The Bungled Bailout (Or the Perils of Paulson)
Somebody should compile an authoritative list of the foolish statements, Wall Street parochialisms and bungled bailouts racked up by Treasury Secretary Henry Paulson and his faithful Federal Reserve Board sidekick, Ben Bernanke, since the Great Credit Crash began in August 2007. Small wonder the global markets can't sustain any belief in the two men's tandem policies. Neither understands the cancer cells spreading in the corpus of the U.S. (and now world) economy.
First, we had Paulson's fatuous analysis that the summer 2007 spasms were just a real estate matter that would be easily contained. Tonto Bernanke agreed. Then came the Treasury Secretary's little remembered autumn proposal to set up a "SuperSIV" to handle the financial sludge that Citigroup and other big banks had parked in tricky off-the-books vehicles.
No sooner was the SuperSIV gambit ignominiously dropped than it was time for March's $29 billion Fed rescue of the investment firm of Bear Stearns. Although former Fed Chairman Paul Volcker called that one barely legal, Paulson and Bernanke said it would stem the tide. It didn't. Since then, we have seen the Washington-facilitated rescue of Merrill Lynch, the shrugged-off failure of Lehman Brothers, and the last minute bail-out of AIG, the too-cocky insurance giant. This regulatory triple-play failed to strengthen international confidence, and the Crash just kept on Crashing.
Eventually the towering T-Man and the bearded banker decided that perhaps skeptics were correct in surmising the world's biggest financial crisis since the 1930s. So during the week of September 15, they forswore the hapless doctrine of piecemeal bail-outs, assembled their crack staffs and consulted the memories of Herbert Hoover and J. P. Morgan. Then, in a mere three page emergency document approved by "President" Bush, they proposed that Paulson be made America's financial czar empowered to use $700 billion of the taxpayers' money to bail out Wall Street scofflaws by buying up the half-worthless or toxic financial products that other Wall Street geniuses -- all too many working in the same hotshot firms -- had pioneered.
The public, rightly perceiving a staggering ego trip and shameless bail-out, inundated Congress with a wave of letters, telephone calls and e.mails, and on September 22, the House of Representatives voted to reject the Treasury-Fed power grab. This stunned the financial community, which bathes 24/7 in the aura of its own importance, and global markets shuddered. Within ten days, the Senate had acted on a new rescue package -- loaded up with $100 billion of baubles, tax breaks and fresh pork to sway public opinion and bribe several dozen congresspersons. On October 3, the House accepted this version, but the global markets scoffed and sank for three straight days -- October 3, 6 and 7.
Here we must keep in mind that while Paulson and Bernanke got much of what they were looking for -- $700 billion and powers that verge on unconstitutionality -- some potentially important conditions were attached. To over-simplify somewhat, companies that turn in their junk paper to the Treasury's new subsidized rescue office can't have overcompensated top executives, and Paulson's Treasury has to make some details of the arrangements public within a few days. Meanwhile, the Secretary did not get the full immunity he sought -- above-the-law financial czar status -- and the Treasury still has a small degree of accountability. The upshot is that if Congressional committees, state attorneys general, consumer and civic groups, watchdog organizations and public interest law firms and research groups set up serious bailout monitoring and response mechanisms, they can quickly identify and publicize any improper pigs lining up at Washington's new public trough.
And hopefully they will.
But the largest reason to the doubt any major success of the just-enacted Washington bailout is that it does not go to the heart of the problem -- the gross excesses of the U.S. financial sector and the need for sweeping reforms and indictments, both ethical and legal. Or to put it differently, given the last decade's malignant transformation of U.S. finance, providing federal transfusions without needed corrective surgery is not medicine but unwise favoritism and cosseting.
Bad Money, my book published this Spring, detailed at length the recent rise of the U.S. financial sector. Over the last two decades, the financial sector has grown from 15-16% of U.S. Gross National Product in the mid-1980s to 20-21% of the current Gross Domestic Product calculus in 2006-2007. Manufacturing, meanwhile, has dropped to a mere 12% share. This upheaval is closely related to the ballooning of total public and private debt in the U.S. -- the great bulk of it is private -- from some $11 trillion in 1987 to some $47 trillion in 2007. Debt and credit, in all its new forms and mutations, from exotic mortgages to securitization and credit default swaps, has become one of this nation's top industries. Alas, the displacement by finance of manufacturing represents as far-reaching a changeover as manufacturing's displacement of agriculture did a century ago. However, the national media refuse any discussion, an information gap that cripples national policymaking.
Something similar, albeit milder, happened to the previous leading world economic powers -- most recently Britain and Holland (in the 17th century when New York was still New Amsterdam). I have described these prior financialization patterns in several previous books, and I will not repeat the discussion here. However, the recent transformation of the United States is a much deeper and more systemic development. In looking at Spain, Holland and Britain and their decline patterns, I described financialization as a late historical stage, a symptom of national aging, and an arteriosclerosis of sorts. Some others have made similar points.
But looking at the financial interactions, complications and surprises of 2007-2008, I think that we can usefully consider a further analogy - positing the U.S. variety of experimental mega-finance and "scientific" speculation as a kind of historical cancer, a dangerous stage in the historical biology of nations and economies.
Even the mainstream financial press has been using pop scientific terms to describe the new economic behaviors, miscalculations and hard-to-explain interactions. "Toxic" and "contagious" are two popular, if imprecise examples. Toxicity, for its part, leads to the subject of cancer, which science only really began to understand in the 20th century.
Interestingly, on the American Cancer Society's website, their short "History of Cancer" begins as follows: "Cancer develops when cells in a part of the body begin to grow out of control. Although there are many kinds of cancer, they all start because of out-of-control growth of abnormal cells." Such cells develop because of damage to DNA, usually among older adults. Then "cancer cells often travel to other parts of the body, where they begin to grow and replace normal tissue. This process, called metatastisis, occurs as cancer cells get into the bloodstream or lymph vessels of our body."
My thesis is that the Frankenstein finance of the last two decades -- the crazed borrowing, pseudo-science, frenetic growth, greed and gambling -- did something roughly similar to the once-normal cells of our American economic corpus. So we don't know exactly what is happening now, why, or with what kind of contagious complexity. Radiation and even surgery (cutting out institutional tumors) may be in order. Over to you, doctors Paulson and Bernanke.
Kevin Phillips' new book Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, published by Viking in April, is now back on the New York Times non-fiction and business bestseller lists.
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Great read.
When you don't hold accountability to the act or actions then it does transform itself to being above the law. The people on the hill are the law, so they don't count. Complicitice to this are all of the Wall street people types that have hauled in their treasure trove. Yet what is striking is how most of all the blame has fallen under the Home Mortgage fiasco and all of these bad people that don't earn enough money to pay for their great mortgage deal. Home mortgage defaults are only a very tiny part of the problem. Maybe less than 1 percent of the problem. The other problem is that wages have been frozen except for the yearly cost of living hikes which are usually 3 percent or smaller in an economy where the cost of living exceeds what the analysis have reported. Yet the American people are a free and giving and sharing people where we can help rescue these sinking billion dollar companies while at the same time toss all of the bad people who do not earn enough, out into the street, for being unable to pay their mortgage. Perhaps we should arrest all of these greedy bad people and haul them away to jail for not paying their mortgage. They are after all the reason why everything has gone south.
"The world economy requires consumer markets in perpetual expansion to absorb rising production and keep profit rates from falling. It also requires ridiculously cheap labor and raw materials to keep production costs down. The same system that needs to sell more and more needs to pay less and less."
--Excerpt from the book “Upside down a primer for the looking glass world” by Eduardo Galeano
I don't know if what you are saying explains the glory days of the 50s ---
when our economy was growing 3.5% each and every year and
when there was a middle class with increasing incomes and real pensions and reasonable health care...and
when the income tax rate was 90% for the rich...
Taking this analogy to its logical conclusion -- what do we currently do to treat cancer?
For the body to survive, we try to kill, often via multiple approaches, by literally starving it of its ability to replicate.
At the same time, and to varying degrees of effectiveness, we try to make our bodies less cancer-habitable by improving our consumption patterns and environments.
If this seemingly apt analogy holds, we are going to need a very different approach to effectively combat it.
The wise man is not happy without the modulations of idea and thought; the rhetorician is not happy without the progression of argument and rebuttal; the examiner is not happy without the tasks of interrogation and intimidation. All are penned in by these things. Men who attract the attention of the age win glory at court; men who hit it off well with the people shine in public office; men of strength and sinew welcome hardship; men of bravery and daring are spurred on by peril; men of arms and armor delight in combat; men of haggard hermit looks reach out for fame; men of laws and regulations long for broader legislation; men of ritual and instruction revere appearances; men of benevolence and righteousness value human relationships. The farmer is not content if he does not have his work in the fields and weed patches; the merchant is not content if he does not have his affairs at the market place and wellside. The common people work hardest when they have their sunup to sundown occupations; the hundred artisans are most vigorous when they are exercising their skills with tools and machines. If his goods and coin do not pile up, the greedy man frets; if his might and authority do not increase, the ambitious man grieves.
Yes, greed. And perhaps sociopaths with no accountability. Was reading Veblen recently. He compared the personality types of certain economic (I won all the chips), men to that of juvenile delinquents. Now who does that remind us of?
It is infantile behavior. There is enough wealth in the world to end all poverty, fill all bellies, and shelter all people in comfort. We have a deficit of will, heart, innovation, ingenuity, and mostly love. Gil Scott Herron said that the only thing wrong with peace is you cannot make any money from it. We know the answers; the question on the table has been on the table for centuries. I have few frustrations that linger. One that does is the inability of the human species to get a clue. How many more generations will flounder before we get a clue about the thing that will drive our technological innovation to unprecedented heights; that will drive infrastructure renewal to beat all time and budgetary records? When will we conclude that through a unified loving approach the energy crisis is as good as a done deal? All of that book intelligence wasted on schemes to secure personal wealth. If Warren Buffett and Bill Gates are to be believed, with great wealth comes great responsibility. I take this to mean that if you have a wealth of intelligence, share the wealth, do not horde it or worst yet, cheapen it by using it for selfish and vain purposes. There are no celebrities there are just distractions in the moment. That done for love is done for real and that done for greed and fame is done for not.
There is nothing wrong with childhood innocence but childish selfishness is unbecoming.
Cont…
Servants to circumstance and things, they delight in change, and if the moment comes when they can put their talents to use, then they cannot keep from acting. In this way they all follow along with the turning years, letting themselves be changed by things. Driving their bodies and natures on and on, they drown in the ten thousand things, and to the end of their days never turn back. Pitiful, are they not?
Chuang Tzu
Translation by Burton Watson
Great piece Mr. Phillips. Here is an interesting piece in this morning Financial Times:
http://www
If a little socialism is good for us during bad times why not some more socialism in good times? Perhaps we Americans, through our government, ought to have a stake in some of our major enterprises. Since we'd be their shareholders maybe they would not be so willing to expatriate our jobs. ;-)
You are spot on. I wrote to senators and proposed that WE be venture capitalists and the bailout would be a loan to wall street, not a gift, at 2 points above prime. Additionally, we would maintain 25% ownership FOREVER of the firms whom we lent the money.
Just don't say BUSINESS WEEK didn't warn us. This one has the Fed's fingerprints all over it and now they think lowering interest rates will cure the addiction.
JULY 19, 2004
Is A Housing Bubble About To Burst? (Excerpt)
As rising rates send mortgage payments higher, demand may cool
Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor.
http://www
As I understand the macro balance sheets of all the financial instituions, there is about $61 T in Assets, and $5 T in euity. It's not hard to see that if 10% of the assets(mortgages and loans, etc.) go uncollected, the equity is wiped out.
And apparently the $61 T does not include $40 T of Credit Default Swaps which are private insurance arrangements with zero transparency.
All of the above makes the $700 B "rescue package" look insignificant by comparison.
Ironquil, you hit the nail on the head. And trying to save trillions of Credit default swaps - which have no tangible assetts behind them like real estate - because your buds on Wall Street underwrote them, will be national suicide.
The US Govt must insure that Fed banks are solvent and liquid and forget the CDS's. We need to concentrate on the real estate loans that concern tangible assetts.
The problem is that Paulson's plan looks suspiciously fabricated for the purpose of getting to the CDS.s.
Today the US Govt just put another $30 Billion into AIG which was going bankrupt because of the CDS's issued from their London office.
We need to let housing prices fall to the level they want to go to so we can begin recovery but I fear that Paulson and his financial press buddies are going to want to bail out their pals on Wall Street which may leave the rest of us in a world of hurt. it may destroy us completely.
then vote out EVERY incumbent in congress..
Agree Kevin. We went for the pizzazz of financial markets that, historically, make recessions and depression through a variation of the Ponzi scheme. We went for pizzazz of free-trade, too, which is little more than outsourcing good jobs in exchange for Walmart type jobs. We then went for deregulation, giving up the power to control the financial markets putting them, instead, under the control of financial psychopaths. Boy, have we got a mess on our hands. But there is a way out which nobody in DC or Wall Street wants to hear. It is the traiff (both revenue and protective) and going back to making the bulk of our own goods--not importing so many foreign goods. This doesn't have much pizzazz but it is solid and will carry us through.
I am delighted to see Phillips' post as I have admired his writing, particularly the book about the Bush/Walker dynasty, investment banking and armaments(can't remember the exact title). I recall the analyses of the angry white middle and it's import to the Bush's.
George W. Bush has epitomized the mindset of the finance and corporate world which allowed this cancer to grow. The unholy alliance of the Bush finance mindset people with the evangelicals and white have-nots has created a vacuum in which the rape of our economy has taken place, unrecognized as such by the very people who kept electing Bush & Co.
It's as if all of the low hanging fruit and the seed corn have now been consumed and we sit here defenseless while the financial institutions, and we with them, slowly starve to death.
So much for a "sound" economy. The fact is that the change to a paper economy in the US was not based on any reasonable equivalent of cash or assets. The books were cooked and the cooks run the kitchen.
You forgot to mention the origins of the Fed and tit'scriminal intent...t
Look carefully fans at stats in this article: "the financial sector has grown from 15-16% of U.S. Gross National Product in the mid-1980s to 20-21% of the current Gross Domestic Product calculus in 2006-2007" This makes the ripple bigger, as well as the spalsh.
"Debt and credit, in all its new forms and mutations, from exotic mortgages to securitization and credit default swaps, has become one of this nation's top industries
People who get their financial advice from smiley brokers and perky analysts on CNBC had better start running for their portfolios before they vanish in front of their eyes. The bailout is like an IOU put on the poker table; if its a losing hand you just bet more than just your money.
Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone.
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.
What's sad is everyone gets off the hook and no one does and best of all the people pay them for money that was stolen from the people.
This is nothing more than the white collar Wall Street mafia who pays off the cops in the White House Paulson and Bush , ect.. They knew what was coming and planned the endgame to be the taxpayer bailout.
Why are you beating around the bush for accountability Mr. Phillips? There needs to be highly sophisticated laws in place that nail these crooks when they pull off scams like these credit default swaps and they need to spend lots of hard time in prison.
REMEMBER ENRON, It was just the same PONZI scheme.
That's a great analogy (the cancer one) and I appreciate your analysis.
My comment is that I would say (and I say this as a progressive, and far from a right-wing Clinton basher) that Bill Clinton's reputation as an economic benefactor the the nation is mud, because he signed The Financial Services Modernization Act of 1999
In Dennis Kucinich's words: "....the The Democrats gave us the Financial Services Modernization Act of 1999, which ripped down the firewalls that were put in place by the 1933 Glass-Steagall Act. The 1933 act, designed to prevent the kind of meltdown we are now experiencing, established the Federal Deposit Insurance Corp. (FDIC). It set in place banking reforms to stop speculators from hijacking the financial system. With Glass-Steagall demolished, and the passage of NAFTA, the Democrats, led by Bill Clinton, tumbled gleefully into bed with corporations and Wall Street speculators. They achieved fundraising parity with the Republican
May be mud with you but then you just tell half the story. The idea of the FSMA was to help low income folks buy an affordable home.
The problem started when Bush and the Republican congress loosened the lending regulations much further than the Act ever intended. The lenders then allowed people to buy a 300,000 dollar house when they knew they could only afford a 100,000 dollar home.
Once the sub prime rates jumped up and the buyers realized they were screwed the foreclosures started and now it's like domino's tumbling. A hundred thousand in California alone for just the month of August. The foreclosures will run into the millions.
the predatory lenders were counting on a quick resale but the market fell like a house of cards and the credit default swaps were worthless because there were no laws that required them to back up their commitment by keeping enough capital on hand to pay the foreclosure claims against them. It was a ripoff.
Plan B? Hit up the good old American taxpayer for a bailout. In short it was a mafia operation set up by the White House and run by Don Bush.
But the Conservatives said we needed deregulation and government is bad..
Wasn't it Conservative to get rid of these pesky regulators and gut all those agencies meant to prevent this type of waste and economic ruin..?
Is there a definition of conservative anywhere..
Maybe these conservatives lied to us, and are really just a bunch of swindlers.
Ya think..?
you betcha!
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