What To Do With $1 Trillion In A Crisis

By Cernig Like many, the more I have heard about the Bush administration's plan to hand Secretary of the Treasury Henry Paulson the Supreme Executive Power to conduct what they say will be a bailout that will stave of a new Great Depression, the more I dislike and distrust it. Thank goodness it's apparently dead after Congressional hostility.

The Treasury's plan to spend up to $700 billion of taxpayers' money to bail out the nation's financial system was recognized as dead Wednesday as lawmakers in Congress made clear that they're going to make significant changes.

Congress intends to add terms ensuring stronger oversight of any bailout, more aid to homeowners facing foreclosure and possibly trimming back the cost of the package, at least initially.

No wonder Congress wants a different plan. For a start, Henry Paulson has a conflict of interest problem. Goldman Sachs, the firm he used to be CEO for and from which he has drawn a coterie of revolving-door aides while at the Treasury will be one of the biggest beneficiaries of his bailout plan. It has also now been revealed that the Administration have been putting together their "shock doctrine" plan for months despite Paulson's assertion six months ago that "our institutions, our banks and investment banks, are strong". Together with Bernanke's insistence that regulation should only be considered after the Paulson plan is approved should give us all more than enough reason to wonder whether we're being right royally conned.

But then you add in the opinion of one of Paulson's former Goldman colleagues who jumped ship, John Talbott:

(T)he problems with the bailout are significant and aren't just faced by Goldman Sachs. This is not a liquidity crisis; this is just like Japan in 1991. This is a bad loan problem and a failure by the banks to recognize those losses because it threatens their solvency. Going in and buying a bunch of assets from these banks and investment banks at 30 cents to the dollar makes the problem worse, not better.

You have to wonder if the original plan wasn't just the ultimate expression of the Bush years - combining a final orgasmic featherbedding for fat-cats with an unprecedented executive power grab. No wonder even Republicans (even Gingrich!) are finally turned on the administration after eight years of lockstep, even to the point of telling Dick Cheney where to get off.

The Bush administration were full of what their plan would do but if any plan for managing this crisis doesn't address bank insolvency it won't solve a darn thing. What it will do is drive the dollar to unprecedented lows- to the point where it might be vulnerable to a run or even lose it's status as the currency of choice for the world. Because $700 billion isn't even the full and final bill - not by a long chalk - and the Bush administration had actually planned to flush even more than $700 billion down the tube.

What was perhaps even more worrying for investors was an item in the small print of Hank Paulson’s rescue plan. It said that, separate to the $700bn markets rescue package, the US Treasury would plunder the Exchange Stabilisation Fund – the US currency reserves, established in the 1930s – in order to pay for an insurance scheme for the money markets.

“The Treasury has committed the nation’s FX reserves to supporting the money market industry,” said Chris Turner, head of foreign exchange strategy at ING. “That suggests to us that the dollar has fallen down the list of the administration’s priorities – a worrying development for foreign investors in the US.”

Analysts are already said reserve managers in central banks in China and elsewhere would treat this as a justification for selling off some of their massive mountain of dollar-denominated investments.

That $700 billion could be used to reimburse banks, home owners, and local governments for nearly 9 million foreclosures or to prevent over 200 million foreclosures. Those would be positive steps, helping homeowners first and foremost, helping insolvent financial institutions out of their hole as a byproduct and restoring credit liquidity thereby. But the Bush administration decided to help only the big institutions and went as far as saying that denying CEO's golden parachutes - even when they reward rotten decisions - would be a step too far.

If you want to influence the plan that eventually makes it out of Congress - and you should, since it'll be you going thousands into debt to pay for it - you might consider signing on as a citizen co-sponsor to Senator Bernie Sanders petition letter to Treasury Secretary Paulson. Sanders and Democratic lawmakers need some backup - send a clear message that middle income and working families shouldn't be the ones paying for this fat-cat rescue plan, that a real bailout plan must include a major economic recovery package which puts Americans to work at decent wages and that the disastrous deregulatory legislation that created this crisis must be repealed.  Because otherwise, you can kiss goodbye to universal health care, transforming our energy system, helping people pay for college, and so on.

Bush is feeling the pressure to make a deal which actually does something worthwhile, rather than simply rush through Paulson's Folly.

not long before his planned 12-minute address to the nation from the grand East Room, Bush took the unusual step of calling Democrat Barack Obama to invite him to the White House for the meeting on Thursday, said presidential spokeswoman Dana Perino. The White House said the presidential invitation was also extended to Republican John McCain and to Republican and Democratic leaders from Capitol Hill.

Intensive, personal wheeling and dealing is not usually Bush's style as president, unlike some predecessors. He does not often call or meet with individual lawmakers to push a legislative priority.

Obama spokesman Bill Burton said the senator would attend and "will continue to work in a bipartisan spirit and do whatever is necessary to come up with a final solution." The plans of the other invitees were unknown, and the exact details of the meeting, which Perino said was aimed at making fast progress to stem the biggest financial meltdown in decades, were still being set.

In another move welcome at the White House, Obama and McCain issued a joint statement urging lawmakers — in dire terms — to act.

"Now is a time to come together Democrats and Republicans in a spirit of cooperation for the sake of the American people," it said. "The plan that has been submitted to Congress by the Bush administration is flawed, but the effort to protect the American economy must not fail."

Help keep the pressure on.

Comments

[Fledermaus]

I think the best way to understand this is that Dr. Evil in Austin Powers only demanded 100 billion not to destroy the earth. What does it say when wall street is 7x as greedy as dr evil?

[Fraud Guy]

My email to my Senators (including Obama) and my congresswoman:

Say no to the Bailout.

I am losing my home tomorrow to a foreclosure. I have tried to sell it for 18 months at progressively lower prices, but it just will not sell, even though I will take a loss and have to beg the banks to forgive the balance owed on the house.

Now, banks in the same situation I am in are going through their representatives in the administration and demanding Billions, without giving up anything, only letting their shills threaten that they will destroy the economy if they don't get what they want.

If I, as a taxpayer losing my home were to do this, this same administration would call it an unfortunate pain due to adjustments in the economy. If I threatened to stop paying my bills, I would be hauled into court and forced to pay. However, if the banks do it, it is somehow a prudent and patriotic act to bail them out.

Say no to the bail out. My wife and I are out at least $110,000 on this home, on top of the shortfall that will be applied to us after the banks collect what they can at the sheriff's auction. That will likely take our losses to over $200,000. Our credit ruined, no bank, no bureaucrat will come in to help us, despite the varied programs Congress and the Administration claim are out there to help distressed homeowners. I make too much to qualify for most assistance, but not enough to claw my way out anymore. I will likely end in bankruptcy, despite attempts to keep our heads above water for the past two years.

What is fair for taxpayers to suffer is more than appropriate for the banks who fueled this "crisis" with their self-aggrandizing financial schemes that have been revealed as hollow and fraudulent by their failure. The executives who profited from this should be called to account. The companies and shareholders who profited from this should be called to account. My accounting comes tomorrow--when will you give them theirs?

Thank you,

[Ian Welsh]

Missed the exchange stabilization fund. I wondered where they were going to get the money for that insurance plan. Very nice catch Cernig.

[Kat]

That $700 billion http://www.cjr.org/the_kicker/what_can_you_buy_for_700_billi.php>could be used to reimburse banks, home owners, and local governments for nearly 9 million foreclosures or to prevent over 200 million foreclosures. Those would be positive steps, helping homeowners first and foremost, helping insolvent financial institutions out of their hole as a byproduct and restoring credit liquidity thereby.

Like, say, a three-year program that would

1. help homeowners that are having problems paying their mortgages by giving them a certain amount of money every month to help them make their current monthly payments while their mortgages are being rewritten,

2. a temporary moratorium on repossessions while this program is in progress,

3. have Freddie and Fannie write 'em new fixed-rate mortgages they can afford the payments on, and splitting the difference between how much the house appraised for on the old mortgage and what it's worth now, with the old lean-holder taking half the loss of the difference and the homeowner taking the other half of the loss. Freddie and Fannie could even add each homeowner's mortgage-payment help onto their new mortgage to recoup that cost.

Seems to me something like this would increase the value of the "worthless paper" the banks are holding, while keeping people in their homes and keeping home values from further precipitous declines.

[xvet]

Leaving this admin in charge of this economic disaster is like having Bin-laden in charge of homeland security. The free market capitalism above all else boobs, except of course when we need a little socialism to bail our asses out, will do more towards the destruction of this Democracy than all our enemies combined.
xvet