Subscribe to Common Dreams News Updates
Most Popular This Week
Popular content
Today's Top News
A Better Bailout
There is, however, an alternative explanation for Wall Street's celebration: the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands--called the American taxpayer.
The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of information asymmetry which played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains.
And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers' exposure. But not so this time. The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was suppose to assure us?
There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.
The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.
The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.
Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February--one that would have included increased unemployment benefits and aid to states and localities--and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.
The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again. There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.
Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.
If we design the right bailout, it won't lead to an increase in our long term debt--we might even make a profit. But if we implement the wrong strategy, there is a serious risk that our national debt--already overburdened from a failed war and eight years of fiscal profligacy--will soar, and future living standards will be compromised. The president seemed to think that his new shell game will arrest the decline in house prices, and we won't be faced holding a lot of bad mortgages. I hope he's right, but I wouldn't count on it: it's not what most housing experts say. The president's economic credentials are hardly stellar. Our national debt has already climbed from $5.7 trillion to over $9 trillion in eight years, and the deficits for 2008 and 2009--not including the bailouts--are expected to reach new heights. There is no such thing as a free war--and no such thing as a free bailout. The bill will be paid, in one way or another.
Perhaps by the time this article is published, the administration and Congress will have reached an agreement. No politician wants to be accused of being responsible for the next Great Depression by blocking key legislation. By all accounts, the compromise will be far better than the bill originally proposed by Paulson but still far short of what I have outlined should be done. No one expects them to address the underlying causes of the problem: the spirit of excessive deregulation that the Bush Administration so promoted. Almost surely, there will be plenty of work to be done by the next president and the next Congress. It would be better if we got it right the first time, but that is expecting too much of this president and his administration.
- Posted in
17 Comments so far
Show AllI've been waiting for Mr. Stiglitz, the dissident former Chief Economist of the World Bank to comment on this travesty. But I am annoyed that he didn't explore the global reach of our casino capitalism and how its melt-down may extend to and affect other countries. Hopefully he will do a follow-up piece to address that those issues.
Economists of this 'stature' are politicians first and economists, second. This article supports the statement with its trite 'profundity' at the expense of illumination or enlightenment. After all, knowledge is power. And information is on a need to know basis.
I'm sure his lawyers have fully explained his 'intellectual property rights' to him and thus the limit of public revelation of his 'superior being.'
Will someone please address this: WHERE would the $700 Billion come from?? It is referred as a "taxpayer Bailout"---meaning the taxpayer will provide the $$$. But the taxpayer is maxed out, the country is maxed out, the banks are maxed out, etc. The tax revenues don't even cover the normal "overhead" of the the country---and much less any wars.
They are selling us "futures." And those futures are overvalued thanks to a failing economy. It requires tough medicine to stop the bleeding----but the big boys of Wall Street aren't willing to sacrifice anything of their ill-begotten gain$.
the money will come from the same place as the surge money - the central bank of china
these commies are the one who are putting the capitol in capitalists
how ironic is that
cheers, b
So the Administration will borrow the money on credit from foreigners, and the American taxpayer will have to pay that loan and the interest on it. Then the Administration will give the money without interest to the failing banks, replenishing their coffers. (This is what buying the toxic investments means.) The banks, made rich again by the largess of the American taxpayer, will lend that money out to the taxpayer with interest---for example, at 30% for credit card loans, 15% for car loans, 12% or higher adjusted level for adjustable mortgages, etc. The banks will also, of course, lend money to American businesses.
With the bailout plan, the individual American borrower will have to pay back twice for any loan he takes out. First, he is obligated to pay the loan back to the US Treasury's foreign lenders who originally lent the money. Then, as the borrower from the failing but resuscitated bank, he will have to pay the loan back to the bank. Never mind that the US Treasury borrowed the money on his behalf, and stuck him with the loan and interest bill, but gave the money, instead, to the comatose bank in order to resuscitate it. The poor individual taxpayer didn't see the money, and so had to again borrow his own (loaned) money from the bank! Even the more fortunate taxpayer who doesn't need to borrow any money for himself will have to pay for the money that the US Treasury will borrow to revive the failing banks and investment corporations.
The bailout plan is a ruinous deal for the American taxpayer. Why should the taxpayer have to pay back twice for the same loan--- to the foreign lenders of the US treasury as well as to the resuscitated failing banks. Let those banks fail, fall, expire, and vanish from the earth. Let any good banks, those few that were not gobbled up by the cannibal mega banks, stay in business. At present, the decent banks don't have enough money to lend, so also let the foreign banks, governmental or private, open shop in USA freely. And let the US individuals and businesses borrow directly from these lenders. This the same source of money that the US government taps, and plans to tap for the bailout.
NO!! to the corporatists' forced dividend payout.
If capitalism's foundation is weak, it is due to corruption... and must not be "propped up". Let it fail and then root out the systemic problems that brought us to this point in history.
Address the real issues surrounding this failure. Rewarding criminality is not a cure for corruption.
toast,
Agreed, but the habit of enabling criminal behavior is hard to break.
The Democrats could have easily voted NO and gotten this issue easily taken care of and at least proven that they actually stand with Main Street on anything. Oh well, nothing to vote for anymore.
Jesus Christ - another damn piece that doesn't even suggest that instead of offering BETTER ways to spend money WE DON'T HAVE, like, maybe we should take a deep breathe and a tough look at our budget and seize the moment to cut, shift and re-prioritize.
First, we need "rescue" funds. Okay - Pentagon, we're taking $200 billion back from the $1 trillion we just handed ya. Our economy needs "protecting," you're the Defense Dept., so do your job and help protect it.
Not only do we want the $200 billion - close 500 military bases and all the golf courses, then sell or lease the assets. That's good for another $200 billion easy.
Then cancel as many "private" contracts as possible and give the work back to the troops who you're bringing back from the 500 closed bases. There's another $100 billion.
Meanwhile, collect all hidden taxes - off-shore, etc - and close all loopholes and shelters. Another $100 billion, no sweat.
Oil companies - time to pay what you owe in royalties. Let's lowball it at $100 billion.
Now that's $700 billion without even blinking, okay? No new taxpayer pain whatsoever, and we show the world we're adults who at least try to balance spending with collection. Confidence restored!
Meanwhile, we unleash the bean counters upon the rest of the budget for the greatest slash and burn and re-prioritizing in our history!
And we sick the IRS on the top 1% of American patriots - did the Forbes 400 billionaires pay at least the average taxpayer rate of 25%? Cause that's another $100 billion...
And, instead of "regulations" that will be ignored anyway, let's file some RICO charges against the top bank robbers, which allows for immediate seizure of all assets - even before trial! This should bring us another $50 billion or so, and will provide a serious deterrent to those considering a career in bank robbing.
You are so right. If only there were some chance it could happen (sigh). But hold that thought because that is the way we must go.
The proposals by Stiglitz are much better than others I have seen. I think he is proposing, for one thing, that the American taxpayer becomes part owner of stock wealth and benefit from the good times as well as the bad, own the good stocks, not just the junk. He is also proposing to solve the problem by directly assisting the mortgagees and letting the wealth trickle up into the banking sector. That's a plan!
Joe
Frank1569
I think you are being a bit harsh on Stiglitz. He does explain a lot about the crisis for those that can't join dots. He should know something about it all after writing a book on the costs of the Iraq war! Economists dislike making policy prescriptions. I agree with you though that the 700 billion could be found much better places. Robert Fisk notes the uncanniness that the 700 billion bailout is the same as the cost of the Iraq war. The corporate media has managed to decouple the occupations and the economic crisis. As an aside. Did you hear Palin interviewed recently on the economy. Phew! She has no idea.
I can hear the Fat lady singing now as the skinny inherit the earth: So sad when that great ship went down. And Pooh bear 's sad refrain from out on the rolling mane Tut tut tut, It sure looks like rain. The Black panthers and Tigger are singing all together It was sad when that great Ship went down. It was sad. It was sad. It was sad when that great Ship went down.
Husbands and wives
And children lost their lives.
It was sad when that great ship went down.
And all the kings whores and the big congressmen , couldn't put wall street together again. Just remember boys and girls what Mr. Green Jeans used to say, it's another be good to mother day . So play nice and don't shoot up the living room. Flying elephants? The bigger they come the harder they fall. So, you know, Don't put all your eggs in one basket case.
So sad when that great ship went down, and the end of the world as we know it... seen the writing on the doorpost saying this land is condemned, all the way from New Orleans Up to Jerusalem.
Unsinkable. Mostly.
After perusing this article a couple of times I can find the bare minimum of an alternative proposal to the current Democratic 'additions' to Herr Bush's circle jerk with Herr Paulson. In other words, I commend the Nobel Prize winner his due, without the follow up. This article supports, by omission, by economic weakness, by a political lack of will, the very real economic proofs that this deal will fail that this economy will tailspin like a helicopter with no rotor.
Without the synthesis of strengthening this middle class, which reflects a huge range of income of individuals, this will devolve into a stasis state. Of course economists dislike predictions, when it is a common knowledge fact that economics is anything but a quantifiable subject. Sure there are cycles that are predictable, numerically, and observable indicators that inform and portend. As a citizen not trained in economics, yet reads, my street smarts helped prevent, personally, what these Ivy League MBAs' refused to see or could care less about.
What those high priced MBAs' have access to that I do not, given the response of my Senatorial her highness, CA Senator Feinstein, have. The response was a regurgitation of what any aware citizen will address, repeated back as if what was sent was a fax repeated ad nauseum. Meaning? The electorate cannot understand any issue. If they do, ignore the intelligence and repeat after Simon Says, "We feel we have represented the best interests of our constituents with this bipartisan fuckfest, because frankly we are not allowed to think for ourselves in any creative capacity. We regret this burden we must place on the American taxpayer."
Darkness descends, the curtain folds closed on a stage of deceit.
The French Revolution, the American Revolution became blood for naught. The U.S. Constitution became "...a god damned piece of paper."
Frank1569 your suggestions are far superior and would actually make a few people more responsible but it has one insurmountable flaw. It assumes America is a democracy. Not so, America is and has been for some time a plutocracy. With that political system firmly entrenched your reasonable solution is impossible.
snydly
Right ---the only way to alter this situation is to make a billion dollars and buy our own congress.
Rewarding bad behavior will only encourage more bad behavior, in this case overwhelming Wall Street greed and lies. The credit markets are freezing up because no one trusts the property valuations of the Wall St banks. They leveraged their loans 20-30 times the value of their deposits.
At the same time there are banks who rejected the easy money that comes from over leveraging. They were much more reasonable in their lending practices. I don't know if any national banks did this, but a number of regional and local banks have been responsible, and had no part of the Wall Street fiasco. If we need new liquidity, let's give money to the responsible banks, rather than the irresponsible ones. The economy gets its needed liquidity and we reward good behavior, rather than bad.
Second idea. A small transaction tax on stock and options trades is estimated to raise $1 billion per year. It would have no effect on investors, but would cut into spectulation and presumable limit it somewhat. $1 billion is a lot less than the hundreds of billion being talked about, but it's a start.
PUT PEOPLE TO WORK; FIGHT GLOBAL WARMING AND RAISE THE VALUE ON HOMES... here's how:
What we NEED to do is to stimulate the economy by spending public money to do "green remodeling" (adding insulation and other energy saving features/updates to buildings and also installing site-appropriate alternative energy generation: solar, wind). Such measures applied to both public and private property would:
- get money in the hands of skilled construction laborers who are out of work;
- reduce energy consumption and thus CO2 production as well as lower the utility bills at a time when energy prices are rising exponentially; and finally
- raise the value of residential and commercial real estate.
This is a WIN-WIN-WIN situation all around. This has been done in a very limited fashion via tax credits in the 2005 Energy Bill-- a number of which have been renewed or are currently slated to be renewed-- but we MUST increase the funding level dramatically. If the bottom line is that we need to inject significant public money into the economy in order to divert any of several different great depression-like scenarios, let us do it in a way that maximizes the benefits.