Posted by MataHarley on 25 September, 2008 at 2:32 pm. 2 comments already!


There’s only one thing good I can see about this Financial Rescue Plan… aka “bailout”… For once, the WH, the DNC and far too many GOPers (IMHO) are on the same page. With my previous posts of “The Perfect Storm” on the combination of events that led to this mess, followed by the possible unintended consequences and then the only existing draft as a starting point for the proposed legislation, I suspect it’s plain I remain a skeptic on this government “cure”.

As the queasiness in my belly on this move remains, I keep trying to explore avenues that may help me see the light… can my gut be so truly off base? It doesn’t help when I hear those I respect, such as Mark Levin, echo my skepticism.

But each day brings something new. And in this case, it brought me only more reasons to place confidence in my gut instincts. Now I find myself in agreement with 122 economists (two Nobel Laureates in the mix) who wrote a letter to Congress voicing their concern over this proposed “cure”.

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

Obviously, whether the plan works, or not, these effects are long term. And fact is, not one of the gurus in charge of this mammoth government intrusion into the free market – Bernanke, Paulson, Schumer, Dodd and Frank – can guarantee positive results. This is so unprecedented, that it’s a gamble of the dice.

Today’s article in Reason Magazine by Steve Chapman – The Case Against the Bailout – takes the skepticism further in it’s analysis by pointing out if the bailout works as effectively as the bill crafters say, it will do even *more* damage to the free market. Gee… I feel better already.

George Kaufman, a finance professor at Loyola University Chicago, is skeptical. “The last refuge of a scoundrel regulator,” he says, “is to shout ‘systemic risk.'” Usually, the alarm is false. He notes that aside from inter-bank lending, the credit markets were functioning tolerably well at the height of the crisis. Rates on 30-year mortgages actually dropped last week.

If banks really need to get rid of this junk paper, they could have unloaded it before now. Merrill Lynch did itself a lot of good by facing reality and taking 22 cents on the dollar. But other companies now have the far more enticing option of selling to the government at a premium.

The point of the plan, after all, is to shore up struggling firms by awarding them more for those assets than they could get anywhere else. As an analysis in The Washington Post put it, “the more effective the plan, the more expensive it will be.”

Not only that, the more effective it is, the more damage it will do to the free market system. Saving companies from their bad gambles turns business into a game of “profits for me, losses for you,” corroding the incentives that make capitalism so innovative and efficient.

And for what? Bernanke warns of a recession. But economic downturns are not to be avoided at all costs. And one good thing about recessions is that they end, usually in a matter of months. An intervention of this nature, by contrast, would have malignant consequences for decades to come.

Chapman reiterates what many of us see as the obvious downsides to the plan. And that includes funneling more cash to an undisciplined government who, like many common Americans, is living beyond it’s means.

What they prescribe is for the federal government to buy $700 billion worth of lousy assets from banks and other lenders, exposing taxpayers to a potentially crushing liability. This plan would nationalize the money-losing part of the financial sector, to the benefit of capitalists who have made spectacularly bad decisions—fostering more bad decisions in the future.

It would add to the liabilities of a government that is already living way beyond its means. It would give unprecedented power to a couple of officials who have proved highly fallible in trying to avert this alleged crisis. And it poses the risk of abuse and corruption because the government has no way to gauge the value of what it will buy.

But any plan must have an alternative… and a group of GOP lawmakers, headed by House Minority Leader John Boehner, have unveiled an alternative rescue plan based around mortgage insurance for the bank’s debt.

House Republicans remain reluctant to throw their support behind a $700 billion asset-buyout plan, presenting an alternative plan Thursday afternoon that would allow banks to purchase insurance for mortgage- based assets.

A House GOP working group organized by House Minority Leader John Boehner, R- Ohio, presented the plan, which would create a new entity that Rep. Eric Cantor, R-Va., compared to Ginnie Mae.

“We charge them the premiums, they finance the insurance, and they unclog the system and Wall Street bails itself out,” said Rep. Paul Ryan, R-Wis., the top Republican on the House Budget Committee and a member of the working group.


The Republican working group, which includes lawmakers ranging from conservative Rep. Jeb Hensarling, R-Texas, to moderate Reps. Michael Castle, R- Del., and Judy Biggert, R-Ill., is trying to reach across the aisle to enlist Democrats in support of the plan.

What both these “plans” have in common is that details on either are slim and scarce. And that doesn’t bode well for John and Susie Q Public. Afterall, it’s our money they’re playing with.

What appears most likely is that the thrust of the majority of Congress will fall behind some morphed version of the original drafted plan. With both POTUS candidates on board, and McCain riding into the beltway to throw his weight behind the plan with compromised changes, it will be hard to buck the path that appears to be 99% paved.

And it’s also likely that the American electorate, who has been indoctrinated and complacent to government as the end-all-be-all answer to woes, will be easy to pull a’board the gravy train.

With some of the proposed changes reported as hammered out, we common folk still find ourselves in the dark on specifics. And one bone of contention still left unanswered to “we, the people” is whether or not we might find our mortgage amounts and loan terms rewritten – dictated not by lenders and appraisers, but judges… a change the DNC is pushing.

One might think that home appraisal values and mortgage terms are “above the pay grade” of the judicial system. What such decisions, possibly based on a borrower’s ability to pay, may have on neighborhood property values is yet to be seen. Not to mention the impact on already overloaded court dockets. Overall the ill-thought out consequences still outweigh the surface intent of this legislation.

All of which lends serious credibility to the 122 economists saying, in essence, “hold your horses, there bucko.. not so fast”.

But hey… what do we know? All our economic futures lie in the hands of those that bungled this to begin with, and they certainly are demonstrating what we have to say matters not. They are rushing this thru at lightning speed, and with minimal disclosure to the public.

But one thing we do know… there’s not a $700 billion bit of difference between the two POTUS candidates.

0 0 votes
Article Rating
Would love your thoughts, please comment.x