The world shouldn't pay ransom to Somali pirates; clearly the ransoms paid lead to more piracy.
The US shouldn't pay ransom to Wall Street; ransoms paid will reward past reckless behavior and incent reckless behavior in the future. They won't "save the ecomomy".
I'm sure you're getting as tired of reading about the bailout as I'm getting tired of writing about it – but it just won't go away. Congresspeople are now saying that constituent pressure against the bill in waning while fear of "doing nothing" is growing. Apparently they think we've changed our minds if we don't write them one more email. We should do that.
The longer there is hope for a bailout, the longer it will be before financial people work on getting the flow of money moving through the economy again. Dragging this out is poor leadership even if the current President and both his would-be successors think otherwise.
Instant analysis of stock markets is taken as an indication that the bill is needed. In fact no one knows why markets move up and down in the aggregate. I bought stock AFTER the bailout bill failed because I thought the failure of the bill was good for the economy. The Dow Jones went up the day after it went down. Newspaper headlines said it went back up in hopes that the bill would be revived; but I bought in hopes that the bill was dead; maybe other people did as well. The Dow Jones is down today despite the news that the Senate will vote tonight on a slightly revised bailout bill but European markets are up; could that be because it is bad news for Americans who will pay for the bailout if the bill passes but good news for Europeans who get the benefits, such as they are, without paying the price? I don't know and I don't believe anyone who claims to know. I do know that economic policy shouldn't be made by watching the stock market any more than a company should be run with a minute-by-minute focus on its stock price.
By the way, some of the purported improvements made to the bill are more show than substance:
- Turns out that the "limit on executive pay" limits business tax deductions for the five most senior executives of some companies which participate in the bailout to the first $500,000 of annual compensation. Of course, unless the companies are profitable, tax deductions don't matter. Moreover, do you really believe that executives will forgo compensation merely because their employers can't deduct them? Did they forgo extreme compensation their companies couldn't afford?
- The limits on golden parachutes do seem to have more teeth for companies which sell over $300,000,000 worth of junk to the Treasury.
- Speaker Pelosi's promise that the bill now contains assurance that losses won't be borne by the taxpayers consists of language requiring the next administration to come up with a plan for dealing with any losses years from now.
With each day that passes, it become more and more clear that the bailout is more designed to benefit those who don't need it than those who will need help in tough economic times. This article from the WSJ explains how auto finance companies will be bailed out – this is in addition to the $25 billion in low-cost loans for the auto manufacturers themselves. "…since GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management LP, each is now being run to maximize profits, not auto sales," says the Journal. So, if the government buys the bad loans from the Cerberus-run companies, that will save Cerberus from losses it's already incurred – basically by loaning too much on gas-guzzlers but won't help car sales or consumers with underwater car loans. Why would we want to do that? This is the kind of thing that happens when panic is used to sell hasty passage of a bad bill. Full disclosure: the business decision I regret most was agreeing with and supporting a Morgan Stanley recommendation that the public company I founded and ran be merged with a Cerberus-owned entity.
This post is about Warren Buffett's ransom demand. He doesn't need help either.
I'm not against Paulson's proposed bailout just because it'll reward the wrong people; I believe that both in the short and long term this bailout will be bad for the economy because it puts much-needed capital where it is least likely to do much good. Tinkering with the bailout proposal won't fix this. Now What? suggests 10 ways to help the economy without a Wall Street bailout.
Since the majority of homes are now in conservatorship, why not decrease what is owed on RESPONSIBLE HOMEOWNER'S mortgages?? Give me $3k tax credit for good behavior instead of rewarding the thugs on Wall Street.
Last time I checked, the vast majority of Americans are well aware of the looming financial disaster and STILL are opposed. Its the sick little entitlement by the corporate and wealthy elite that have Congress in their pockets.
Time for a "Wall Street Bailout Party" much like Boston Tea.
Folks, there is no better way to assess what is REALLY happening than to open your friggin eyes and quit pointing fingers.
Who wins? Wall Street.
Who created the derivatives? Wall Street.
Who failed to self-regulate? Wall Street.
Who do we bailout? Wall Street.
What a joke. Let the free market bring down the price of McMansions such that those of us that are responsible have a crack at them.
www.bobbarr2008.com/pr.../
Press Releases › BARR: No more government guarantees
October 2, 2008 10:39 am EST
Originially published at the Washington Times ...
Just one week ago, Treasury Secretary Henry Paulson was demanding that Congress grant him unprecedented, unreviewable authority to spend $700 billion or more to bail-out Wall Street. But in a major rebuke to the administration and to both the Republican and Democratic congressional leadership, the House voted down the 110-page plan that emerged from last weekend´s frenzied — if not unseemly — effort by Mr. Paulson to salvage a bailout deal.
The Dow dropped some 10 percentage points in reaction to the House vote and, while that was less than a third of the massive percentage drop it suffered in 1987, it shouldn´t surprise anyone that Wall Street was upset at being denied at least $700 billion of taxpayer´s money to practice more of what got it into trouble in the first place — buying up over-valued mortgage-based securities. A majority of members of Congress correctly concluded that the leadership-backed bailout bill was, to put it mildly, bad and that the closed-door sessions that spawned it were deeply flawed as well.
Perhaps at long last, some basic understanding of economics is seeping into the Capitol. Dare we hope that some members now understand the fact that Congress can only redistribute, not eliminate, the pain of an economic downturn? At a minimum now, as a result of the House “no” vote, Congress has time to seriously consider alternative strategies and it needs to press its advantage.
The starting point should be private market adjustment. With the knowledge that an easy government bailout is no longer around the corner, the markets can get serious about working through the mountain of bad debt that imperils homeowners, banks and companies alike.
Unfortunately, artificial booms inevitably lead to painful busts, but these can be productively addressed. Today, this means a mix of bankruptcies, company workouts, and takeovers as we are seeing in the banking sector and outside investors buying large pieces of companies, such as Warren Buffett´s $5 billion investment in Goldman Sachs. This process will reward more responsible firms and encourage them to move early to correct past mistakes.
Many companies also will have to sell mortgage-backed securities. Obviously, companies holding over-valued mortgage-based securities (MBS) prefer to dump bad securities on the government than sell them in a down market. But there is a market even though asset values are uncertain. Merrill Lynch liquidated its MBSs in July.
Bailout advocates simultaneously tell us that these assets are “toxic” and are destroying firms, but which magically at the same time are possessed of value that will ultimately make money for the government if it is allowed to buy them with taxpayer funds. However, good business leaders know that private investors are better able than government officials to dig out that hidden value. Private buyers, too, could participate in reverse auctions and hire asset managers on their dime, not the taxpayer´s. This adjustment process should be carried out in the marketplace — not behind closed doors in Washington.
Both Congress and the administration should focus on cleaning up the mess, not making it potentially far worse. Federal and state authorities need to begin to aggressively prosecute fraud in private markets; fraud that has resulted in trillions of dollars of grossly and deliberately, if not criminally negligently, overvalued mortgage paper. The goal is not to create scapegoats, but to keep markets clean. At the same time, we need a thorough investigation of the misbehavior of public officials in spurring Fannie Mae and Freddie Mac, for instance, to engage in reckless lending. Many of the politicians leading the attack on Wall Street for its failures worked overtime to create the subprime lending debacle.
Congress should rein in the Federal Reserve System. Over the last decade the Fed has followed an easy money policy designed to spur economic growth. But this encouraged irresponsible lending and inflated property values. Increasing the money supply is a bit like mainlining heroin — it´s pleasant while you´re doing it, but it´s extremely painful when you finally stop. Yet as currently configured, the Fed is neither transparent nor accountable.
Congress must say never again with Fannie Mae and Freddie Mac, which lowered mortgage standards and pushed people into new or larger homes than they could afford. These government-sponsored enterprises must be privatized; there must be no more implicit or explicit public guarantees for mortgage lending.
Congress needs to repeal the Community Reinvestment Act. The CRA effectively forces banks to lend to poorer communities irrespective of the creditworthiness of borrowers. Many of the same legislators who demanded increased bank lending in the inner-city now criticize banks for making “predatory loans.” Agencies such as the Securities and Exchange Commission need to suspend the mark-to-market accounting standard and reconsider its application. The rule makes sense for trading assets, especially where values are well established; however, the standard has a perverse impact when applied to long-term income-producing assets in a volatile market. A single major, bad sale can force a major corporate write-down, artificially crippling an otherwise creditworthy firm.
We need better, more streamlined regulation, not more regulation. There are a multitude of government financial regulators, leaving us with expensive controls, but without the transparency most needed by customers and investors.
Finally, we must control federal spending. Where is the $700 billion or more for a bailout supposed to come from, in a government already drowning in deficit spending and a spiraling national debt? Who will bail-out the federal government when investors at home and abroad refuse to buy its paper Instead of attempting to ram through a new version of this bad bill, the president and congressional leaders should announce that a government bailout is off the table. Companies and institutions must focus on systematically working through their problems, in a transparent, focused effort, utilizing the tools in the government´s already-massive quiver of tools.
We must learn from today´s economic disaster lest, to paraphrase George Santayana, we repeat this painful experience in the years ahead.
Bob Barr, a former Republican congressman from Georgia, is the official candidate for president of the Libertarian Party.
Rules to economics:
1) Let do.
2) People respond to incentives.
If you don't let the economy run it's course it is bound to continue to flounder.
By providing this bailout we are rewarding the corporate giants for making foolish mistakes while telling them it will be okay if they do it again because the US treasury is there for them.
I'm not sure if you've looked lately but our economy has shut down and the rest of the world will follow.
There is no where to hide your money. Not even cash, which is falling in real terms, but is probably your best bet right now. Good luck to all of you ostriches!
www.boston.com/busines.../
The bill does not address the root causes of the problem. Government has fundamentally contributed to this mess with the Community Reinvestment Act and the GSEs (Fannie and Freddie). The CRA needs to be repealed or modified so that traditional lending standards can be applied to all extensions of credit, including low and moderate income borrowers. The GSEs need to be downsized and their function needs to be placed entirely in the private sector without a government guarantee.
What you miss is that the source of this problem is government.
What Wall Street did is try to efficiently allocate capital. Is Wall Street complicit? Yes! So was Greenspan and the Fed (e.g. keeping rates to low for too long, Greenspan encouraging people to use ARMs, etc.), mortgage brokers and hedge funds.
Turning the US Treasury into a distressed debt hedge fund is a bad idea. The US Treasury does not have the skills to manage these assets. Outside managers should be retained to manage the assets. PIMCO said it would do it for free, simply covering their costs. 100% of the profits, if any, must be returned to the US Treasury.
This plan does nothing to ensure that banks will resume lending. My view is that credit has permanently contracted in part because of tighter lending standards and in part because consolidation among banks reduces capacity. The cost of credit will be higher for the foreseeable future. This will impact valuations and demand for many assets across the entire spectrum.
The bailout will not save us from a recession. No economy has ever expanded during a period of contracting credit.
We can argue about more or better regulation. But this would not have happened at all, or if it did it would have been systemic, if government had not forced banks into the subprime market via CRA with the help of the GSEs.
You may not like it, but Bush, a number of Republicans (including McCain) and ultimately Greenspan warned and tried to address the risk posed by subprime loans and the GSEs. The effort was stopped by the Democrats. And, yes, Obama helped train folks at ACORN in Chicago on tactics to force banks to increase loans to unqualified borrowers. If Obama is elected, he will continue to take America down the path of socialism much to my chagrin.