In spite of its best efforts, the Bush administration failed to push through a $700 billion give away to Wall Street. President Bush conjured up scary images of the Great Depression on national television. He even partially backed away from his initial demand for a complete blank check for Henry Paulson. But the public refused to send their tax dollars to Wall Street banks run by incompetent bankers, and they insisted that their representatives in Congress listen to their wishes.
While the editorialists are busy denouncing members of Congress for surrendering to the vulgar masses, it's a good time to quickly check the score card. The United States is in a recession and facing the worst financial crisis in almost 80 years because the folks currently in charge were out to lunch.
They allowed an $8 trillion housing bubble ($110,000 for every homeowner) to grow unchecked. People like Henry Paulson, Ben Bernanke, and Alan Greenspan repeatedly insisted that there was no housing bubble as house prices got ever further out of line with fundamentals. President Bush regularly boasted about record rates of homeownership as the sleazes at outfits like Countrywide, IndyMac, and New Century pushed predatory mortgages on moderate income families, many of whom were black or Hispanic.
It just took a little common sense to see that a disaster was imminent, even if the exact timing and course could not be predicted. But, our elites lacked commonsense, and that is why we now face such a dire economic situation.
The main cause of the economy's weakness is not insolvent banks and lack of credit; it's the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble's partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero.
With much of this equity now eliminated by the collapse of the bubble, many families can no longer sustain their levels of consumption. The main reason that banks won't lend to these families is that they no longer have home equity to serve as collateral. It wouldn't matter how much money the banks had, they are not going to make mortgage loans to people who have no equity.
And house prices are not going to come back. This is like Pets.com. We are not going to get the price of $200,000 homes in central California back up to $500,000.
The main problem in recovering from the recession will be finding ways to boost demand other than household consumption. In the longer run, this will mean reducing imports and increasing exports. In the short-run, we will have to rely on government stimulus to help spur growth and reduce unemployment. The Democratic demands for stimulus were not extraneous to the legitimate goal of a bank bailout bill. Fiscal stimulus must be central to any serious effort to boost the economy.
The weakness of the banks contributes to the downturn, but they are not the core of the problem. We would still be facing a recession even if all our banks were flush with cash. Hence the hype about the urgency of the bailout was an invention. It would be good to get our banks in order, but it also would be good to send $100 billion to state and local governments to support infrastructure projects and other spending.
How do we go about getting the banks in order? Almost every economist I know rejects the Paulson approach and argues instead for directly injecting capital into the banks. The taxpayers give them the money and then we own some, or all, of the bank. (That's what Warren Buffet did with Goldman Sachs.)
This isn't about begging for a sliver of equity as a concession for a $700 billion bailout, this is about constructing a bank rescue the way that business people would do it. We have an interest in a well-operating financial system. There is zero public interest in giving away taxpayer dollars to the Wall Street banks and their executives.
If Secretary Paulson constructed a package that was centered around buying direct equity stakes in the banks, he could quickly garner large majority support in both houses. Better yet, Congress could just construct its own package centered on buying equity stakes and send it to President Bush. If he balks, we can just threaten him with stories about the Great Depression.
There is no interest from anybody on backing the failing banking system as it is and we all know that.
Only if the Plan included the working class and spending money for the good of the general public in all states it would pass.
Not my Congressperson, Henry Waxman -- he voted for the toxic bill. No one is running against him.
"The main reason that banks won't lend to these families is that they no longer have home equity to serve as collateral. It wouldn't matter how much money the banks had, they are not going to make mortgage loans to people who have no equity."
Home equity? They probably don't even have jobs anymore.
I've heard Mr. Baker on several radio shows and applaud that he's one of the sane people talking about this issue.
Imagine what the bankers will do with all this extra money once they offload their more risky securities onto the taxpayer. I suspect they'll pack up and leave. After all, an Obama administration will not be a prosperous opportunity for them as they are the only people in the country who will get a tax increase.
Might as well retire in Monte Carlo, don't you think?
LAST UPDATED: 28 Jan 2008
This sounds analogous to the mortgage/Wall Street crisis to me. Taxpayers should not have to buy up the banks' bad debt and hope it turns around. Instead, we should do something akin to what we are doing for the car makers. We should look at the Swedish approach and demand real equity if we decide it's in our best interest to keep them afloat by loaning (not GIVING) them any money at all. (For more on the Swedish approach, see http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em. )
NO WELFARE FOR WALL STREET !!!
IF this taxpayer bailout of Wall Street was absolutely critical to keep the economy functioning, The REPUBLICAN Secretary of the Treasury would be able to persuade the REPUBLICAN Senators and Representatives to vote Yes. Unanimously. The fact that Paulson can't even get a third of the House Republicans to vote 'yes' makes it clear that this taxpayer giveaway to Wall Street is NOT necessary to prevent a depression.
Call your congressmember NOW. Keep the bailout DEAD.
It has taken years to get to the place of a $700B bailout, buyin, or however folks won't to term it HOWEVER it should not take two weeks to get us out. What are other alternatives? Let us hear them and make this work for EVERYONE and not a select few.
1) We give the banks money, they give us stock (same as Buffet).
2) Government regulators sit on the Board of Directors (same as Buffet).
3) We get dividend checks (same as Buffet) used to fund Social Security (or offset taxes).
4) When banks recover, we earn a profit (same as Buffet)
5) Regulators on the board set executive compensation packages.
6) New bank regulations prevent this from happening again.
If they are $400,000 on average let say, that's $800 billion.
This is the way it needs to be explained to the citizens.
Now the GOP in the House who try to stop regulation whenever they can won't bail anyone
out but would rather everything collapse and then we have to come up with unemployment
and FDIC insurance when the depositors loose it all if banks fail.
And the latest news is that the GOP in the Senate is blocking Altenative/Renewable Energy
incentives up for renewal as oil remains around $100 a barrel even as a world recession looms.
The GOP has to pay a heavy price for this insanity. They deserve Palin. But is that enough of a punishment?
They want That! Not a few hundred billion here or there. They want this Loony Toons fractional banking system where $1 dollar gains the value of $10 everytime it is loaned out or sold as a debt, to be the basis of the bailout. And as long as we buy into their Fairy Tale definition of banking and money, we will be paying $700 Billion as the down stroke and the rest for generations.
That may be so, but why does an "ordinary person" (whatever that is) couple such economic misery with the self inflicted gunshot wound of an interest only or adjustable rate mortgage?
This "ordinary person" today has a 50% savings rate. I could live big but I don't. In the past I used to have a 20% savings rate and even when I was on a minimum wage job as a student I had a 10% saving rate. Why? Because I have seen what living on borrowed money did to the life of my parents. They did not have a choice. I did. And I exercise it.
My personal rule for taking out a loan for a new home is that I have to be able to pay the loan for a full year while being unemployed. A full year. I turned down three homes over the past two years because my criteria were not compatible with the asking price. That's called fiscal discipline. You don't buy larger than you can truly afford.
The whole liquidity in lending markets come from securitization. If you are opposed to securitization, you have to accept higher rates.
cant have it both ways
"You can't keep what you ain't got, you can't lose, what you never had.."
So I should be pointing my incredulous finger at blacks and mexicans because they intrinsically understand less about the nuances of mortgage financing than whites???
No? Everyone who fails to read the fine print (regardless of color) is to blame? Ok then.
"The main cause of the economy's weakness is not insolvent banks and lack of credit; it's the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble's partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero.
With much of this equity now eliminated by the collapse of the bubble, many families can no longer sustain their levels of consumption. The main reason that banks won't lend to these families is that they no longer have home equity to serve as collateral. It wouldn't matter how much money the banks had, they are not going to make mortgage loans to people who have no equity."