The Mind-Boggling Trillion Dollar Bailout: A Q&A With Finance Writer Max Wolff

In the past 24 hours, Henry Paulson effectively committed up to a trillion dollars of tax payer money to bail out bankers and investors, and locked in fiscal policies of his choosing for the next several years. To try to understand the full implications of this, I asked Max Fraad Wolff for an email interview. Max's work regularly appears in the Asia Times, The Prudent Bear and many other international outlets. His work can also been seen regularly on his site GlobalMacroScope.com. Based in NYC, he does contract research on international financial risks and opportunities while teaching in the New School University's Graduate Program in International Affairs. Max is an unorthodox economist--just the kind we need right now.

ZE: Wow. What just happened?

MFW: We just went from Free Fall to Free Lunch. It turns out free markets are the greatest system on earth, but only when they go up. Market discipline is for low income people and homeowners. Short selling must stop only when it laps up on Goldman's shores. Today, the government deploys hundreds of billions, maybe more than a thousand billion dollars to bail out banks and owners, insurers and traders of mortgage backed securities. Wave after wave of cash infusions didn't work, Thursday morning's $183 billion did not work. So here come new rules and whole lots more money. The government will insure money markets, the government will buy between $800 billion to $1.2 trillion in distressed securities to sure up balance sheets. If this had been done last week, then Lehman, AIG and Merrill would still be out there with ALL their employees. If it had been done in March, Bear Stearns would be with us. This financial run just got more expensive than Iraq. Where will the money come from? Who gains and who loses? Is this the largest economic intervention in at least several decades?

ZE: So let me make sure I understand this. Big investors made trillions in bad loans over the past couple decades. Everyone just realized it and now markets are flipping into turmoil. Treasury Secretary Paulson and other financial big wigs decided that without intervention, we'd get into a 1929 free fall. And so they stepped in and said, "Everyone can stop panicking, because we'll insure all your bad loans." Is that right?

MFW: Basically, yeah. The crash is 13 months old. The pain is real and it is really slamming into employees, home owners and the global economy. Many of us have been warning of this for years. Federal regulators have lied and done day-late, dollar-short failed interventions for 14 months. After another round of false promises, they last night gave in and finally decided to admit that the financial sector was leading us into a global recession. So we just pledged years of tax revenues upfront to buy bad mortgage-backed securities. We still don't know the all important details. At what price is the U.S. tax payer picking up the tab? We have been told "market prices" but, what does that mean? Not the market prices before this announcement. Those prices were killing firms and spreading massive losses throughout the world economy. We still don't have congressional approval either. I have no doubt those dead fish will float with the tide. Congress will back the action. Action is needed. We were sliding off the edge. It is just a question of which actions and who benefits.

ZE: What should the American people be saying right now? Should home owners be saying: "Instead of helping some investor who bought my mortgage from my bank, just help me pay my mortgage!" In America we don't like handouts, right? But if we're handing out a trillion dollars to irresponsible lenders and investors, why not hand that money out to the borrowers instead? Shouldn't they be forgiven for taking out "irresponsible" loans before high-finance lenders are forgiven for making -- and aggressively marketing -- such bad loans?

MFW: Over the next few days every financial institution in America will be grappling with congressional staff for a piece of this bail out. It's a huge fight going on right now. People like to think of Wall Street as a monolith, but there are many competing factions. The bond market folks are not too excited by this. The shorts are told their life work is illegal -- at least for a while. Many hedge funds must be getting shredded by the new rules and regulations. The government waited until two of the five investment banks were destroyed and two others were in varying depths of shotgun weddings.

The big banks that wrote all those bad mortgages may well be the biggest beneficiaries of the whole shebang. Investors, especially those who were betting on financials are very happy. Many will be hoping that this works to jump start the heart of the US economy -- credit provision. And the American people have no direct say in this at all. So yes, those who claim to represent the interests of the American people -- Congress? -- should be asking what the people get in this deal. The banks and insurers are fully engaged. The American people are totally left out. There will be some provisions to keep some people in still-overvalued homes that they still can't afford. It is not clear that will do much other than buy time and transfer losses from asset holders to the already near-bankrupt government. That has been true all along and remains part of the problem. And in the end, will these newly helped banks loan again as they did before? I doubt it!

ZE: If their representatives did stand up for them, what should the American people be looking to get in this deal?

MFW: Firstly, they should have a say. They are missing the size and profundity of what is happening. We are selecting our national priorities and committing our tax dollars -- for years -- right now. What is on offer to distressed homeowners, struggling college students, unemployed Americans, pension and 401K accounts hammered by what has already happened? What is being done to address the core mismatch that created this problem? People can't substitute loans for wages and savings! They still can't after this deal goes through! Until and unless we fix that problem, all solutions are temporary and we fix one problem by creating the next problem.

By the way, the US Dollar is now the world's first currency backed by home mortgages!

ZE: And let's say the government did work to help ordinary Americans in addition to bankers at this moment. Would that fix the whole problem?

MFW: There is no easy fix here. It's crucial to understand the underlying problem. Over the past few decades, Americans' wages did not rise and government taxes did not rise overall. But, people and the government massively increased their spending. Thus, the vast debts and our addiction to foreign capital -- much worse and more pressing than the addiction to foreign oil! Now it's finally become clear that America can't pay back all the money -- and that is the source of all the pain. It is rippling through the system and slamming owners investors, traders. As long as the problem was just people losing their homes, there was no sense of urgency. But when it hits the people who really count, it is a crisis and they get help.

ZE: What I'm having trouble grasping, why is bad debt is such a huge problem for the economy as a whole. Can we boil it down? Let's say I bought a house for $500,000 and that you lent me the money to buy it. But I can't pay back the loan. And it turns out my house was only worth $500,000 at the height of the bubble and no one will buy it now. So even if you repo my house, you'll still lose half your money. That in itself doesn't seem like a huge problem for the economy. I lose my house, and you lose some money. Maybe you buy the house and rent it to me (as is happening often in real life). What's the big deal?

MFW: The problem is our economy runs an credit. When creditors take losses -- and these losses are global -- they can not and will not lend as much in the future. This creates shock wave after shock wave that slams into banks, investors, markets, pensions and confidence. By last Friday it became clear that the entire global financial system and the US macroeconomy were on the brink. In other words all those assurances and past solutions had definitely and totally failed. Thus, we confront the next round.

ZE: OK. Hopefully when we get to that next round you'll have time for another Q&A like this! Thanks.

Comments

[greene]

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[jcd8822]

The minute this money is handed out it will disappear just like all of the tons of money sent to Iraq for rebuilding that country. No Oversite.....NO MONEY. Part of the agreement for bailing out these crooks should be tied to the resigination of the top two crooks, Bush and Cheney who want this money for their golden parachute out of office. I trust them as much as I trust the old brain dead man running for president on the GOP ticket.

[jake1492]

Address the problem at the mortgage holder level. Share the pain between the three stakeholders... the mortgage holder, the bank, and the public. It will take time to make back the money lost, but it will begin again on a stable footing... and will turn that "Junk" debt into real performing debt again. Some mortgages will still fail, like always, but overal the system will have adjusted to the reality of the popped housing bubble.

Giving hundreds of billions that we don't have to the banks is NOT a solution. It is enormously unfair to those caught losing their homes and life savings. DO find a reasonably equitable way to share the pain. DON'T take all the pain away from the banks, leave all the pain with the home owner, and create new pain for the general public.

[sdsteve]

NO Universal Health Care, NO Education reform, NO health care for our Vets, NO investments in green energy creating millions of good paying jobs, NO repair of our crumbling infrastructure, NO rebuilding New Orleans OR Galveston/Houston. Let's bankrupt the nation for 2 or 3 generations making sure that rich people don't lose money. We can kick a working family with children out on the street but heaven forbid if we let these bankers lose their summer homes.

[veggiequeenmo]

When we had creid issues a few years ago, we knew that buying things on credit was killing us and decided to be cash only, except in an emergency. We've saved thousands over the years. We spend less, we get only what we can afford. No frills, but few worries. What that, if we, and I'm sure many other families as well, can figure out that borrowing money can be detrimental, then why can't the big wigs? If my family was in debt to the hilt, i guarantee no one would bail us out. We'd have ruined credit for years, lose our home, cars and have to sell items to pay off those we owe money to. These Wall Street goobers aren't being held accountable for anyting they did - or didn't do - to create this disaster - neither is the Bush administration. But I'm not suprised - they're all repukelicans, I'm sure, with lots of money under their mattress and bank accounts in foreign countries.

[NotWithObamaCampaign]

Mark my words: this week McCain will propose torturing Wall Street execs on pay-per-view TV in order to defray part of the cost of the bailout.

I agree with McCain on this one. We have Guantanamo. We might as well put it to good use.

I'd like to torture them into telling the truth on:
(1) why they ruined our country;
(2) why they thought they'd get away with it.

Greedy Americans are a greater threat to our national security than peasant Afganis.

[JonRaymond]

But there's no corporate profit in that like there is in Afghanistan.

[acidwave]

We should not bail out the slicks that created this taxpayer ripoff and expect to be bailed out.Let the
market fall like in 1929 and take the trillions of dollars to rebuild the economy with FDR type
programs to help the unemployed, to build an affordable energy program that says to hell with
mideast oil,rebuild our education system, rebuild the national infastructure.In other words direct our attention to taking care of the people who you are borrowing the money from, and who will end up with no money at all if you continue with the bailout of 2% of the people.
Paulson said we need to buy these assets that are clogging up the system and bringing the economy
to a halt.Paulson IS LYING TO CONGRESS AND THE PEOPLE.WE WOULD BE BUYING UP LIABILITIES OF PAPER clogging up the economy.Worthless paper that represent morgages that never
should have been written in the first place.
If you are an american taxpayer say hell no to the bailout, and if congress rams it down our throats then we should retire every last one and cut off their pension money.

[WmC]

Looks to me like its all gain and no pain for banks and financial institutions. Meanwhile for the taxpayer, it's the reverse.

It seems to me that if the real problem is massive fear with a corresponding credit crunch, there would be a number of possible solutions . . . furthermore, Paulson is pushing the most expensive solution; one that calls for little or no sacrifice on the part of banks or Wall St.

[wordvarc]

When an indebted taxpayer goes to a financial counselor the wise and prudent advice is to stop living on credit.

Moneychangers, speculators, and financiers will lose nothing, want their game to continue, and are the one's being bailed out...at taxpayer expense.

This is the financial meltdown Spitzer warned about causing the WH to use illegal wiretaps to out his sex play. Spitzer was hated by the knuckleheads that bought then grew rich from the 1999 financial institution deregulation bill. They, not you and I, are being balied out by w. It's just like Enron. The schemers who corrupted the markets are being bailed out. You and I are paying by the month in our quadrupled electric bill for their wealth and corruption.

[arthur2008]

Henry Paulson and George W. Bush are trying to extort these funds from the American public, insisting on immediate agreement to an 800 word "plan" that would give them a blank check to enrich the very same people Paulson has spent his career in bed with, and giving absolutely no relief to homeowners damaged by these thugs and thieves. On top of that, they inisist that there be no meaningful legislative or judicial oversight. Remind me: at what point did George W. Bush earn the trust and respect of the American people?

[PT6]

Obama is thinking clearly for Wall Street and Main Street.

I think Paulson in charge of administration is the FoxHen problem.

If we set up a Refinance Institute for the homeowners this problem can be stopped. Otherwise it could go on for many years as "tricky" loans come up for readjustment and homeowners are forced to walk away.

Helping homeowners is COST EFFECTIVE because with fair fixed loans the payments continue and we do not need to bailout Wall Street again later.

So balanced solution with $300 Billion to Main Street and
$400 Billion to Wall Steeled - this will not be cost effective.

STOP THE HEMORRHAGING on Main Street and Wall Street at lower cost

[zoocrew]

I predicted weeks ago that Cheney and company would take advantage of the distraction of the election to implement their final hurrah of abuse of power. Time to earn the money they were paid by their contributors! It is really too far fetched to believe that the folks that would tweak the intel and sell a preemptive war to Congress over oil, abuse the executive branch like never before, and play on the fears of their own people would create this level of financial crisis? Are they actually trying to break the government?

It"s our own fault! Can"t we Democrats multitask? Can"t we run for president and monitor the corrupt administration at the same time? And if not, are we really together enough to do the right things when we get there? Are we proactive enough to implement the changes, innovative enough to get the job done? YES. But we can"t keep getting blind sided by the folks that don"t play by the rules. Pay attention, guys!

[Mason]

HuffPost's Pick

Two major points are being overlooked in the blogs, or at least I haven't found any reference to them.

1. A week ago the national debt reached $9.7 trillion, mostly due to the wars in the Middle East and the no-bid cost-plus contracts awarded to crony firms in the military industrial complex. How can we the American people afford this bailout unless our government immediately ends these wars and brings the troops home? Shouldn't this be a deal-breaker bargaining chip?

2. Whomever is elected, and I pray it's Obama-Biden, has no authority or control over what Paulson does until after the inauguration. Even then he has no authority except to appoint someone else to be the Secretary of the Treasury. I'm not sure that this bill permits him to do that, however, because it confers dictatorial powers on Paulson for 2 years. I suppose Congress could amend the law after the inauguration, but that takes time and might destroy confidence in the fix and plunge the economy into the abyss.

These issues must be clarified in the legislation because the Wall Street mess can't be solved without resolving the war issue and we can't have a new president whose authority is trumped by a Secretary of the Treasury who was not vetted and elected by the American people. Finally, something needs to be done to assure that this crisis does not become the justification for canceling the election for two years.

[lostinNJ1]

And our interest payment for FY 08 on the debt: $431.3 billion!
http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

[handyallen1]

exactly we are borrowing the money to pay interest on the national debt were not paying on the principle and were borrowing the money to pay the interest, you think the holders of our debt arn't figuring this out, its a pig in a poke and the music is stopping and there ain't no chairs left were busted done finished ,and mccain wants to give more tax cuts and spend more on defense, it dont add up even for a kidngardner let alone those holding the bag ....obama 08

[JonRaymond]

There's one more point being overlooked, the disaster capitalism play. Just as 9/11 was a disaster that gave Bush a free hand to spend trillions on war, now we have this fiasco that will again give him a free hand to spends trillions more on corporate bailouts. Who are the winners here? The corporations being bailed out. Whether these lenders took risks deliberate or out of naivete is beside the point. They are now taking advantage of this disaster for personal gain.

[Pdubya]

I'm getting really tired of the ridiculous use of the term "free markets" in describing what is happening in the U.S. This fall isn't 13 months old. It is 95 years old.

Read The Creature from Jekyll Island.

We do not have free markets. We have managed markets - corporatism - aka, fascism. Fascism is just socialism with shareholders.

Examine the secret establishment of the Federal Reserve. Examine the plutocratic "votes" on the Hill, feeding at the Fed's trough through wall street and lobby.

Divide and conquer. We keep wearing our red and blue capes and the globalist elites collect the green.

If we really had sound money, constitutional issuance of funds and a free market, these bailouts wouldn't happen. We would have to let them fail, and fail they should. We must change and accept the hard medicine. Given that we are on a fiat currency we are stuck between a rock and a hard place. Hurt now or hurt more later.

Each candidate offers no change in foreign or monetary policy. These drive everything else. All they are doing is arguing over which arm to thrust the needle into.

http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=281024-1&showVid=true

[maizie]

I have two suggestions. Because the slime at the banks/companies who got us into this mess are now effectively "government employees," put them in the GS system. Pay them a government salary and nothing more. Suggestion two: Because the slime at the bank/companies who got us into this mess have effectly ruined the credit of millions, MILLIONS, of Americans who were sucked into this mess, wipe out the credit reports of every taxpayer and start over. Why should the scum who caused this come away with no punishment while the American people are left -- again -- paying for the sins of Wall Street?

[bitabingbitabangbitaboom]

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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I hear that the $700 Billion price tag is bogus and the real price is going to be $1.2 to $1.4 Trillion

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!