Congress: Please, Don't Rush the Bailout Plan 12 comments
September 25, 2008
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Policy is at its worst when it is rushed. Compromises are made under the guise of a crisis that no rational man would take, if given his leisure. There are other options versus rushing into a bailout:
- Do “one off” bailouts until the new year. Then let the new Congress, with fresh authorization from the electorate, attack the problem, rather than a bunch of lame ducks. (As an aside, the panic engendered by the Bush, Jr. administration over the Iraq war is now serving them badly as they try to rush decisions here.)
- To the Republicans: no deal is better than a bad deal.
- To the Democrats: no deal is better than a deal that you will be saddled with if it goes wrong, particularly if you can’t get Congressional Republicans to go along.
- Another option is doing a new RTC. Wait for financial institutions to fail, then be the undertaker … selling off the assets in a better credit environment.
- Yet another option would be offering a tax credit on all mortgage interest paid over 8%.
- Let the Fed flood the short term money markets with liquidity, sparking inflation that no one can dispute. This will solve the crisis in the short-term lending markets at the cost of more inflation.
- Relax rules to allow foreigners and private equity (still further) to own US financial assets.
- Let financial institutions offer shares to the government in exchange for being bailed out.
Anytime someone rushes you to a decision, watch your wallet. The crisis is not as severe as many would say, and there are other ways of handling the situation. Stopgap measures will hold us until after the new Congress is in place; there is no reason to rush a bailout.
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This article has 12 comments:
To address the solvency problem, an automatic, mandatory recapitalization for all US banks would be a better. If banks currently have a market cap of $2T then $700B should buy about 25%. This would certainly help the majority of healthier banks survive, and would let the markets continue to try to value the toxic waste. There could even be provisions for eventual buy-backs which might cap the profits of US taxpayers.
Giving Paulson a $700 billion check to dole out to his circle of friends is just obscene.
Bailout tab: $700,000,000,000
From LA Times print edition headline: "The Treasury secretary would have unchecked power to buy ailing mortgage-backed securities."
This is the same Bush Administration that lost $12 Billion cash in Iraq trying to jump start Iraq economy.
What makes the American people and the rest of the world think they can do a better job?...practice?
I've attached the article from the Gardian to document the loss the $12 Billion cash.
By David Pallister The Guardian, Thursday February 8 2007
How the US sent $12bn in cash to Iraq. And watched it vanish
Special flights brought in tonnes of banknotes which disappeared into the war zone
David Pallister
The Guardian,
Thursday February 8 2007
Article history
An armed guard poses beside pallets of $100 bills in Baghdad. Almost $12bn in cash was spent by the US-led authority
The US flew nearly $12bn in shrink-wrapped $100 bills into Iraq, then distributed the cash with no proper control over who was receiving it and how it was being spent. The staggering scale of the biggest transfer of cash in the history of the Federal Reserve has been graphically laid bare by a US congressional committee. In the year after the invasion of Iraq in 2003 nearly 281 million notes, weighing 363 tonnes, were sent from New York to Baghdad for disbursement to Iraqi ministries and US contractors. Using C-130 planes, the deliveries took place once or twice a month with the biggest of $2,401,600,000 on June 22 2004, six days before the handover. Details of the shipments have emerged in a memorandum prepared for the meeting of the House committee on oversight and government reform which is examining Iraqi reconstruction. Its chairman, Henry Waxman, a fierce critic of the war, said the way the cash had been handled was mind-boggling. "The numbers are so large that it doesn't seem possible that they're true. Who in their right mind would send 363 tonnes of cash into a war zone?" The memorandum details the casual manner in which the US-led Coalition Provisional Authority disbursed the money, which came from Iraqi oil sales, surplus funds from the UN oil-for-food programme and seized Iraqi assets. "One CPA official described an environment awash in $100 bills," the memorandum says. "One contractor received a $2m payment in a duffel bag stuffed with shrink-wrapped bundles of currency. Auditors discovered that the key to a vault was kept in an unsecured backpack. "They also found that $774,300 in cash had been stolen from one division's vault. Cash payments were made from the back of a pickup truck, and cash was stored in unguarded sacks in Iraqi ministry offices. One official was given $6.75m in cash, and was ordered to spend it in one week before the interim Iraqi government took control of Iraqi funds." The minutes from a May 2004 CPA meeting reveal "a single disbursement of $500m in security funding labelled merely 'TBD', meaning 'to be determined'." The memorandum concludes: "Many of the funds appear to have been lost to corruption and waste ... thousands of 'ghost employees' were receiving pay cheques from Iraqi ministries under the CPA's control. Some of the funds could have enriched both criminals and insurgents fighting the United States." According to Stuart Bowen, the special inspector general for Iraq reconstruction, the $8.8bn funds to Iraqi ministries were disbursed "without assurance the monies were properly used or accounted for". But, according to the memorandum, "he now believes that the lack of accountability and transparency extended to the entire $20bn expended by the CPA". To oversee the expenditure the CPA was supposed to appoint an independent certified public accounting firm. "Instead the CPA hired an obscure consulting firm called North Star Consultants Inc. The firm was so small that it reportedly operates out of a private home in San Diego." Mr Bowen found that the company "did not perform a review of internal controls as required by the contract". However, evidence before the committee suggests that senior American officials were unconcerned about the situation because the billions were not US taxpayers' money. Paul Bremer, the head of the CPA, reminded the committee that "the subject of today's hearing is the CPA's use and accounting for funds belonging to the Iraqi people held in the so-called Development Fund for Iraq. These are not appropriated American funds. They are Iraqi funds. I believe the CPA discharged its responsibilities to manage these Iraqi funds on behalf of the Iraqi people." Bremer's financial adviser, retired Admiral David Oliver, is even more direct. The memorandum quotes an interview with the BBC World Service. Asked what had happened to the $8.8bn he replied: "I have no idea. I can't tell you whether or not the money went to the right things or didn't - nor do I actually think it's important." Q: "But the fact is billions of dollars have disappeared without trace." Oliver: "Of their money. Billions of dollars of their money, yeah I understand. I'm saying what difference does it make?" Mr Bremer, whose disbanding of the Iraqi armed forces and de-Ba'athification programme have been blamed as contributing to the present chaos, told the committee: "I acknowledge that I made mistakes and that with the benefit of hindsight, I would have made some decisions differently. Our top priority was to get the economy moving again. The first step was to get money into the hands of the Iraqi people as quickly as possible." Millions of civil service families had not received salaries or pensions for months and there was no effective banking system. "It was not a perfect solution," he said. "Delay might well have exacerbated the nascent insurgency and thereby increased the danger to Americans."
I've been emailing a friend in Congress all week with this precise sentiment. Unfortunately, he doesn't sit on any of the relevant committees. :-(
My fear is that there is little understanding of this issue on the hill. People often expect that lawmakers are usually intelligent and at least have intelligent people working under them. This is a) not always true, and b) even if true does not guarantee understanding of a specific discipline. Congress is particularly susceptible to panic when people like Paulson and Bernanke yell "Fire!".
These two are behaving like brokers cold calling Congress for a "once in a lifetime opportunity." Treasury should be presenting specific findings and a specific plan, not this absurd power grab.
I especially like one point in this article: foreign investors and private equity. Let's take advantage of the preposterously low dollar and get some foreign capital infused into the market. Private equity firms of late have demonstrated a drive to turn around companies and look for long-term solvency and profitability. We could use some focused, hands-on ownership on Wall St. right now.
Too many have fed at the trough. What Fannie Mae and Freddie Mac executives did was illegal.
Still no time to panic, but some executives and some in Congress should see jail time.
When Wall Street absorbs the $700 billion, Main Street banks will pay dearly to maintain their capital ratios.
It makes more sense to distribute the $700 billion to American community banks so they can lend for local transactions or use it to recapitalize Wall Street.