Posted on 09/25/2008 4:18:31 AM PDT by Kaslin
"Fearing a political backlash against Democrats," Roll Call reported, "Senate Majority Leader Harry Reid (D-Nev.) has told the White House that it must serve up support from Republican presidential nominee Sen. John McCain (R-Ariz.) if it hopes to ensure bipartisan backing for a massive economic bailout package by week's end."
Falling for this trick by Sen. Reid and the other Obama supporters in the U.S. Senate could severely damage Sen. McCain's campaign. McCain should reject the plan and use the issue to draw a distinction between himself and President Bush for good policy reasons.
Wall Street is in trouble because of misplaced bets on derivatives and other financial instruments. It is not the purpose of tax dollars to limit the damage to multi-millionaires for trading mistakes they have made.
The hyper-ventilation of New York hedge-fund operators reminds us that "masters of the universe" can make big mistakes. The media can laud the supposed great work of Paulson and Congress for diverting the economy from a new version of the Great Depression, but America isn't buying it. The only depression is in the suites of these traders' offices.
Average Americans should be concerned -- concerned they are being taken again. Any plan crafted by the pro-business, Wall Street veteran Paulson will be dramatically changed as it runs the gauntlet of the anti-business House of Representatives. Who knows what the plan will contain when it emerges from the halls of this rightly unpopular institution.
But here is what we know so far. While the plan has been dubbed the "son of RTC", referencing the independent Resolution Trust Corporation which bought the assets of failed savings and loans in the 1980s, it will be very different from the RTC. The RTC took the assets of defunct savings and loans. Shareholders in these savings institutions were wiped out. However, the Paulson process is protecting Wall Street. The U.S. Treasury Department will seek to buy as much as $700 billion in toxic assets from institutions that are still solvent. This will protect those same current corporate titans who ran many of these firms into the ground with excess leverage and wayward trading.
Because this is being done by the government directly, the balance sheet of the U.S. Government is at risk for further deterioration of the assets. Treasury, by some accounts, plans to buy the assets through "reverse auctions". But the danger of naïve government functionaries buying assets they don't understand is scary for the taxpayer. Banks could sell the U.S. Treasury assets much shakier than currently anticipated. Since these bureaucrat buyers have no skin in the game as private buyers would have, the possibility of additional shell games mushrooms.
Also the plan includes the insuring of money-market funds with over $3.4 trillion in assets. This amounts to the nationalization by the U.S. Treasury of the commercial-paper market. Money-market funds are generally low-risk commercial paper, but with a government guarantee, the risks will climb and the due diligence of the buyers will fly out the window. Before long, Wall Street will be selling bad assets here. When risks are divorced from investments, you naturally have an increased opportunity for fraud.
Some press reports say that Congress is demanding equity in the firms that sell assets to the Treasury. This is direct nationalization similar to the warrants demanded by Treasury before they lent money to AIG. The wholesale nationalization of much of the mortgage market and many banks sets a bad precedent.
America has more than 200 years of bankruptcy law that should be governing these transactions. If managers who accumulated too much risk by not adequately qualifying lenders are allowed to continue in their jobs, we are doing a disfavor to the intelligent managers who accepted lower returns for more prudent lending practices. The shareholders and management at imprudent firms should be wiped out. This allows new managers and companies to fill the void. This type of creative destruction always strengthens the economy in the long run.
McCain should reject the logic of the Wall Street hedge funds and turn the tables on Obama, Bush and their Wall Street supporters. John McCain has an excellent opportunity to prove he is the real reformer.
Yes he should but...Birds of a feather???
I don’t know a lot about economics, but as a taxpayer, I think this “plan” stinks!
With around 60% of the nation against this nationalizing of Wall St. risk, McCain should stand up for the taxpayer and let them know it.
If this passes in its current form, the next thing to be taken over will be the oil industry. Mark my words.
Just wonderful, talk about being above one’s pay grade.
And what do you then say if the market opens down 2000 points on Monday? If that happens, Obama wins 40 states and the Dems carry the 60 Senators. Then the Floyd Browns of the world can go back to permanent minority status as we were in the House for 40 years.
One of the biggest reasons for this bailout is not being mentioned because of the obvious political fallout. When these companies first got into trouble about 6 months ago, they first turned to foreign Sovereign funds, the GOVERNMENT investment arms of Singapore, China, etc. for help.
ALL OF THAT CAPITAL, MANY BILLIONS, IS NOW GONE.
Do you think, given all the Treasury debt they hold, that they will not retaliate? After all, they were encouraged to invest this money by OUR GOVERNMENT.
If you think this bailout is expensive, just wait to see the cost of having these funds send a message by selling 25% of their holdings at once, just to send a message. The dollar falls 10% in a day, mortgage rates go up to 8% overnight and the Dow falls another 2000 points (if you don’t think this is possible just remember tath the PE ration of the market was 8 before the Reagan led Bull Market starting in 1982. We are now around 15.
It seems vicerally pleasing to watch the bastards go down the drain, but the tangential effect is devastating.
If you want to make Ahmadinejad a prophet, just go right on thinking this way.
Sorry for the typos:
that, not tath
ratio, not ration
viscerally, not vicerally
I am too amazed taht our side is not getting the severity of this situation. This is not McCain’s strong suit and he can lose the election right here if he tries to take the other side in this. Public opinion is not always right, I would have thought Freepers would know this already!
He sure should. Stand up and be a man of honor, McCain, like you say you are.
That’s like calling a doctor and saying, “I don’t know a lot about brain surgery, but I think using that stent stinks!” ;)
Thank you for posting that explanation of the situation. I had the hardest time getting my head wrapped around why such a grand over the top fix was needed. You neatly tied up all the loose ends that were giving me a week long headache.
I for one do not want this critical, once-a-century response determined by a popularity contest.
If, for example, 60% of the nation is against something that actually is the right thing to do, and which should be done, then our leaders should take on the task of garnering support for it, not cave to those who are basing their opinions on everything but a deep understanding of global economics.
As Margaret Thatcher said, “Consensus is the antithesis of leadership.”
If you want to make Ahmadinejad a prophet, just go right on thinking this way.
I snipped out the above, but EVERYTHING you said needs to be repeated and repeated and amplified.
See also:
and
15 months ago the stockmarket was at alltime high. Happens everytime Demcrats hold Congress. Republican congress saved Clintons rear.
“Solving” this problem by adding trillions more in debt is pretty much like curing a heroin addict by cooking up a major hit and jacking it right into the vena cava.
This problem requires a little deeper level of thinking than that. I expect more from Freepers, this is not the Huff Post.
---Ludwig Von Mises
Paulson and Bernanke are choosing option #2.
. . . a voluntary abandonment of further credit expansion . . .
The abandonment has already happened. The CREDIT MARKETS ARE FROZEN. The government is making an EQUITY investment. They are buying time to UNWIND these assets.
The Financial Institutions they are buying these from have already written down over $500 Billion against their income statements.
The government will MAKE MONEY on this, reducing the deficit in the future. It will make money because the LOSSES HAVE MOSTLY BEEN TAKEN ALREADY BY THE FINANCIAL FIRMS.
Von Mises was talking about the PRIVATE SECTOR, not the PUBLIC SECTOR.
Hahahaha! Does your mommy let you cross the street alone? BTW, I have a candy factory I will sell you, cheap!
After the Crash of 1929, President Hoover and his advisers (except Andrew Mellon) took an interventionist role, setting up the Reconstruction Finance Administration and other agencies in an attempt to prevent the same purgative process that benefited the economy in prior crashes. His efforts prolonged the agony, and FDR piled on with numerous other agencies, including a failed price stabilization attempt through the National Recovery Administration. As a result, the 1929 downturn morphed into a decade long depression unprecedented in American history.
As for the fact that sovereign nations such as China and wealthy investors such as various Arab oil sheiks own large portions of American government and private debt, this nation has always had foreign investment. We are still the most powerful nation in the world. In the early years of the Republic, British, French, and other European investors were major investors in state government bonds, railroads, canals, etc. There were several defaults on the part of American state governments and private companies that caused foreign investors to suffer losses. At the time, we were weak militarily. Nonetheless, foreign powers did not intervene to compel the Americans to pay their delinquent debts. China and other creditor nations would be fools to start a war with a nation with the strongest military. Rather, they will do the same as the Europeans did in the 19th Century and wait for full or partial recovery of their principal.
Any and all bailouts to the investment banks, commercial banks (beyond FDIC insurance coverage), brokerages, and insurance companies should be opposed. Let this country take the hit and move on, as we successfully did in the first 130 years of our national existence.
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