Why Bail? The Banks Have a Gun Pointed at Their Head and Are Threatening to Pull the Trigger
If you have a real story, you don't have to make up phony stories. That's pretty straightforward.
I've heard lots of phony stories. Much of the country's political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true.
There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.
At this point I cannot identify a single good reason to do the bailout.
The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can't trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.
That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis.
In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks. The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money. In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion.
If we are not worried about this worst case scenario (to be clear, I wouldn't want to see it), then why should we do the bailout?
There has been a mountain of scare stories and misinformation circulated to push the bailout. Yes, banks have tightened credit. Yes, we are in a recession. But the problem is not a freeze up of the banking system. The problem is the collapse of an $8 trillion housing bubble. (It was remarkable how many so-called experts somehow could not see the housing bubble as it grew to ever more dangerous levels. It is even more remarkable that many of these experts still don't recognize the bubble even as its collapse sinks the economy and the financial system.) The decline in housing prices to date has already cost the economy $4 trillion to $5 trillion in housing equity. This would be expected to lead to a decline in annual consumption on the order of $160 billion to $300 billion.
Given the loss of housing equity, I have actually been surprised that the downturn has not been sharper. Homeowners had been consuming based on their home equity. Much of that equity has now disappeared with the collapse of the bubble. We would expect that their consumption would fall. We also would expect that banks would be reluctant to lend to people who no longer have any collateral.
This is the story of the downturn and of course the bailout does almost nothing to counter this drop in demand. At best, it will make capital available to some marginal lenders who would not otherwise receive loans. We should demand more for $700 billion.
For the record, the restrictions on executive pay and the commitment to give the taxpayers equity in banks in exchange for buying bad assets are jokes. These provisions are sops to provide cover. There are now written in ways to be binding. (And Congress knows how to write binding rules.)
Finally, the bailout absolutely can make things worse. We are going to be in a serious recession because of the collapse of the housing bubble. We will need effective stimulus measures to boost the economy and keep the recession from getting worse.
However, the $700 billion outlay on the bailout is likely to be used as an argument against effective stimulus. We have already seen voices like the Washington Post and the Wall Street funded Peterson Foundation arguing that the government will have to make serious cutbacks because of the bailout.
While their argument is wrong, these are powerful voices in national debates. If the bailout proves to be an obstacle to effective stimulus in future months and years, then the bailout could lead to exactly the sort of prolonged economic downturn that its proponents claim it is intended to prevent.
In short, the bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal.
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Believe me, I am no economist. I do know that experts say there will be a great depression unless we hand over $700 billion to the government. This is the same government that, for the last five years, has spent our tax money at the rate of 10 billion a month for a "war" based on lies. The same one that "lost" 9 billion dollars in cash at the beginning of the war. The same one that handed out no bid contracts to their closest buddies to rebuild Iraq and straighten out the sewer, water, and electric systems (never done). This is the administration that has shredded the Constitution, removed all the civil and legal rights, and appointed cronies to key positions, This is the administration that that has killed one million Iraqis and 4000 plus Americans. Nancy Pelosi, Paulson, and most of the others on the committee have decided our fate. They all have holdings in the biggest corporations. Because greed, corruption and mismanagement have been rampant in Congress for so many years, the ordinary taxpayer will have to try and survive a great depression or worse yet, a fascist take over of the entire country. You doubt this?
FOLLOW THE MONEY!
Well said!
Arming ones self to face the coming months is a good idea.
let's start with the assumption that these aren't stupid people. let's further assume they have been briefed on matters of grave national concern by those responsible for having that information, whatever it is, straight from the horse's mouth. to date, i haven't been told what that information is. have you?
here's what could have happened to make your argument not only wrong, but dangerously wrong.
the deal on the transfer from the texas railroad commission to opec included the promise for opec to trade oil on the international market for US dollars. the result? other countries (like japan and china) needed to have US dollars to buy oil from opec. as long as this was true, the US had a virtually limitless credit rating. the US could borrow and spend to its heart's content. the only risk was that the world would decide to sell oil for something other than US dollars.
and that's exactly what the bushie neo-cons did. what was probably brought to the senate last week was an international message that unless we stabilized our economy, the world would do as saddam did --- sell oil for a more stable currency, like euros.
if that's what happened, there were no options. if we didn't take care of the problem, the US would lose it's abililty to borrow. that the repugnants managed to align themselves against bush and the democrats in the process --- well, that's pure rove.
do doctor doctor, is the scenario you suggest is correct, should the US have bailed?
what would be the consequences of oil being sold for euros not dollars?
if we cannot borrow any more money to make war with Iraq or in future with Iran, my feelings will not be hurt
A good analysis, but had the US government stepped in to take over the banks, the value of the dollar would be assured. Dealing directly with our government rather than the banks is always preferable for the democratic leaders and despots who control the world's oil resources, who appreciate the strength of the "state" vs. unreliable private institutions.
Oh, goodness. I don't know anything about this high finance (or low finance, to be truthful)!!
Who do I believe, this Dean Bazker guy (the author) or the Congress and President and the Secreatry of the treasury?? (Well, I don't believe the President about sh&t, but why are the Congress and Secretary pushing it, too??)
(Excuseme typo: that should bw "Dean Baker.")
If it lays your morning eggs, it's probably a ........
BECAUSE:
The "Crises" will hurt a lot of very rich people if someone (YOU) doesn't cover their bad investments/Gambles.
The Media is owned by very rich people so they tell you we must act now.
"The Secretary" is a very rich person who is also the former CEO of Goldman Sachs, which made a lot of bad investments/Gambles.
The people in Congress get to stay in Congress through the money of very rich people, so the Congress does nice things for rich people with YOUR tax money.
Oh!! Thanks. This article helped my understanding as well:
http://www.huffingtonpost.com/david-sirota/top-5-reasons-to-vote-aga_b_130068.html
I don't know Baker at all. He seems to think that doing nothing is the way to go. That sounds to me like he is an idiot. The banks are going under. There won't be a banking industry is they are swallowed by the bad debt. They need relief. Please publish other opinions besides the obvious rabid outsider.
The point that he's making is that the banking industry will not collapse! And while I don't know if he's right or not, I CERTAINLY know that spending $700 billion in this way is almost GUARANTEED to fail! Thus we will not only waste $ 700 billion, we will have to spend MORE later!
He is correct about the banking industry not collapsing, but that won't solve the second and more important part of the problem: availability of cheap credit lines for business and industry.
Please understand that not all credit is created equal. There is the credit that people need to perform business activities and then there is the credit people mistake for income (credit cards, home loans). We need to cut the latter while preserving the former.
Now, I am not sure the bailout would do that, but something else will have to.
EXACTLY! Credit for a home or for a business, or to expand a business is a good thing. Credit to buy your gasoline (since you're too lazy to do anything other than swipe) is NOT. Further, as you point out, home loans that people TREAT as income is ALSO not good credit!
I don't think that the bailout will succeed in removing bad credit while creating or maintaining good credit. In fact, I think that the only thing that could work would be massive govt spending programs like the New Deal.
You are so smart LeftRight. I agree with you. UP with socialismm. Let's let the government take over energy, health care, food, and housing.
Share and share alike. That's the way.
Thanks again.
When bad banks go under, others will spring up to take their place. That's the way it works. You don't think all banks are going to disappear never to be seen again do you?
If banks have to fail to get rid of greedy, incompetent administrators, let them fail. The sooner we get rid of the bad'uns the better. Clearly, deregulation has failed exactly as its opponents predicted. Greed is fairly predictable.
Read his bio..he's an economist.
The bill failed!
For some reason, the WaMu ad with the naked bankers pops to mind...
Ironic that WaMu was actually among the naked!
I hated that commercial. It goofy. TV is so dumbed down I barely watch it anymore. I know if I turn it on, something's going to come on that will make me sad or mas shortyl.
Let the Wall Streeters fail. They should be responsible and accountable for their incompetence. And, just like with any businesses that fail - - there'll be "replacements" opening up shop within months. The whole "bailout" idea is absurd! If the effort was aimed at bailing out businesses that offered many jobs, i.e., the U. S. auto makers, maybe! But a bunch of commission agents who produce nothing? Not!
Dennis Kucinich & Ron Paul are against the bailout. They are the only ones I trust besides Bernie Sanders. If Pelosi & Bush are for it, you know it's a scam.
What do the mean congress is out of session until next year? How can our government take so much time off? 2 weeks twice a year is more than I ever had. We need to completely make over the insipid laws, rules, vacations, better healthcare than we who pay for theirs. I say let's start over with Ron, Dennis & Bernie leading the charge.
These are not just the Wall Streeters. This includes one of my favorite Chinese restaurants which is moving into a larger place as we speak. They had customers waiting at lunch and dinner for ages. Finally they decided to expand. Now I have to hope that the expansion will not kill them because of the cost of credit they have to pay for the renovation of the new location.
I couldn't agree more,...try shorting your cash drawer at Burger World for a week and see if the manager is waiting for you with an extra paid day off and a bonus check?!
If the bail out does not happen many may medium small and other business will fail ot lay off millions fast. They must have credit and if they cannot get they will also fail or become a fraction of there potential business.
There will be a run to remove saving from the banks and you will see allot more bank failures.
Intrest will climb out of control at the banks . Consumers will not trust any bank small or big to have there money there. Those that have over $100,000 in deposits will run for the hills i have already seen this happen with people i know.
If you want to see what a total meltdown is just vote No and watch unemployment in 60 days..
Do not be spiteful demand those that comitted fraud be prosecuted such as CEOS of banks, Fanny Mae, Freddy Mac appraisers etc. and e -mail your congressman and senators that you demand Prosecutions or NO BAIL OUT.
"In short, the bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal."
That basically says it all. They are voting now. Let's hope it doesn't pass because I don't see any reason to "reward the richest people in the country for their incompetence". There economy isn't going to implode the way the fear mongers claim it will....
The deal rewards ordinary Americans for having a savings rate that is almost negative, too. The message it sends is counterproductive, but the consequences in the short term could be worse.
We will see what most people think about it a month from now.
Just In: The Bailout Bill has been defeated by House Republicans.
I don't care WHO defeated it, it will have to go again! We may still have a chance to PERMANENTLY defeat it!
Look like Cenk was right it a fracking setup! The GOP want this bail out but they want to blame the Democrat for it!
And that's why I'm seeing morons out there who are claiming that this is all the fault of DEMOCRATS and now those elitist snobs want to give away $700 billion of taxpayer money......
Never mind the FACTS which show incontrovertibly that it was REPUBLICAN deregulation which led to this, and a REPUBLICAN president who proposed the $700 billion bailout.....
I just wish Pellosi would grow some and tell them. "Frack you! You broke it you fix it it not our problem anymore!"
I don't think that anybody is guilty of anything but stupidity and greed! Credit got so cheap that it drove the price up too fast. Peoples sold their home for 40% over the real value and nobody figured out that the whole thing was artificial. Contractors started asking more and more over their cost and cost of building started to rise anyway due to specialist like electrician and plumber starting to ask for their share! Landowners also sold their land for inflated value and a lots of peoples got rich flipping house.
The cities got greedy too and property tax went to the roof and they never considered that it was a temporary artificial situation. Insurance company had to adjust their rate to take into account the new value and that sure did not help peoples who were already struggling.
Many foreclosure at the start of this mess were not due to the fact that peoples could not afford their mortgage anymore it was all the other cost that have gone to the roof these peoples had bought their homes before the bubble started and they could only afford the mortgage that they had and in a few years they see their insurance and tax goes 40% to 60% up. By the time these peoples tried to sell nobody wanted to buy anymore at least not at 60% more than what it worth! Did I forget anyone... So who is guilty? More to the point who innocent?
Actually, MY hometown is now hurting because they counted the higher property values, and lowered their tax RATES. Now they will have to raise rates to keep up!
Maybe the Brits have the right solution. Nationalize the financial industry. Not that the government can do any better. But isn't holding people hostage illegal? Give me equity or give me debt.
http://www.ft.com/cms/s/0/1e5b888c-8c06-11dd-8a4c-0000779fd18c.html?nclick_check=1
Continued from "STIMULUS"
The ultimate effect of such investments on the economy would be:
1. Stabilization and eventual reduction of the unemployment rate (i.e. more people working, earning, buying and eventual---2-5 years---positive impact on the housing market )
2. Increased opportunities for investors and venture capitalists to capitalize businesses created to support these programs (e.g. manufacturers of wind, solar, hydrogen and other "alternative" energy solutions).
3. GDP growth
4. Increased federal revenues
Aside from possibly temporarily unfreezing the credit market, sending $750B to Wall Street won't accomplish any of this. It will just give Wall Street a second chance under slightly different conditions (i.e. technically they are no longer investment banks, but rather bank holding companies or subsidiaries of them).
I say "possibly" because no one, neither Paulson nor Bernanke, has yet presented a clear, detailed analysis that describes exactly how this "rescue" is supposed to work. If they have and I happened to miss that, please send me the slides. It will make me feel better about the $750B obligation if I understand how it's going to be spent and why.
Considering Ben Bernanke's history (PhD in Economics from MIT; Milton Friedman school monetarist) I'm guessing (without any evidence to the contrary) he either doesn't know how "the Plan" is supposed to work, or for one reason or another doesn't want to tell us.
What is it about Navy vets???? We are both looking at this and recognizing that this "bailout" will do NOTHING to help the economy (unless you are VERY rich!!!) and that we will STILL suffer a collapse, possibly with a REAL bailout next time, but we can't afford both!
"...the bailout absolutely can make things worse...We will need effective stimulus measures to boost the economy and keep the recession from getting worse."
FDR's series of programs between 1933 and 1938 (i.e. during the Great Depression) that successfully restored the US economy to growth and stability was focused on job creation (e.g. the WPA). It also focused on reform of business practices---particularly in the banking industry---that were the primary cause of the depression to begin with (i.e. 1929 stock market crash). None of the New Deal programs provided direct funding to the banks or insurance companies.
It was a bottom-up approach that recognized the fact that labor force in any thriving economy is the keystone to its success.
If the US government is going to obligate $750,000,000,000 to save the economy, why not use the greatest part of that obligation---as Dr. Baker appears to be suggesting when referring to "stimulus programs"--- to create federally funded hydrogen filling stations, for example, at a strategically selected number of conventional filling stations across the country? Such a program would create jobs in a new high-technology applied research, manufacturing and service industries, create demand for training opportunities, and work in a strategic direction to dramatically reduce carbon emissions and dependence on foreign oil.
Let the FED handle the "credit crises".
The same could be said of other infrastructure refreshment and expansion programs.
Go to "Continued From STIMULUS"
Amen to what you said.
The only problem is that it makes to much sense and that it helps the working smucks like us not the filthy rich.
I am no economist. I have been listening to the experts and the pundits on this matter. So, here is my non expert 2¢ on the crisis.
At the heart of the current crisis is the housing bubble burst and bad subprime loans of little or no real values were bundled and sold as securities. These valueless securities were used as collateral for loans. When loans came due, KABLOOEY!
Rather than giving the money to the CEOs and stockholders who have already made billions in profits and through their own mismanagement created this implosion when the bubble burst. My suggestion is for the government to refinance all the unstable loans, including those that have defaulted and those that have foreclosed in the last 3 years. Refinance on a case by case basis at reasonable rates that are manageable and within the homeowners means.
This will provide a reliable influx of cash to the banks and increase credit. It will revalue the failed securities to increase their value. It will ease the crushing debt off the backs of homeowners and give them hope and confidence. Also it will stabilize the market long term and restore confidence and value over time to 401Ks and retirement funds, as well as investor confidence.
Could someone explain to me why the "deregulators" are refusing to sign this legislation and why the democrats are supporting it? I am baffled that for the first time in my life (and I'm no kid) I am siding with the Republicans! What is going on here???
Because the republicans aren't really opposed to it! They are CLAIMING that they are, so that they can say to the American people, "SEE!!! The DEMOCRATS want to just spend spend spend!!!"
I know, but WHY are the democrats doing this? What's their reward for this?
That I don't know. I think that it has to do with the same idea as FISA, Iraq, and impeachment. In the first two they went along with it because they were scared. In the last, it was because Nancy didn't want to be President.
Hard to believe I could be more sad now....
You and me both.....
Buck up!! and saddle in sailors!! We're in for a ride and we're gonna need every hand!!!!
Excellent article Mr. Baker. You got right to the heart of the matter. Time to Digg this one.
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