Another World Was Possible
This has been a great week for the ownership society. Not only do we all own an insurance company, but now we've got ourselves hundreds of billions in bad debt:
While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.
Senior aides and lawmakers said the goal was to complete the legislation by the end of next week, when Congress is scheduled to adjourn. The legislation would grant new authority to the administration and require what several officials said would be a substantial appropriation of federal dollars, though no figures were disclosed in the meeting [...]
“What we are working on now is an approach to deal with systemic risks and stresses in our capital markets,” said Henry M. Paulson Jr., the Treasury secretary. “And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions’ balance sheets,” he added.
One model for the proposal could be the Resolution Trust Corporation, which bought up and eventually sold hundreds of billions of dollars’ worth of real estate in the 1990s from failed savings-and-loan companies. In this case, however, the government is expected to take over only distressed assets, not entire institutions. And it is not clear that a new agency would be created to manage and dispose of the assets, or whether the Federal Reserve or Treasury Department would do so.
President Paulson and Vice President Bernanke make a good case here. We can't allow the financial markets to blow up, and so federal intervention is needed on a big enough scale to stop the bleeding. And the numbers they're talking about are one trillion dollars.
Also, the government is restricting short selling, basically stepping in to ensure the market rises less than 50 days before a general election, and increasing the chances of a major meltdown in the future. The forces that be are telling Wall Street that financial stocks essentially are not allowed to go down anymore.
Kevin Drum writes the post I was about to write before I got tied up this morning.
...if Uncle Sam can afford to spend a trillion bucks or so rescuing Wall Street, it would be nice if they could spend a trillion bucks shoring up all the poor saps losing their homes because they can't make the payments on those option ARMs they were talked into buying during the boom years. We could do it if we wanted to, and the risk wouldn't even be appreciably different from the Wall Street bailout. The feds would have to make distinctions (just as they will with overleveraged banks), and some homeowners would qualify for a rescue package while others wouldn't. The ones who qualified would get loan relief, which most of them would eventually make good on, in the form of restructured financing. People would be helped, the subprime crisis would get attacked at its roots, and although it would cost a lot of money up front, in the long term the price might end up being fairly modest (by present-day brobdingnagian standards, that is). Moral hazard is an issue, but no more than it is for the bank bailout.
That's exactly correct. If you stepped in to bail out homeowners and pay off their restated ARM rates, suddenly they would have more money to spend in retail. The "illiquid assets" that these banks were holding would suddenly have value. The market would go up across sectors because consumer-based businesses would see more robust growth. The economy would expand and the people would see the fruits of it instead of the bankers who mad bad bets in the first place. It may sound unfair, but I don't think anybody would compare it unfavorably to what we're seeing today.
There's a chance that this wouldn't work so smoothly, of course. But the real point is that it doesn't get considered. And that's because the new President and Vice President are the Treasury Secretary and the head of the Federal Reserve. They, and most economists, essentially view financial crises from the standpoint of the banks instead of those who put their money into them. What's more, Paulson used to run Goldman Sachs, and even if he isn't collecting money in stocks from them, he has relationships with those who are.
There is no voice for taxpayers in a situation like this, and so nobody should be very surprised when taxpayers are left with all the burden at the end. The elites snap their fingers, shrug their shoulders and try again with the full backing of the federal treasury, and the workers see nothing but debt as far as the eye can see. This has been the reality in our country for all but only those few years after the Depression, after a global meltdown that could not be stopgapped. The big money boyz are a lot more sophisticated about protecting their own fiefdoms these days, but that doesn't mean they can survive forever. They went to the edge of the cliff this week, and this temporary reprieve doesn't mean they won't fall over.
...Robert Reich agrees. Money quote.
Congress, the Fed, and the Administration shouldn't be giving more help to Wall Street. Policymakers should focus instead on people who really need a safety net right now -- workers who have lost or are about to lose their jobs, who need extended unemployment insurance and health insurance for themselves and their families; homeowners who have lost or are likely to lose their homes, who need additional help meeting mortgage payments and reorganizing their debts; and people who have lost or are in danger of losing their savings or pensions, who need better insurance against possible loss.
The only way Wall Street's meltdown doesn't spill over to Main Street is if policymakers begin to pay adequate attention to the people whose wallets really keep the economy going, and who merit more help than the Wall Street tycoons whose carelessness and negligence have put it in such jeopardy.
Labels: bailouts, banking industry, Federal Reserve, Henry Paulson, mortgages, Treasury Department