Dec 23, 2008
Talk about crazy making. How
do we believe anything Hank Paulson says?
First, he needed $700 Billion,
and fast, to buy up troubled assets or the skies would fall and we would
be pressed to impose martial law. He found an appropriate acronym, TARP,
to manage the money with a skeletal staff of 28 headed up by one of
his former proteges at Goldman Sachs.
Far, So Good,
But then he had himself a rethink,
realizing that no one has a clue about how to price troubled assets
considered practically worthless. So he had to a make a shift, "in
the light of new facts," even though Congress never authorized the
So Far, So Good.
He claimed this showed flexibility
and a willingness to respond to new information. Never mind that that
information was not new and kind of obvious to anyone paying close attention
to the subprime fiasco.
So Far, So Good
Then Congress pumped a three-page proposal into a four hundred-page package. Once it was 'enhanced' will all kinds of pork and earmarks it was passed. Legislators
screamed about the absolute necessity of oversight and transparency; after all, this is taxpayer's money. But then, they took a break to
run for re-election without naming anyone to oversee Hank's new TARP
or the taxpayer money. There seems to have been an oversight of oversight?
So far, Less Good
Paulson, then changed the playbook
and started pumping a few billion here, and a few billion there into
the coffers of financial institutions, many with lots of money already
to recapitalize banks. The goal, we were told was to get them lending
There was a problem, though. Most banks didn't
start lending because of fears of the risks to their own survival in
the current economic free fall.
Partly that was because the
government was not requiring any concessions except NON-Voting stock
which gives it little leverage. The auto industry was expected
to outline a reorganization plan to get the money. The banks had no such requirement.
A New York Times report from
"Some analysts said the idea
that recapitalizing banks would repair the lending market was flawed
from the beginning because it was contradictory. On the one hand, the
policy was meant to make banks reduce risk. On the other, it pressured
them to lend more which meant taking more risks."
So instead they diverted some
of the money to satisfy their internal needs. An Associated Press investigation
found: "Banks that are getting taxpayer bailouts awarded their
top executives nearly $1.6 billion in salaries, bonuses, and other benefits
last year." Many other banks would not disclose what they did with
the money. Many of them have tightened credit, rather than loosened
Oops, not so good
"Treasury has bought preferred
stock with no control rights," writes former Fed governor Alan Blinder. "...There
are no public-purpose quid pro quos, such as a minimal lending requirement.
So banks can just sit on the capital, which is what most of them have
done, or use it to make acquisitions, as a few have....
So here we are, looking at
an all-too-familiar story. The administration that brought you the Iraq
war and the Katrina response is locking in another disaster before it
"TAMING WILD BEASTS"
Historian Howard James goes
further indicting the measures governments have been taking which he
calls a "crescendo of ad hoc measures that several governments took
throughout the fall: injecting liquidity, purchasing toxic assets, capitalizing
banks, and, finally, nationalizing entire banking systems." He's
skeptical that they will work.
"The $700 billion bailout
announced by the U.S. Department of the Treasury in late September was
designed to remove from banks' balance sheets mortgages and other securities
that in some way corresponded to real houses. But it is still unclear
today how these assets are to be valued or how that valuation might
wind up benefiting or hurting their new owners. In the United States
and in Europe, the hope is that governments will assume many of the
risks inherent in this uncertain valuation -- and tame the wild beasts
of the financial jungle through state-backed and state-run banking systems.
To some, this is profoundly ironic.
As Russian President Dmitry
Medvedev put it in September, the experience shows that "the move
from self-regulating capitalism to financial socialism is only one step."
American free-market capitalism was not supposed to look like this.
Recently, I met Princeton Professor James, who was speaking
at an elite forum on the economy at the Council of Foreign Relations.
I asked if he shared my belief that our financial system is permeated
with crime, and that the financial crisis was engineered by banksters
and white collar criminals. (This was before the Bernard Madoff revelations.)
I expected the panel to be dismissive of such a "crude" suggestion
in a room full of finance professionals, but he wasn't, and agreed
publically that the problem is fraud problem is serious but that in
times of prosperity, exposes are rarely pursued.
He now sees the US now emulating
China-which is having a hard time too-with more state intervention.
He thinks this is the direction we will be forced to move in and sees
Beijing more than Washington as key to solving what is now a global
This thought upsets guardians
of the free market like finance expert Peter Schiff, Ron Paul's economic
advisor and the man who was laughed at on TV when he warned of the current
collapse. I spoke to him recently for the film I am making on
the economic crisis based on my book, Plunder. He thinks the government
has to stay out of markets even if that means businesses will collapse.
SCHIFF: What is happening
right now, the credit crunch, the collapse of the real estate stocks,
all these companies going bankrupt, this is not the problem. This is
actually the solution. This is the consequence of the problem. The problem
was that for years we ran this funny economy where we borrowed money
SCHECHTER: How could that be
the solution? So many people are out of work, people are losing homes?
SCHIFF: Well, we have to rebalance
The clash over macro-economic
policy is mirrored in a debate over specific policies. Congress finally
found an oversight person in Elizabeth Warren, the Harvard Professor
and critic of consumer rip-offs. She says Paulson is not disclosing
enough and just published a report with tough questions about Paulson's
Already the banking industry
is fighting back, questioning her judgment and implying she is some
kind of commie. Hedge Funder Tom Clark derides her concerns but doesn't
doesn't just quibble with this lending practice or that one. She thinks
the entire industry is diabolical. Warren apparently believes consumer
lenders have some mystical, systematic advantage over consumers, which
they see as their duty to exploit at every turn. Or, as she puts it, 'Credit products
aimed at both middle class and poor families are designed to trick them,
trap them, and otherwise pick their pockets.'"
And so, as
the Obama Administration is poised to take over, we have radically conflicting
ideas of what to do. Should we help people or banks, Main Street or Wall Street,
take new initiatives or recycle old ones, use interventionist government
power or put all our eggs in 'the market rules' basket?
centrist appointments suggest he is buying into the prevailing Washington-Wall
Street consensus that tilts towards the private sector with Wall Streeters
as key advisors.
To be fair,
the Obama Plan has yet to be spelled out. The Washington Post reports
he has expanded it with
a massive federal stimulus package and now hopes to create or preserve
3 million jobs over the next two years.
He also has said Wall Street needs "adult supervision." Great phrase,
but they will need more than that. Many banks are basically bankrupt;
any recovery seems far off.
The only good
news in this bleak picture is that Paulson, the Goldman Sachs miracle
worker turned Donald Rumsfeld of the economy, is leaving soon, stage
right. Despit his feverish initial demands, however, he just announced that he doesn't need
another $350 Billion... at least for now. That was yesterday. Maybe he changed his mind.
That ball has
been kicked into Barack's court.
Have the Bush-Paulson-Bernanke
policies worked? Did the economy turn around on their watch or through
the trillions spent by the Fed?
Not even close and maybe
its time to TARP them all.
So far, Not
good at all.
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