The performance of the big indexes are telling us that most investors do not have a lot of faith in what they are being told by U.S. Federal Reserve Chairman Ben Bernanke and Secretary of the Treasury Hank Paulson. Here is a chart of yesterday’s action in (NYSEARCA:DIA) and (NYSEARCA:SPY). As you can see, people no longer seem to believe them, and don’t seem enthusiastic about the bank rescue plan any more.
Bernanke is urging the U.S. Congress to pass this hastily crafted bailout bill on a so-called “emergency basis”. In prepared remarks, he will tell the Senate Banking Committee, on Tuesday that:
Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy,
Why should anyone take his advice? He has been wrong, over and over again, since the beginning of this economic downturn in July 2007. The man has given away a total of over $700 billion worth of Fed owned treasury bills to the banks, in exchange for mortgage backed securities with little to no private market value. He has already brought the Federal Reserve to the brink of insolvency, such that the U.S. Treasury was forced, last week, to recapitalize it by $100 billion, using sales of new Treasury bills, on Wednesday and Friday. The good doctor has been wrong on virtually everything, and has crafting a uniformly poor response to dealing with this crisis, There is no likelihood that his current opinions are any more valuable than the ones he gave us over the past year.
He told us, back in July, 2007, for example, that the financial crisis that was unfolding would be a strictly limited affair that would have little effect on the real economy. That wasn’t true. He told us that a ½ point cut in interest rates would help prevent the need for further cuts. It wasn’t true. Just two Fed meetings ago, he told us that the downside risks to the economy had been substantially reduced, and there was talk about raising interest rates in the near future. All of that, and much more, was not true.
Since July 2007, Bernanke and Paulson have had over a year and two months to figure out what to do. That is plenty of time. Why did they craft no plan whatsoever? Why hasn’t Congress been given ample time to debate this issue? What have they been doing for so long? Twiddling their thumbs? Now, having failed to hammer out any working strategy at all, over more than a year, they suddenly come to Congress, claim it is an “emergency” and demand dictatorial powers for a Treasury Secretary, including the unfettered right, free of judicial review, to reward or punish financial institutions.
For example, under the Paulson plan, he can pay Goldman Sachs a very high price for their assets, and 1st National Bank of Timbuktu, a much lower price for the same assets. No judicial review will be permitted.
Wrong choices are made when choices must be made in haste. Congress desperately needs to make the right choices, or we will pay with economic hell. The potential disaster that looms in the future, from making mistakes, now, is far more serious than any negative consequences of a bit of delay. Congress must, at all costs, avoid putting this level of taxpayer money at risk, without imposing adequate safeguards.
So far, as noted above, almost every choice made by the Fed and Treasury has been the wrong choice. Every forecast, has been fundamentally wrong, also. Now, instead of a carefully crafted plan, presented in a timely manner, Paulson and Bernanke present us with a last minute, hastily crafted plan arising out of their own panic. It includes virtually no oversight. They tell us that if it is not passed into law, immediately, disaster will strike. That is fear mongering. Yet, if they had so little foresight that they could not see the need for any plan at all, for over a year, what should make us believe they are showing foresight now?
The Treasury’s plan threatens to permanently remove $700 billion from the pockets of innocent taxpayers, and place it in the hands of the same executives who caused the credit crisis. This has the potential of destabilizing the U.S. dollar and debt markets, while, at the same time, richly rewarding those who caused the credit crisis. Hastily drawn plans, requiring expenditure of staggering amounts of public funds, are a recipe for corruption and abuse.
Hasty conduct, in approving temporary dictatorial powers, on similar claims of “emergency” needs, occurred 2,000 years ago, in the Roman Senate. The Roman Senate failed to take the necessary time to consider what they were doing. Those ancient Senators ended up conferring dictatorial powers on one man. This ended the Roman Republic, and marked the beginning of the Roman Empire.
Let’s not allow history to repeat itself. Congress must reject the plan, now being presented by Paulson and Bernanke, and take the necessary time to debate the issues, even if it takes a month or more to do it. At the end of that debate, we may have a plan that works, rather than one which vests dictatorial powers in a Treasury Secretary, and is likely to pick the pockets of the American taxpayer to the tune of $700 billion.