Wall Street Bailout Won't Do Much to Help Ailing Economy
It is now clear the approval by Congress of President Bush's $700 bailout package on Friday October 3rd has done nothing to ease the current financial crisis. Credit markets have worsened for several days after the bill passed the Congress. The stock market also plummeted to nearly ten-year lows.
So much for dire warnings from the Bush Administration that Congress was risking a Great Depression if it did not quickly fork over the dough. The bailout's supporters said Congress had to do something to unfreeze the credit markets. It didn't work.
There is a basic misunderstanding of the current financial crisis and economic recession that is widespread. Most people think that the current economic downturn - which will be officially designated a recession some time in the near future -- is the result of the financial crisis. But this is not true. The current recession is mainly the result of a collapsing housing bubble. This bubble of more than $8 trillion dollars accumulated between 1996-2006, and it is only about 60 percent deflated so far. This means that even if all the problems in the financial system were miraculously solved tomorrow, the United States would still be facing a serious recession.
Of course the financial crisis can make this worse, as financial institutions cut back on lending and short-term interest rates for commercial borrowing rise. And we are indeed facing a serious financial crisis. But the bailout package is a wasteful and inefficient way of dealing with the problem of banks holding bad debt, mostly related to mortgages gone sour in the housing bust. It enables the U.S. Treasury Department to buy up "troubled assets" -- mostly mortgage-related securities -- from financial institutions, at prices that will likely be much higher than they are worth.
Economists across the political spectrum saw this as a wasteful and inefficient way to fill holes in banks' balance sheets. Ordinary citizens and taxpayers saw the bailout as an enormous rip-off, and flooded Congress with phone calls, defeating the bailout on its first vote.
Indeed, the most important ways that our government is currently holding the financial crisis in check do not involve overpaying banks for bad assets. The Federal Reserve and U.S. Treasury have intervened repeatedly to pour liquidity into the banking system. They have agreed to federally insure $3.4 trillion of money market mutual funds held by millions of Americans. This week the Fed created a new facility to buy commercial paper, the short-term debt issued by banks and corporations, where lending has been shrinking. The Federal takeover of Fannie Mae and Freddie Mac, and the nation's largest insurer, were also necessary to preserve the stability of the financial system.
All this is just the beginning of cleaning up the mess that has resulted from a de-regulated and un-regulated financial system gone wild. The government will have to take over more insolvent financial institutions and provide capital to others. It will have to take steps to help homeowners, to minimize foreclosures and evictions. And it will need to provide the largest fiscal stimulus package since the Great Depression, to prevent this recession from dragging on for years. The worst part about the bailout is that some politicians will say we can't afford the necessary stimulus because we just added $700 billion to the national debt.
Americans will have to fight for measures that protect the public interest, not the interests of those who made this mess. Treasury Secretary Henry Paulson made $163 million as CEO of Goldman Sachs in 2006. Now he and his former colleagues at Goldman are running the Wall Street bailout.
During the Asian financial crisis ten years ago, there was an expression for this kind of system: "crony capitalism."
This column was distributed by McClatchy Tribune Information Services on October 8, 2008.
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Mr. Weisbrot states the obvious:
""There is a basic misunderstanding of the current financial crisis and economic recession that is widespread.""
And then he proves it.
And continues the misunderstanding.
FDR took office DURING the great banking failures of 1933, and he began his fireside chat series with a discussion on banking.
There were millions of Americans that used the banking system, but knew little of how it worked, he said, and they were losing their meager fortunes.
There were a few thousand wealthy Americans who understood the money and banking system, and they would gain in fortune.
His plea for future prosperity:
The American people need to understand the banking and money system.
The tragedy of the $700BILLION bailout is simply this:
That the American people, acting through their government, must BORROW AT INTEREST, that money, from a bunch of privileged monied interests, who create it out of thin air.
With a promise to pay it back to those bankers based on the full faith and credit of the American people.
The late Thomas A. Edison stated the matter this way:
""It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay: but one promise fattens the usurer and the other helps the people.""
The people's money.
Public credit.
Or, as FDR said, get ready to repeat history.
One thing they're going to have to do is revamp the tax laws so those who derive the greatest financial benefit from our system begin to pay a fair share of the costs of supporting that system. No more free ride for the top 1%.
We need to begin treating un-earned income the same as earned income, and we need a STEEPLY progressive income tax.
First, the current crisis certainly is not due to the housing bubble alone. The financial fundamentals of the US were in disarray several years before that and made everybody wonder already, if fundamentals such as a trade and a fiscal deficit really did not matter anymore. Looks, like they do, at least in the long term. Oops.
Second, the bailout, even if it goes to the banks, is certainly needed. Only it was botched up so badly by this administration, international confidence in the US to handle the crisis in some responsible way quickly faded. The two most crucial errors of this administration were: the failure of Lehmen bros. and the plan to buy up worthless assets instead of recapitalizing and nationalizing the banks in distress. The current situation is only the end game. Of course, Paulson, as a former GS employee, would not have Lehman survive in any form or have GS be nationalized. In that sense, this is crony capitalism in broad daylight.
Third, a fiscal stimulus package in the form of investments into the infrastructure (except prisons) and to relieve the burden of the most deprived (and these are not homeowners), is also needed. Even if it is paid for by more dept - and at a higher interest rate!
But wait! They haven't actually done anything with all the money yet! They just said they were going to, but now it turns out they're thinking about doing stuff with all the money they said wouldn't work when they were telling Congress that they had to have all the money! And they might have an even better idea next week, maybe even early next week, which will supercede all the suddenly stupid ideas which were great last week! And maybe that's the idea which will save everybody's everything, so no worries!
Here's my better plan for the week.
Give the $700Bn back to the American people.
From whence it came.
And from whence would come the payback.
With interest. Lots of it.
It's time for a new Monopoly game.
In this one, the people are the bankers.
The people create their own money.
They put it in their banks and their investments.
The bankers lend out this real money,
at something called one-hundred-percent reserves.
AFTER they pay people for their deposits.
More credit unions.
More cooperative banks.
Social credit.
The Chicago Plan.
A whole new business school model.
A new Bretton Woods before we implement Basel II.
Based on cooperation.
Not power.
Just a thought.
Unless you really like the idea of paying for EVERYTHING three times over.
Once for the goods, and twice to the bankers.
Under faractional-reserve, debt-based private money creation.
It's up to YOU.
The turn around may come to late for people like me holding the bag. Please, for all of you out there who think your immune from this, find a way to organize and DEMAND representative government.
You may not lose your shirt, but you will lose your job if you don't.
The Federal Reserve is Guilty of Helping Create the Global Financial Meltdown
Show your outrage at what the Federal Reserve has done to the American economy
with their easy money policies which caused the credit & real estate bubble and subsequent global financial meltdown.
Join the thousands who are signing & commenting on the Abolish the Federal Reserve Petition at http://www.petitiononline.com/fed/petition.html
Please.
And replace it with what?
Seriously.
Free banking?
Social credit?
Now you would expect Americans to think of this first being an overtly religious nation while we British are a bunch of heathens but last week in Parliament The Rev. Dr. Iain Paisley said the only way out of the crisis was for us all to repent and pray for divine intervention:
http://greenteeth.blog.co.uk/2008/10/07/god-moves-in-mysterious-ways-financial-crises-to-resolve-4834973
while later in the week Member of Parliament Tony Baldry found The Bible advises us that economic cycles may come and go but The Word of The Lord endureth forever:
http://greenteeth.blog.co.uk/2008/10/10/financial-crisisjust-invest-in-the-word-of-the-lord-saysmp-4850548
Personally I would not rely on either the bank bail out or God being an effective solution but God would at least be cheaper.
May we just say that this article is one confusing piece that lacks fundamental insight into the problem? The bailout package was never meant as a fiscal stimulus. It is what it says it is: a short term financial band aid to prevent the automatism of bankruptcy from flushing too many financial institutions down the drain. A second goal is to reduce the risk for the institutions that are still performing their basic functions. This is necessary because a bank that is close to its bankruptcy limits and has to fear to go negative on its balance sheets CAN NOT give any loans to other banks or customers.
The problems with the US economy can not be cured with stimulus packages. Why? Because every stimulus package is essentially a loan (it's just not so obvious who has to pay it back and when). Now, the financial reality of this country is such that its consumers are living on borrowed money already (see the miserable savings rate of 0.7 percent). But let's say we give these people another loan, where will it go? They can spend it on paying back their credit card bills (no stimulus), paying for gasoline for their cars (in which case 60 percent of the stimulus go to Canada, Mexico and OPEC) or to buy more "stuff" in which case most of it goes to China.
The bailout is necessary. The stimulus package will solve nothing and dig the hole even deeper.
OK, try this:
Replace "stimulus plan," with "major investment in energy efficiencies for homes and a new clean power grid." Hey look, lots of government spending keeping the economy going (and unemployment down) till we ride this out, while giving us infrastructure to pay back our children for the money we borrow during this crisis.
Now we are talking. But that's not a stimulus package. It's a long term program to change over the infrastructure of the country. And it's not just energy. We could make enormous investments in public transportation, education, the environment. We could, quite literally, convert smart bombs to smart investments in the future.
I doubt we are collectively smart enough to do any of this. I mean, where is the next quarter gain in investing into your children? Right? And isn't the next quarter gain the only thing that counts?
Great article! Great facts! I would just like to add something I ran across today which is pertinent least people accept a lie as fact. For the record, Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage, do not make loans--never have. They purchase loans from the private lenders who actually underwrite the loans. Subprime loans, therefore, were made by private lending institutions (http://www.mcclatchydc.com/251/story/53802.html). Also very important, Bush preempted all state predatory lending laws in 2003 making them inoperative (http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html). Why the press has not run with this is beyond me. It might be one of the major Bush smoking guns in this crisis.
Crony capitalism vaporized the instant Paulson demanded entitlement on September 19, 2008, for $1 trillion dollar going away present for his cronies. The same instant that the RNC admitted they are the Party of Corporate Welfare. America does not tolerate corporate welfare. Next Republican you meet, remind them they belong to the Party of Corporate Welfare. In the meantime, where's the moratorium on foreclosures?
If your kids were playing with matches and started a huge fire and they came to you asking for more matches, would the solution be to give them more matches?
Great analogy
Right. And in this case, Paulson and crew are not just asking for more matches, they're threatening financial collapse if we don't give them all the "matches" they want, and to be used in the method they choose. This is a matter of the children completely controlling the adults.
Economic stimulus toward a saner future, combined with financial regulation, is the only hope for the country. Deregulation from Reagan through Bush has hurt the middle class greatly and produced a group of super wealthy talking heads like Paulson. And now such people want the U.S. taxpayers to even pay for the financiers' bad investments--they get us coming and going.
The bailout is extortion. Now they say that even $1 trillion may not patch the problems.
Don't get me wrong. I think the people could use another stimulus, but we're throwing around the word "billions" like we used to the word "thousands". I'm getting low on firewood, I guess I can always throw 20's in there for heat.
Hey ... "a billion here, a billion there, pretty soon it adds up to real money"
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