cut deals to value and mop up Wall Street’s dubious paper. There are to be no limits on executive compensation for the firms that get relief, and no equity share for the government in exchange for this massive infusion of capital. Both Obama and McCain have opposed the provision denying any judicial review of decisions made by Paulson — a provision that evokes the Bush administration’s suspension of normal constitutional safeguards in its conduct of foreign policy and national security.
Though the administration’s line is that these securities are not trading because of a crisis of confidence, so many are ultimately backed by loans that will not be paid back that they will eventually be sold for a fraction of their face value. Firms that have marked these securities down or have otherwise gotten them off their books have valued them at around thirty cents on the dollar or less. If Paulson had proposed such a deal in his old job as CEO of Goldman Sachs — putting $700 billion of the firm’s capital at risk in exchange for junk bonds of unknown value — he would have been fired in short order. But this is merely taxpayer money.
The differences between this proposed bailout and the three closest historical equivalents are immense. When the Reconstruction Finance Corporation of the 1930s pumped a total of $35 billion into U.S. corporations and financial institutions, there was close government supervision and quid pro quos at every step of the way. Much of the time, the RFC became a preferred shareholder, and often appointed board members. The Home Owners Loan Corporation, which eventually refinanced one in five mortgage loans, did not operate to bail out banks but to save homeowners. And the Resolution Trust Corporation of the 1980s, created to mop up the damage of the first speculative mortgage meltdown, the S&L collapse, did not pump in money to rescue bad investments; it sorted out good assets from bad after the fact, and made sure to purge bad executives as well as bad loans. And all three of these historic cases of public recapitalization were done without suspending judicial review.
What should Congress demand in return for this deal?
- Government equity in firms receiving assistance, in rough proportion to the amount of aid extended.
- Limits on executive compensation paid by any firm receiving the public aid.
- A recapture of the cost to the government, to be extracted from the firm’s future profits.
- A six-month sunset provision, so that the Treasury Secretary’s bailout authority would expire by next April 1. Any extension would be conditional on across-the-board re-regulation of financial institutions of all types.
- Creation of a small independent board, which must review and approve Paulson’s proposed deals.
- A narrower treatment of court challenges to Paulson’s actions.
- A parallel program to refinance subprime mortgage loans, and to provide funding to municipalities and community-based nonprofits to acquire, restore, and repopulate foreclosed properties.
- At least $200 billion of new economic stimulus, in the form of aid to states, cities, and towns, for infrastructure rebuilding, more generous unemployment compensation and retraining benefits.
For nearly three decades conservative Republicans have insisted that the cupboard is bare when it comes to needed social outlay. Conservative Democrats have been hesitant to spend more than token amounts, because of concern for the deficit. Now suddenly, spending that will increase the deficit by $700 billion is greased to slide through Congress in less than a week, but only because the money is for Wall Street.
Paulson said Sunday that the two cases are not comparable. “This is different than spending money you know you’re never going to get back,” he told CBS’s Bob Schieffer. “This is buying assets, holding assets and then selling assets.” But that is just nonsense. Investing public funds in college education, the health of children, public infrastructure, research and development, or energy independence is money that is far more likely to produce a good return than public investments in the toxic junk of Wall Street. If the economic emergency requires deficit spending, the benefits should be spread. No self-respecting legislator should vote for this lopsided plan in its present form, and a bracing debate should shed light on what the two parties really stand for.
When you think about it, Hank Paulson is about the last person in America who should be entrusted with this emergency infusion of public capital — because his perspective is entirely that of the bankers who created the mess in the first place. Paulson is treating the U.S. Treasury as a branch office of Wall Street. When I was a proudly liberal graduate student, I used to snicker at my radical classmates who described the government, in Marxian cant, as the “executive committee of the ruling class.” Well, there is no better description of the Treasury as operated by Hank Paulson.