Oh, okay, so now, Republicans believe in socialism...
On "This Week" on Sunday, Bush Treasury Secretary Henry Paulson confirmed that the administration is prepared to up the ante on American socialism by not only taking over the vast majority of Wall Street's bad assets (meaning, as George Will pointed out, that after the bailout, the government would control most U.S. investment banks) but that the White House would push for the $700 billion bailout to include buying up the bad assets of foreign financial firms, too:
"We are talking very aggressively with other countries around the world," Paulson said in an interview on ABC News' "This Week." "If a financial institution has business operations in the United States, hires people in the United States...they have the same impact on the American people as any other institution." Paulson, the architect of the bailout, also said that he will fight requests by Democrats to include a broader stimulus package in the bailout legislation. "We need this to be clean and quick, and we need to get it in place," said Paulson. By "clean and quick," he means rush through a bailout for the big boys, with nothing for you, except the bill. So much for Republicans' belief in the free market. In their former Darwinian belief system, failed companies are supposed to be allowed to fail. Not anymore. Now, Republicans believe in aggressive government intervention to help the richest of firms and investors stay rich. Bailouts for ordinary people who are in danger of losing their homes: not so much. You see, those people are actually to blame... Meanwhile, the world begins to notice our sudden love of socialism. From the Herald, UK: Today we will learn further details of what could turn out to be the greatest act of grand larceny in history: the US treasury secretary, Henry Paulson's, trillion-dollar bailout of the US banks. Following last week's crash, the US government has decided to use taxpayer money to buy up all the bad mortgage debts of the banks and investment houses and insurance companies and let them start again with a clean sheet. In other words, save them from the consequences of their own folly. Nothing similar is yet proposed here, but it will. The Bad Bank bailout is a bad idea. If the bankers get away with this we really will be one step from serfdom. I'm someone who has always tended to the left of the political spectrum, but on this issue I side with the American conservatives, such as Republican Congressman John Culberson, who are saying that this is socialism for the rich. Congress has no right bailing out private investors with money pledged in advance from the children and grandchildren of American citizens. Advocates of the Bad Bank fund cite the success of the Resolution Trust Corporation (RTC) which sorted out the wreckage from the US savings and loans bust in 1989. But the RTC was very different from this Bad Bank. It collected and eventually sold off loans made by banks that had already gone bust; what is being proposed now is to buy loans before the lenders go under. In other words, it will create an artificial market with artificial prices to perpetuate the bankers' delusion that they are not actually bankrupt. Still less is Paulson's bailout any kind of legitimate descendant of the Reconstruction Finance Corporation set up by Roosevelt in 1933 to cope with the last comparable banking crisis during the Great Depression. The first thing FDR did was shut the banks down, throw out their managements and halt all dividend payments. He then reopened the banks under new management and under US Treasury supervision, giving federal loans to banks prepared to behave.
And from the Asia Times:
E pluribus hokum or
When the gamblers bail out the casino
By Spengler
Why should American taxpayers give US Treasury Secretary "Hank" Paulson a blank check to bail out the shareholders of busted banks? Why should the Treasury turn itself into a toxic waste dump for their bad loans? Why not let other banks join the unlamented Brothers Lehman in bankruptcy court, and start a new bank with taxpayers' money? Or have the Treasury pay interest on delinquent mortgages, and make them whole? Even better, why not let the Chinese, or the Saudis or other foreign investors take control of failed American banks? They've got the money, and they gladly would pay a premium for an inside seat at the American table.
None of the above will occur. America will give between US$700-$800 billion to the Treasury to buy any bank assets it wants, onany terms, with no possible legal recourse. It is an invitation to abuse of power unparalleled in American history, in which ill-paid civil servants will set prices on the portfolios of the banking system with no oversight and no threat of legal penalty.
Why are the voices raised in protest so shrill and few? Why will Americans fall on their fountain-pens for their bankers? If America is to adopt socialism, why not have socialism for the poor, rather than for the rich? Why should American households that earn $50,000 a year subsidize Goldman Sachs partners who earn $5 million a year?
Believe it or not, there is a rational explanation, and quite in keeping with America's national motto, E pluribus hokum. Part of the problem is that Wall Street, like the ethnic godfather in the old joke, has made America an offer it can't understand. The collapsing the mortgage-backed securities market embodies a degree of complexity that mystifies the average policy wonk. But that is a lesser, superficial side of the story.
Paulson's dreadful scheme will become law, because Americans love their bankers. The bankers enable their collective gambling habit. Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose; individually they nonetheless hope to win their way out of the hole.
Americans are so deep in the hole that they might as well keep putting borrowed quarters into the one-armed bandit. They have hardly saved anything for the past 10 years. Instead, they counted on capital gains to replace the retirement savings they never put aside, first in tech stocks, then in houses. That hasn't worked out. The S&P 500 Index of American equities today is worth what it was in 1997, after adjusting for inflation (and a pensioner who sells stock purchased in 1997 will pay a 20% capital gains tax on an illusory inflationary gain of 40%). Home prices doubled between 1997 and 2007 before falling by more than 20%, with no floor in sight.
As it is, many of the baby boomers now on the verge of retirement will spend their declining years working at Wal-Mart or McDonalds rather than cruising the Caribbean. Some of them still have time to tighten their belts and save 10% of their income (by consuming 10% less), plus a good deal more to compensate for the missing savings of the 1990s.
Altogether, they'd rather gamble, and if that requires a bailout of the house, they gladly will chip in to pay for it. After all, today's baby boomers won't pay for the bailout. The next generation of taxpayers will pay for Paulson's $700-$800 billion. If that enables the present generation to keep borrowing rather than saving, it is no skin off their back. If home prices continue to collapse, the baby boomers will die in debt anyway, working at low-paying jobs until the day before their funerals.
And Spengler has this additional, interesting note: Investment banks typically hold about $30 of securities for every $1 of capital, so a 3% write-down would leave them insolvent. If Lehman Brothers classified 14% of its assets as Level III at the end of the first quarter; Goldman Sachs was at 13%. Why is Lehman bankrupt, and Goldman Sachs still in business? If Secretary Paulson, the former head of Goldman Sachs, had not proposed a general bailout last week, we might already have had the answer to that question.
... Some Democrats in Congress are asking for some form of oversight, but it is hard to imagine how they might use it, for a Treasury with $800 billion to spend would constitute the whole market bid for low-quality mortgage assets, and would set whatever prices it wished. Professionals with years of experience set prices on these securities with great uncertainty. How would an overseer determine if it had set the correct price? And if the Treasury decided to bail out one bank (say, Goldman Sachs) rather than another, how would the overseer judge whether that decision was judicious, politically motivated, venal, or arbitrary? Hm... and now from Lanny Davis, writing in the Murdoch Wall Street Journal:
If a liberal Democratic administration had put hundreds of billions of dollars of taxpayer money at risk by bailing out Bear Stearns and nationalizing American International Group (AIG), Fannie Mae and Freddie Mac, wouldn't conservatives accuse Democrats of "socialism"? Can Mr. McCain now square a circle by calling himself a conservative while favoring increased regulation? In fact, Mr. McCain championed financial deregulation for years. In 1999, he supported legislation crafted by Phil Gramm, then a senator from Texas, that removed Depression-era walls between banking, investment and insurance companies -- allegedly to make the country's financial institutions more competitive and free to take entrepreneurial risks in the marketplace. (Many Democrats, including Sen. Joe Biden, the party's vice presidential nominee, supported this ill-considered legislation as well.) The result was the creation of a free-market free-for-all of banks approving home mortgages to people who clearly couldn't afford to repay them if real-estate values stopped rising. It also spurred investment banks to buy and sell packages of mortgages after they had convinced themselves that by "spreading the risk," bad loans could become less-bad loans. Then they bought insurance contracts from gargantuan insurance companies like AIG to spread the risk even further. Investors banked on the fact that if real-estate values stopped rising (impossible!), and more and more people defaulted on their mortgages, Fannie and Freddie would pick up the tab. And, if Fannie and Freddie went down, there would be -- The-Ultimate-Bearer-Of-All-Risks -- the lowly taxpayers. Now I know what former Sen. Gary Hart meant when he told an audience of wealthy Republican businessmen during his 1984 presidential campaign, "I know why you are conservatives -- you favor private enterprise for the poor and socialism for the rich."
And the boos keep coming, from Krugman, from Roger Cohen, and from Bill Kristol, who advises John McCain to flip-flop again and oppose the bailout. Personally, I'd give the same advice to Barack Obama...
| Labels: deregulation, financial crisis, John McCain, mortgage crisis, Republican socialism, the Bush bailout, u.s. economy, Wall Street |
