An Open Letter to Congress on the $700B Paulson Bailout Plan 22 comments
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Dear Congress,
Treasury Secretary Paulson is asking you to rush through a $700 billion package because "we’re literally maybe days away from a complete meltdown of our financial system".
Paulson states that it must be done quickly and that it is better than the alternatives. Fed Chairman Bernanke agrees.
The first question Congress should ask is how would Paulson or Bernanke know?
It was only a month ago Paulson was reiterating to anyone who would listen how sound our banking system is. The fact of the matter is that neither Paulson nor Bernanke saw this coming, yet now Congress is supposed to trust they now "know" the solution.
Problem Defined
Before one can work out a solution, the first step is to identify the problem. The problem is not a lack of liquidity, it is not a lack of trust, it is not lack of consumer confidence, it is not subprime lending, and in fact the problem is not housing at all.
The problem is consumers and corporations are deep in debt with no way to service that debt.
Attempts to bail out banks and brokers at taxpayer expense will do nothing but add to consumer debt, weaken the US dollar, and literally waste $700+ billion dollars that can and should go to more productive uses.
What Caused The Problem?
- The Fed
- Congress
- Fractional Reserve Lending
- The Treasury
The root cause of this problem is the Fed micromanaging interest rates, the Treasury cheerleading every step of the way, and Congressional sponsored spending that went wild. The critical issue that ties everything together is fractional reserve lending allows banks to borrow money (credit really) into existence with insane amounts of leverage.
To top it all off, Greenspan slashed rates to 1% fueling the biggest global housing bubble the world has ever seen. Congress needs to figure out a way to eliminate the Fed.
Fed Uncertainty Principle
I kindly ask of you to please read the Fed Uncertainty Principle written April 03, 2008 before any hint of this meltdown occurred. Here is Corollary Number Two.
Uncertainty Principle Corollary Number Two
The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Why The Paulson Solution Fails
The Paulson solution fails because it does not help consumers or businesses service debt, it does not create any jobs, it increases the national debt, and it encourages more reckless lending by banks. Attempting to bail out banks on the back of cash strapped consumers is simply doomed to fail.
If printing money was the solution to all problems, Zimbabwe would be the most prosperous country in the world.
The Barney Frank Non-Solution
"We're going to be buying up a lot of mortgage paper" said House Financial Services Committee Chairman Barney Frank.
Sadly, that will not do a single thing in and of itself to stop foreclosures. All that will do is bail out banks and brokers at taxpayer expense.
Barney Frank also stated “We should be more willing to write down the mortgages. We’ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.”
Congress needs to ask "How much extra will Barney Frank's proposal cost taxpayers?"
Were does the madness end?
As stated earlier the problem is not housing in the first place, and besides taxpayers who pay their mortgages on time should not be subsidizing those who don't!
Banks Need To Recapitalize
Paulson wants to recapitalize banks so they can keep lending. Ironically, one of the problems is lending. The US has been on a credit binge to such an extent that I have to ask what more do we need? More Pizza Huts? More Home Depots? More Houses? More Nail Salons? More Car Dealers? What?
What is the urgent need to lend still more?
We are in this mess because of too much reckless lending. We do not need more lending, we need more saving!
Paulson's idea that more lending is needed is ass backwards. Paulson's proposal cheapens the dollar, and discourages the one thing that is desperately needed: saving.
Alternatives Discussed
In the mad rush to push through this package, Paulson states it is better than the alternatives. That is an interesting statement because no alternative have even been presented to Congress, let alone discussed.
Shouldn't there be a discussion of alternatives before doing a mad dash to sign a $700 billion package?
Paulson is attempting to hoodwink Congress to pass his plan without any discussion of alternatives. I believe the Paulson proposal is the worst of all solutions in that it bails out banks at the expense of the taxpayer and the taxpayer gets virtually nothing out of the deal: no jobs, no tax relief, no health care.
Paulson claims that taxpayer will benefit by the bailout indirectly because one the government owns the debt, servicers will be more willing to negotiate terms. Once again, it will be taxpayers on the hook for any negotiation granted. Paulson conveniently ignores this cost as does Barney Frank.
Taxpayer Gets Nothing From Current Bailout Proposals
The taxpayer gets nothing for this bailout $700 billion. Actually the taxpayer gets a negative benefit because the Paulson and Frank proposals will cheapen the US dollar, increase the deficit, and ultimately cause prices of imported goods to rise for everyone, while saving a relative few.
The solution is to address the recapitalization of banks in a fair way that does not jeopardize the taxpayer but instead puts the onus of responsibility on banks making reckless lending.
Recapitalizing Banks
Banks are undercapitalized. They need funding badly. Here is what I propose.
- Reduce the capital gains tax by 50% for any investor willing to cash out stocks and invest in 5 year bank CDs.
- Eliminate the difference between long term and short term capital gains.
- Eliminate taxable interest on savings accounts, CDs, and US treasuries.
The above would promote saving rather over speculation and provide a big boost in government revenues as well. Stock prices will not be affected over the long haul by these measures.
Jobs, Jobs, Jobs
I am a libertarian. I do not believe in makeshift government proposals. However, I would rather get something than nothing for $700 Billion. Paulson's proposal scores a big fat zero in term of providing an jobs or any real economic stimulus.
It is no secret that infrastructure in the US is decaying and needs to be fixed. A collapsing bridge in Minnesota is one key example. And what out our aging energy grid? Instead of giving $700 billion to banks that deserve to go under, I would rather give half that for jobs programs.
To create as many jobs as possible at the least cost Congress needs to scrap the Davis-Bacon Act. It would be better to create 3 construction jobs at $12 an hour than 1 job at $36 an hour. The idea here is to get as most bang for the buck and create as many jobs as possible for the money spent.
Waste In Iraq
We need to admit the mistakes in Iraq. The public never supported this war and the public was correct. The war in Iraq easily cost $1 trillion dollars if you count future medical bills. That is $1 trillion dollars that could have been spent right here in the US.
I propose we declare the war won and get out, totally and completely. Offer returning veterans first crack at any infrastructure rebuilding jobs. It is the least we can do to those who are likely going to be emotionally if not physically scarred for the rest of their lives fighting a war that never should have been fought.
Congressional Spending
Congress needs to admit its own role in this mess. Congress passed hundreds of programs to make housing more affordable. They all failed including the biggest failure of all: Fannie Mae and Freddie Mac.
It should not be the role of Congress to promote housing vs. renting. The very act of doing so creates an artificial demand for housing. Ownership society madness culminated with many financially unqualified to buy a house buying house anyway because Congress and the White House promoted the idea.
Congress is also directly responsible for deficit spending and that weakened the US dollar. Indeed there was virtually a panic out of dollars for this reason. Adding another $700 billion to the deficit as Paulson is asking you to do is adding insult upon injury. Don't do it.
Instead, balance the budget. It can be done.
Who Am I?
Who am I to suggest what Congress should do? I am nobody. However, this nobody and a bunch of fellow nobody bloggers and bunch of nobody fund managers who I respect all saw this all coming 3-4 years ago. Paulson did not, Bernanke did not, and almost everyone in Congress did not.
So the choice Congress needs to make is who to believe. Congress can believe Bernanke and Paulson who have been totally wrong about everything for years, or Congress can listen to people who not only understand what is happening but predicted it.
Desire To Believe
You desperately want to believe that Paulson and Bernanke are telling the truth. You have for years put your faith and trust in them. It is a very difficult thing to do to admit you are wrong.
However, it is critical that you look at the simple facts for what they are.
The fact is Paulson is grasping at straw in a tornado. So is Bernanke. Problems cannot be cured by printing money, and problems cannot be on the backs of already overburdened consumers.
No problem is fixed by madly and blindly rushing into solutions where no alternatives are discussed. You now have alternatives.
I will also offer one more alternative but it is not from me. I kindly ask Congress to consider An Open Letter to the U.S. Congress Regarding the Current Financial Crisis by John P. Hussman, Ph.D., an economist and investment manager whose opinion I trust.
Hussman too has an opinion as to how to address this issue without impacting the taxpayer. For the record, I have no idea what he might think of my proposal.
However, between the Hussman proposal and mine, I am sure there is fertile ground for further discussion and for doing something other than what I believe to be the worst possible alternative, the proposal submitted by Treasury Secretary Paulson.
No problem is too big that a solution has to be rushed into without considering the alternatives. I ask that you consider these alternative proposals either over an extended session or by letting the next Congress tackle the issue.
Heaven help us if recess is more important than taking the time to seriously consider all reasonable alternatives.
Sincerely,
Mike "Mish" Shedlock
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This article has 22 comments:
He ran Goldman while they created this toxic paper, he knows full well that this situation was inevitable.
Now he wants to save his hide and his buddies second and third summer homes.
Lock up Paulson.
Our children are going to pay dearly for our addiction to debt and spending
Well, Clinton may have been aggressive in this area, but Bush was no slouch in following his footsteps. Bush pushed for increased home ownership via both government assistance and increased private sector involvement. Here it is, in his own words....
www.whitehouse.gov/new...
www.whitehouse.gov/new...
www.whitehouse.gov/new...
The Financial Katrina that has hit Wall Street is a fitting metaphor for
8 tiresome years of incompetence from the Bush White House.
Lets take a look:
White House: During the months leading up to 9/11, there were numerous red flags
that Al Qaeda was planning something big. These were blatantly ignored.
Wall Street: During the years leading up to this financial crisis, there were numerous red flags that
Wall Street was dangerously over leveraging the real estate market. These were
ridiculed and blatantly ignored.
White House: After Katrina hit New Orleans, the administration claimed everything was
hunky dory, under the adept leadership of a political hack called Brownie.
Wall Street: After the Subprime market began to implode last year, the administration continuously
claimed that our economy is fundamentally sound. The financial markets were
being competently protected by the SEC and its disastrous politically appointed Chairman Cox.
White House: After 9/11 the Bush Administration laid the blame on Saddam Hussein. A despicable
guy, but not the perpetrator.
Wall Street: In the Subprime Crisis, the administration is laying the blame off on short sellers. You may not
like them, but they are not the perpetrators.
White House: After 9/11, the administration slacked on chasing the real perpetrator, Bin Laden.
Wall Street: In the Subprime Crisis, the real perpetrators, reckless Wall Street executives, are not being brought to
justice.
Weapons of Mass Destruction
Financial Weapons of Mass Destruction
Improvised explosive devices
Synthetic CDO's
Blackwater
Blackrock
Opaque Whitehouse
Opaque financial institutions
Failed regimes
Failed models
Following years of mismanagement of the Iraq War, the administration used scare tactics to
force Congress to go along with the military surge.
Following years of regulatory inaction and months of failure to stem the subprime crisis, the administration is using scare tactics to force Congress to go along with
the subprime bailout surge.
After the surge, there is no final solution in sight.
There is no final solution for the subprime bailout surge.
The Military Industrial Complex thrived under Bush.
The Consumer Finance Industrial Complex has thrived under Bush and will thrive once again. Who do you think is going to manage
all the bailout assets after they are purged from Wall Street's books. Wall Street of course!
Wall Street: Moral hazard.
White House: Moron Hazard
Wall Street: Got Drunk
White House: Former drunk
Billions and billions of dollars to be spent all around.
The same guy gets screwed in the end, Joe tax payer.
A BETTER IDEA FOR HENRY
Although, to be fair, the only half-assed attempts at "addressing" parts of this problem in the last 10 years were by Reps.
a plan to stimulate the economy, lower taxes, start paying off the National Debt,
alleviate poverty and decrease crime
by replacing our OLD economic system with a NEW system based on
a new and debt-free U.S. currency to replace Federal Reserve Debt-Money,
a 0.5% tax on electronic transfers to replace the Federal Income Tax and the IRS,
and $1000 per month privatization compensation (non-Fed $) for all legal U.S. residents
(This is the short version. Basically it suggests we replace Fed Debt Money with a new currency - one that amounts to equally-distributed ration coupons - to replace all other forms of government largesse, replace the Income Tax with a de facto tax on wealth, letting everyone work as much as they want or can to supplement their incomes, decentralizing all economic decisions to the individual level (the more decision points, the smarter the system), in order to get our economic system to start functioning like the human body (the government being analogous to the autonomic nervous system and the new currency being analogous to the blood supply each cell gets whether they `earn` it or not = `Autonomics`). Also included is a healthcare `cure` and a zero-cost plan to get us off the crude oil habit.)
There is NO BENEFIT AT ALL in having a Central Bank (well, none for us) compared to having the U.S. Treasury print and distribute our own debt-free money to ourselves. THE ONLY DIFFERENCE between having a central bank or not, is that ``One system costs us 95% of our wealth every hundred years and puts us and our posterity into mind-boggling debt until the end of time``... and the other doesn`t.
So the first thing we need for our NEW SYSTEM is our own, debt-free U.S. Government fiat currency, backed by all the property within the nation`s borders. Obviously I disagree with those who insist that `only gold is real money`. The hoarding of gold-backed money has led to and prolonged many U.S. economic depressions which explains why the U.S. has tried and abandoned `the gold standard` many times over the years. ``Bad money drives out good`` means people will always wind up using as money whatever has the least actual value that will still be accepted by others to facilitate trade. Debt-Free fiat money will work just as well as Federal Reserve fiat Debt-money, but without all the nasty side-effects.
Another problem with the OLD SYSTEM is that income-based taxation creates wasteful tax avoidance behavior, requires an expensive tax reporting industry and an intrusive collection bureaucracy, and is, arguably, a form of `involuntary servitude`. Under our NEW SYSTEM, we should replace all income-related taxes with a one-half percent, automatically-collecte... electronic transfer tax (also known as a `debit tax`) which will be avoidable by transacting business using cash or barter. This will not only rid us of the IRS (saving the billions currently spent on `tax reporting`), it will also end the current penalization of work and entrepreneurism, as well as freeing up untold billions currently spent on `tax avoidance`. A debit tax is `more just`, corresponding closely with ``benefits previously-obtained`` rather than penalizing labor and industriousness, and (as it can be legally avoided, even if only inconveniently so) this debit tax can be considered ``voluntarily-paid``. A small electronic transfer tax will also act to discourage excessive short-term market speculation and should be able to raise enough revenue to begin paying off the National Debt. The tax should be either paid with the new debt-free money or exchanged for it by the Treasury with tax revenue on Federal Reserve money being used to start retiring the National Debt.
As argued by Tom Paine in his 1797 essay ``Agrarian Justice``, the third problem with the OLD SYSTEM is that, because governments privatize all of their claimed property (allocating it however they like), everyone winds up being denied free access to all property (other than that which has been specifically allocated to them) without being compensated for that loss. That`s not a problem for those with access to capital and property ownership, but for the rest of us, it is totally unfair and creates a slanted playing field upon which wealth gravitates to the already wealthy and the well-connected. However governments allocate their property, every method has the same result of `denial to everyone of free access to all land`. It has taken 200 years for this injustice to be acknowledged in a place and time where something can be done about it and when events have conspired to make rectification not only just, but vital to our economic survival. Just as compensation for eminent domain takings are provided for in the 5th Amendment of the U.S. Constitution, governments should provide compensation for denying everyone `right of free access to all property`.
Thus, in order to remedy this, we must elect a Congress that will PAY EVERY LEGAL U.S. RESIDENT `Adequate and Equal Compensation for Denial of Free Access to U.S. Property`, compensation which can FUNCTIONALLY REPLACE ALL FORMS OF PERSONAL AND CORPORATE WELFARE AND SUBSIDIES, including rescinding Federal Minimum Wage laws and phasing-out the Social Security system. (Once everyone is getting `Denial of Free Access` compensation their whole lives, most people will be able to save enough to be able to comfortably cease working at some point in their lives.)
Our NEW SYSTEM should pay $1000 per month (of our new, non-Fed, non-Debt-Money) to every legal adult resident. Compensation for minors should be held in a trust fund to avoid incentivizing `baby factories`. Since everyone gets the same amount of compensation, this plan is not wealth redistributive, but will give the least wealthy the biggest relative monthly percentage increase of wealth. Because when people HAVE something, they have something to lose, we can expect a reduction in all sorts of crime under our NEW SYSTEM as well as better childcare, less poverty, more rural homesteading, better maintained urban areas, less intrusive and cheaper government with lower military-related expenses and a safer world in general. Once this NEW SYSTEM gets going, I expect residents of other countries will insist their governments either copy our NEW SYSTEM or else apply for U.S. statehood as Texas did in 1845.
HEALTH CARE...The AMA and FDA work to constrain competition in order to maximize the medical and pharmaceutical industries` ability to extort unconscionable prices for services and substances that should be affordable out-of-pocket. We need to train up thousands more doctors and other healthcare professionals and to decriminalize and unbridle access for adults to WHATEVER drugs adults want, obtained from WHATEVER source adults decide thay want to obtain them, for WHATEVER purpose those adults wish to use them, and let the market work to make prices of normal medical help and pharmacology affordable.
OUR ADDICTION TO CHEAP OIL...If we seriously want to kick our `crude habit`, Congress could add on a 10% surcharge at the gas pump, bump it up another 10% every 6 months, and rebate the surcharge revenue in monthly equi-dollar amounts to every registered car OWNER, regardless of how much they drive. That would cause the biggest oil consumers to subsidize everyone else with no BOTTOMLINE cost to taxpayers or consumers. The surcharge would incentivize cheaper alternatives which would rapidly come to market, no government subsidies or mandates required.
SEND A MESSAGE to candidates running for Congress in 2010 and 2012 (that, in order to get elected, they will need to support a change to a NEW SYSTEM, whether exactly like my plan or not) with a MASS WRITE-IN CAMPAIGN that `blows socks off` from DC to LA. I will be registered as a Write-In Candidate for US President in Michigan, and in other states as I get help with other states` registering processes. Pass this message along to several people every day (or, even better, to everyone you know today, and to everyone you meet from now on). IF EACH OF US EVERY DAY CONVINCE EVEN ONE OTHER PERSON TO JOIN US, OVER ONE BILLION PEOPLE WILL BE `ON BOARD` IN 30 DAYS. (Seriously. Grab a calculator and start doubling from 1.) For an e-copy, or to ask questions or volunteer, write me at alan_jacquemotte@yahoo... or P.O. Box 183393, Shelby Twp, MI 48318.
Bingo! Since FRB is based on both fraud (so called "demand accounts" that have been lent out!) and theft via inflation, only a moral moron would fail to suspect that this might have serious economic consequences.
This is old news to the Austrian Economists.
John Maynard Keynes,
you've had your fun.
Now we find we're living
in your "long run."
Thanks
CEOs needed a way to keep showing blowout earnings for an investing public that wasn't happy with a steady 12% annual return anymore. Banks made bad loans through dishonest mortgage brokers to greedy homebuyers who thought they were going to get rich overnight. Now all of these people are going to be rewarded at the expense of the average working American who busts their ass everyday to make ends meet.
Putting blame for that expressly on the shoulders of one or two individuals is absurd. There's plenty of blame to be assigned here and this bailout just gives them all a free pass to do it again.