Posted on 09/23/2008 12:07:46 PM PDT by Notary Sojac
Congress should think long and hard before giving Hank Paulson $700 billion to buy fallen mortgage securities. Paulson has draped his bailout plan in the cloak of a national emergency. Much as George W. Bush demanded expedited action from Congress to help fight terrorism, the treasury secretary wants his war-chest pronto. And just as Dick Cheney and his minions argued that the terrorism threat was too grave for the White House to submit to the customary checks and balances, so Paulson wants an appropriation with no conditions, no terms--nothing written down about how he would spend the money.
All Paulson has said is that the Treasury (and not an independent agency, as was the case during the 1980s savings and loan crisis) needs the money to buy distressed mortgage paper. Since almost no restrictions govern the use of the bailout, money could be used to buy securities held by strong institutions as well as weak ones. What price they would pay, how that price would be set, and for what assets--all to be determined later. The Treasury's charter would turn every bank into the equivalent of the former Fannie Mae and Freddie Mac--a government sponsored (but now quite government owned) enterprise, a half-man, half-beast Centaur seeking profit for their shareholders and distributing their losses to taxpayers.
Paulson, the former Goldman Sachs banker, whose stock when he cashed out in 2006 was worth half billion dollars, is sure to argue that the appropriations are necessary because the market is illiquid. Yet a market for mortgage paper still exists. "Sellers just don't like the bids," a hedge fund manager told me. A manager with a big money management company confirmed that if Citigroup, Goldman, and the rest want to unload their securities, his firm has money to spend. "We just can't spend as much as Paulson," he noted.
The only conceivable purpose of Treasury intervention is to buoy the market (using taxpayer funds) by paying higher-than-market prices. After all, if the government merely intended to match the market, what would be the point?
The sums involved are staggering. As a comment that Greg Mankiw, the former White House economic adviser, posted on his blog asked, "Has more money ever been given with fewer restrictions on how it is used? Ever?"
In 1932, at the height of the Great Depression, the government created the Reconstruction Finance Corp. to make loans to banks, railroads and others. President Hoover asked for $2 billion--equivalent in today's money to $30 billion--and spent just under that amount in the RFC's first year. The country then was in the midst of an economic catastrophe. Economic output had dropped 45 percent. Production of steel and autos were each down by three-quarters. Unemployment was 24 percent, and so on.
The allocation sought by Paulson is 23 times bigger. And it is in addition to the tens of billions pledged to back loans to Bear Stearns, Fannie, Freddie and A.I.G.
America's economy does not face an emergency--only its financial system does. This is a distinction lost on the bankers in Washington, but it is one worth remembering. On Main Street, unemployment is 6.1 percent. Home prices are down close to 20 percent and presumably headed lower. These numbers are not pretty, but they do not add up to an economic Pearl Harbor or even close.
Of course, potentially several million Americans face home foreclosure. That is a crisis, but it is a slow-developing one, for which the normal legislative process--as distinct from a shotgun corralling of Congress--will suffice. And the Paulson plan does not help homeowners.
The only emergency is on Wall Street, and that is entirely of Wall Street's making. It was the banks that made the loans, the banks that bought the paper, the banks that dumbly believed the models that said that housing prices wouldn't collapse. The pinstriped bankers who leveraged their institutions' capital thirty-to-one so as to inflate their profits (and their personal take) now complain they were done in by those nasty short-sellers. How touching to see executives from the likes of Lehman Brothers, not normally an institution associated with widows and orphans, squawk about cutthroat tactics. Regardless, had they not borrowed so much, they would not have been vulnerable.
Ultimately, the issue of blame is less important than is the question of whether markets will eventually right without a federalization of losses. After a lifetime as a champion of free markets, Paulson should carefully explain why he no longer thinks they will. And Congress should listen with just as much care.
One thing is for sure, Chris Dodd and CNBC wants this bailout ASAP. If there is no bailout the fallout will mean the end of his carreer and perhaps Barney Phffrank.
If you don't see action you will see credit card rates on existing cards go up significantly, you will see unemployment rise, you will see tax revenue fall horrifically which means all public services like roads, police, schools, etc. suffer. (Not to mention the terrorists cheer because war funding will be in serious jeopardy.)
Small businesses aren't going to get the loans they need to expand much less function. Oh, and home prices fall further. It's not a nice picture.
If ever there was a contrary indicator, this would be it.
you will see tax revenue fall horrifically which means all public services like roads, police, schools, etc. suffer.
because after all, governments are so tight and efficient with our money. /sarc
So what happens if we do nothing?
The assets are real. The houses exist. They aren’t going to vanish. Families live in the houses. If they can’t make their mortgages, the banks can renegotiate or foreclose and re-sell the house at a lower price.
Tough, but not unbearably so. A few banks may change names. A few managers may lose their jobs. A couple people may even go to jail. Tough, but not unbearably so.
They are making this out to be the biggest financial crash of a generation, because its an election year. As soon as they figure out they can’t hang it on Republicans, its going to quietly disappear off the news cycle. Its tough, if houses have been overbuilt and you’re a carpenter you are going to have a tough year.
But the $700 billion they want to spend bailing out, who, exactly? would be better spent as tax cuts and tax incentives for energy projects. $700 billion in nuke plants and coal-to-diesel plants would put a lot of people to work, and the financial geniuses who don’t jump out their office windows will also find new work, I promise you.
My humble opinion as an observer of this thing called government for more years than I care to admit: a bailout is inevitable regardless of what anyone here or at TNR thinks.
In my own case, I will admit that any failure of our money market funds that is more than trivial might actually cost us more than the bailout.
How do you feel about a Barack Obama appointee or a John ("Cuomo for SEC") McCain appointee having an unlimited federal line of credit to reward his friends, with no restrictions whatsoever?
Are you joking? Most people with some credit card debt are already paying outrageous interest rates on these cards. I am talking about back alley loan shark rates.
You will see unemployment rise
That's already happening in many regions of this country...Look at Ohio, Michigan etc.
You will see tax revenue fall horrifically which means all public services like roads, police, schools, etc. suffer.
So what? Government at every level is way to large and too intrusive. If this is the only way to scale it back, so be it.
We have always been told when things get bad for individuals, to pull themselves up by their bootstraps and don't expect government handouts or bailouts.
Why is this a good thing for the working class backbone of this country, but bad for those that caused this disaster, like those major corporations and the government that was supposed to regulate and oversee this disaster?
-----------------------------------------------------------
I'm a partner at a half billion dollar convertible bond hedge fund. I'm a firm free market believer, I love Ayn Rand and the Austrian political economists. I have been living this crisis on the front lines. I don't think people realize how close to the abyss we came on Wednesday and Thursday morning. Morgan Stanley and Goldman Sachs were about to fail. The credit markets were frozen. Other brokers and banks stopped taking assets. You couldn't move good securities from Morgan to another prime broker before it went bankrupt. There were no buyers and sellers were taking any price in the market. Money market funds were going to fail. I try to refrain from the breathless hyperbole that runs rampant in times like these, but I was truly fearful that the system was about to collapse.
Some may say that this is how the system cleanses itself and they may be right, but if everything is allowed to unwind in a haphazard way the results will affect every person in this country in a substantial way. You simply cannot take that much cash out of a leveraged economy all at once without serious consequences. Companies will not have cash to make payroll, factories will be shut down immediately, there will be no severance and no paycheck on no notice, credit cards will be cancelled, car loans and mortgages will cease to be available, home equity loans will be called in.
I'm not pretending to know what the answer is, but the problem is that serious.
-----------------------------------------------------------
We have always been told when things get bad for individuals, to pull themselves up by their bootstraps and don’t expect government handouts or bailouts.
Why is this a good thing for the working class backbone of this country, but bad for those that caused this disaster, like those major corporations and the government that was supposed to regulate and oversee this disaster?
Part of the problem here is that those incurring risk felt insulated from its consequences. We will only exacerbate that problem we allow them to escape unscathed.
But is it prettier than the alternative picture that may emerge? Are we fixing or merely backstopping?
Where are all the adults?
Sure is an odd feeling, isn't it?
Really, the only ones pushing the plan seem to be the usual rah-rah bushbots.
Y’all are not gonna believe this.
I phoned the offices of Senators Nelson and Martinez along with my R Representative. Martinez said he opposed any severence compensation for those in the companies being bailed out. Mr. R Representative did not yet have a position on the bailout by daddygovernment however I informed him that if he votes for it, I expect a $1,000,000 earmark for my own financial needs. Senator Nelson is opposed to any bailout that does not include help for homeowners as well.
The only one of these three remotely close (albeit for all the wrong reasons) is D Senator Nelson!
Another WallStreet ChickenLittle crying The Sky is Falling to enter the ranks of the BIGGEST WELFARE QUEENS ever.
Wall Street Whines Way too much.
As far as that poster is concerned, he was overpaid and not intelligent enough to see the Ponzi scheme he was participating in. And if he did, like everyone else, went along with it.
Why should we bail out these bozos? Are they going to have their salaries prorated for the miserable, incompetent job they have done. No way, Jose.
It’s pure panic mongering by the WallStBoys.
They cry like stuck pigs when the consequences of their actions come home to roost.
Whiny pukes.
This does not go over well with the WallSt types I’m acquainted with.
Congratulations, I think you are the first Freeper to suggest that if we don't insulate our bankers from the consequences of their poor judgment, that the terrorists will win.
Once people realize that all you have to do to fix anything is fire up the printing presses and print 700 million smackers then we’ll continue to do so at ever decreasing intervals.
Everybody is acting like we actually have a rainy day fund of $700 million laying around for emergencies. Now that I’m close to retirement I can see them pulling the rug out from under me.
You really don't get that?
"the only ones pushing the plan seem to be the usual rah-rah bushbots those whose bonuses, campaign contributions, and transaction fee income went through the roof in 2002-2006."
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.