Paulson Bailout Plan a Historic Swindle
By William Greider
19/09/08 "The
Nation" -- - Financial-market wise guys, who had
been seized with fear, are suddenly drunk with hope. They are
rallying explosively because they think they have successfully
stampeded Washington into accepting the Wall Street Journal
solution to the crisis: dump it all on the taxpayers. That is
the meaning of the massive bailout Treasury Secretary Henry
Paulson has shopped around Congress. It would relieve the major
banks and investment firms of their mountainous rotten assets
and make the public swallow their losses--many hundreds of
billions, maybe much more. What's not to like if you are a
financial titan threatened with extinction?
If Wall Street gets away with this, it will represent an
historic swindle of the American public--all sugar for the
villains, lasting pain and damage for the victims. My advice to
Washington politicians: Stop, take a deep breath and examine
what you are being told to do by so-called "responsible
opinion." If this deal succeeds, I predict it will become a
transforming event in American politics--exposing the deep
deformities in our democracy and launching a tidal wave of
righteous anger and popular rebellion. As I have been saying for
several months, this crisis has the potential to bring down one
or both political parties, take your choice.
Christopher Whalen of Institutional Risk Analytics, a brave
conservative critic, put it plainly: "The joyous reception from
Congressional Democrats to Paulson's latest massive bailout
proposal smells an awful lot like yet another corporatist
lovefest between Washington's one-party government and the Sell
Side investment banks."
A kindred critic, Josh Rosner of Graham Fisher in New York,
defined the sponsors of this stampede to action: "Let us be
clear, it is not citizen groups, private investors, equity
investors or institutional investors broadly who are calling for
this government purchase fund. It is almost exclusively being
lobbied for by precisely those institutions that believed they
were 'smarter than the rest of us,' institutions who need to get
those assets off their balance sheet at an inflated value lest
they be at risk of large losses or worse."
Let me be clear. The scandal is not that government is acting.
The scandal is that government is not acting forcefully
enough--using its ultimate emergency powers to take full control
of the financial system and impose order on banks, firms and
markets. Stop the music, so to speak, instead of allowing
individual financiers and traders to take opportunistic moves to
save themselves at the expense of the system. The step-by-step
rescues that the Federal Reserve and Treasury have executed to
date have failed utterly to reverse the flight of investors and
banks worldwide from lending or buying in doubtful times. There
is no obvious reason to assume this bailout proposal will change
their minds, though it will certainly feel good to the financial
houses that get to dump their bad paper on the government.
A serious intervention in which Washington takes charge would,
first, require a new central authority to supervise the
financial institutions and compel them to support the
government's actions to stabilize the system. Government can
apply killer leverage to the financial players: accept our
objectives and follow our instructions or you are left on your
own--cut off from government lending spigots and ineligible for
any direct assistance. If they decline to cooperate, the money
guys are stuck with their own mess. If they resist the
government's orders to keep lending to the real economy of
producers and consumers, banks and brokers will be effectively
isolated, therefore doomed.
Only with these conditions, and some others, should the federal
government be willing to take ownership--temporarily--of the
rotten financial assets that are dragging down funds, banks and
brokerages. Paulson and the Federal Reserve are trying to replay
the bailout approach used in the 1980s for the savings and loan
crisis, but this situation is utterly different. The failed S&Ls
held real assets--property, houses, shopping centers--that could
be readily resold by the Resolution Trust Corporation at bargain
prices. This crisis involves ethereal financial instruments of
unknowable value--not just the notorious mortgage securities but
various derivative contracts and other esoteric deals that may
be virtually worthless.
Despite what the pols in Washington think, the RTC bailout was
also a Wall Street scandal. Many of the financial firms that had
financed the S&L industry's reckless lending got to buy back the
same properties for pennies from the RTC--profiting on the
upside, then again on the downside. Guess who picked up the tab?
I suspect Wall Street is envisioning a similar bonanza--the
chance to harvest new profit from their own fraud and criminal
irresponsibility.
If government acts responsibly, it will impose some other
conditions on any broad rescue for the bankers. First, take due
bills from any financial firms that get to hand off their
spoiled assets, that is, a hard contract that repays government
from any future profits once the crisis is over. Second, when
the politicians get around to reforming financial regulations
and dismantling the gimmicks and "too big to fail" institutions,
Wall Street firms must be prohibited from exercising their usual
manipulations of the political system. Call off their lobbyists,
bar them from the bribery disguised as campaign contributions.
Any contact or conversations between the assisted bankers and
financial houses with government agencies or elected politicians
must be promptly reported to the public, just as regulated
industries are required to do when they call on government
regulars.
More important, if the taxpayers are compelled to refinance the
villains in this drama, then Americans at large are entitled to
equivalent treatment in their crisis. That means the suspension
of home foreclosures and personal bankruptcies for debt-soaked
families during the duration of this crisis. The debtors will
not escape injury and loss--their situation is too dire--but
they deserve equal protection from government, the chance to
work out things gradually over some years on reasonable terms.
The government, meanwhile, may have to create another emergency
agency, something like the New Deal, that lends directly to the
real economy--businesses, solvent banks, buyers and sellers in
consumer markets. We don't know how much damage has been done to
economic growth or how long the cold spell will last, but I
don't trust the bankers in the meantime to provide investment
capital and credit. If necessary, Washington has to fill that
role, too.
Finally, the crisis is global, obviously, and requires concerted
global action. Robert A. Johnson, a veteran of global finance
now working with the Campaign for America's Future, suggests
that our global trading partners may recognize the need for
self-interested cooperation and can negotiate temporary--maybe
permanent--reforms to balance the trading system and keep it
functioning, while leading nations work to put the global
financial system back in business.
The agenda is staggering. The United States is ill equipped to
deal with it smartly, not to mention wisely. We have a
brain-dead lame duck in the White House. The two presidential
candidates are trapped by events, trying to say something
relevant without getting blamed for the disaster. The people
should make themselves heard in Washington, even if only to
share their outrage.
Copyright © 2008 The NationClick on
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