Wednesday, October 1, 2008

Contrasting Viewpoints on the Bailout

THE KEY GRIP NOTES: The first of these two essays on the subject was submitted to me by a loyal reader named Alan G. The second is authored by The Key Grip himself.


The puppets of Wall Street are about to engage in the greatest robbery in US history.

George Bush and Henry Paulson's bailout of Wall Street does no more than rob the US people while they still have some money, before we fall over the cliff of a tortuous economic decline. The only positive to come from the crisis is to starkly show who our politicians represent - the wealthiest and most powerful 1 %.

The last 28 years has seen an orthodoxy reign in Washington. The orthodoxy that private interests will best solve the problems of society, so long as the private interests can be persuaded they will make a financial killing. More recently this was compounded by the myopic view of economic thinkers in government, academia and television that the US system guaranteed growth. The financial system concluded that if growth was guaranteed, and in housing backed up by Uncle Sam'a guarantee, then bet on that future growth with CREDIT. These cheerleaders of the free market became involved in a Roman orgy of easy credit and speculation on that credit. Now the chickens have come home to roost and they are seeing that they made money from the most toxic poison of capitalism: bad money.

After 8 years in power, the Bush response is seen by people for what it is: another money and power grab by the rich. The audacity of the Democrats in grabbing hold of Bush's sinking ship is astounding. Since they finally woke up and discovered the war was a lie, they have posed as if he was their mortal enemy and now we are supposed to kiss and make up while we put generations of working people in hock to the government simply to hand out free money to Paulson's former employers.

The sheer injustice of this bailout is plain to see. Robbing the bottom 95% to give to the top 1%. This plan also can not achieve what Bernanke and Paulson want. It will solve the banks' liquidity problems in the short term. Liquidity means cash by the way. Your money can help the banks' cash balance. The other condition the banks need before they start lending to individuals and businesses is to believe that conditions will exist for the lendee to earn enough over the medium term to be able to pay the loan and interest back so the bank will make a profit on the loan.

These banks just woke up from a decade long orgy of easy credit and speculation. They have woken up broke, sick and with a hangover and will not be in a mood to start up the party once more. Their economists know it would be nuts to start lending in the current climate. They have seen the numbers and the numbers shout out the economy is in decline, wrapped in astronomical levels of debt and supporting a government that is rapidly becoming a debt peon to foreign banks. No the financial institutions wont lend to anyone outside of the recipients of the bailout.

What can you do? Wake up and smell the coffee. Read about how this started. If there is a protest, attend. Never trust any politician who votes for this bailout.

Finally, wouldn't it have been better not to have abandoned the idea of a social housing policy. A government that builds modest low cost rentable accommodation for the poor. After all, it's a lot less expensive to bail out the bottom 30% than the top 1%.

Alan G.

Gainesville, Florida



Many of my most avid readers have been asking me why I seem to be so ready to pass some sort of bailout bill for Wall Street, particularly when the legislation is so unpopular with rank-and-file Americans across all shades of the political spectrum. Few among us aren't at least secretly made happy by stories of the mighty brought low, and, like the GOP sex scandals of 2006, this evolving mess carries with it the potential to bring some very mighty people very, very low indeed. So why not just let it evolve? The answer is simple: We can't weather the consequences. None of us can.

You'd have had to be living in another solar system not to have noticed over the past few days that this economy of ours is a unique animal. Ninety-nine percent of any corporation's total cumulative P/R is spent railing against government intervention and oversight--and then, the moment some large company or "key" industry gets into financial trouble (the automakers, say), the alarm bell is sounded by those same P/R departments, warning us about the terrible consequences to the American worker if some drastic public rescue effort isn't immediately crashed through the halls of Congress.

Most of the time these arguments are pure bunk: Adam Smith didn't say that consumers have a responsibility to buy the shoddy products tumbling from the doors of the factories in their midst; indeed he said rather the opposite--it is the corporations' duty to figure out what it is that the consumer wants, and if those things aren't delivered then the consumer should take his dollar elsewhere. Only in the United States does a consumer stand a more than passing chance of being stopped in the hallway of an indoor shopping mall and asked, as a friend of mine was, recently, why he isn't carrying a larger assortment of shopping bags as evidence that he is doing his part to help the economy.

But the financial markets are different, for two reasons that all the delicious pleasure flowing from visions of their demise won't make disappear: First, they are markets whose profitability at any given moment is founded entirely upon subjective assessments of the future (I can kick the tires of a car and maybe even take it for a drive, before I buy it, but I can't ever really know exactly what I'm letting myself in for when I buy an IPO share of that company's stock), and second, they are the only industry in our entire modern system, without which every single other industry immediately ceases to function. Financial markets provide the linkage--the only linkage--between households with savings upon which they wish to earn a return, and businesses who need those funds to continue innovating, expanding, upgrading, indeed even maintaining, the means of production.

And make no mistake, this is a loss that no modern industrial society can afford even to joke about: companies base their decisions on whether to undertake some future activity on the basis of "Return on Funds Employed," meaning that virtually no expansion, no new product development, no r&d, can be justified without leverage. In the world of today, I borrow 80% of the money I need to build my factory, confident that the revenue stream created by the project will be adequate to cash-flow the debt service, and the resulting profit that comes back to me and me alone is magnified by a factor of five, since I don't owe any of the profits to my creditor. Without the creditor, I undertake no projects whose profitability isn't expected to be five times higher -- which is none of them.

With apologies to my learned readers, the Government must act. (A reality perhaps brought closer to home by the impact of Monday's blood-letting on our 401K's?) This is not the question. The question is, in what form should that action take? And here is where we Democrats have a grand and non-negotiable responsibility to undo some of the desperate mistakes that have gotten us to this moment in the first place. The government must re-institute the Glass/Steagall Act, at once. An industry as irreplaceable as I have argued this one is, and as based on pure conjecture, cannot be trusted to its own devices. We need powerful regulatory oversight, and we need it now.

We also need any expensive bill to address the greed-induced fallout not just at the top of this pyramid of greed, but at the bottom. Personally I think it's foolish to buy a house that one cannot afford, with principal-and-interest payments that one cannot possibly make (once they kick-in) on the blind hope that the house will be worth more by the time any of those bills have to be paid. Indeed I don't think it's foolish; I think it's pathetic. But it's no more foolish or pathetic than a $50,000,000 CEO signing-off on the idea of securitizing those peoples' stupidities into a portfolios of worthless assets, and then selling them under the cover of a triple-A rating. If we're going to bail out the stupid people at the top, in other words, I see no reason not to bail out the stupid people at the bottom. Handling home mortgage defaults in bankruptcy court (and repealing the current bankruptcy law altogether) would be a start.

Speaker Pelosi and Majority Leader Reid have these opportunities, now, precisely because the Republican minority in the House balked at their first, best chance for compromise. After the way their efforts were rewarded in the markets on Monday, they wouldn't dare filibuster any second attempt when at last it found its way over to the Senate. Our duty as rank-and-file Democrats, then, is to press the issue with our legislators. We need a bailout bill, yes, but we need to restore sanity to the very places in which its absence led to such shenanigans in the first place.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida


isuyankee said...

Here is my question for Alan: Does the fact that there is no liquidity in the financial system affect the Main Street economy? The answer of course is yes. If we let the banking system fail and "punish" the Wall Street folks you dislike, do you think it makes the average person's life better? Bernanke has spent his life studying the Depression and financial panics. He is not a Wall Street guy, he is an economist. The left wing conspiracy theory that this is a plan to bail out the super-rich is silly. Of course, we need to address exceutive compensation and fraud and the government should participate in the upside in exchange for taking some of this debt off the street. I think all of this is being addressed in the new version of the bill. A lot of mistakes were made in this mortgage crisis. Wall Street deserves some of the blame. But there are other culprits. Government dropped the ball on regulation. Greenspan let rates stay too low for too long, creating an environment of excess. Credit agencies did an awful job rating the mortgage backed securities. And yes, the consumer extended himself/herself way too far on houses they couldn't afford. The conspiracy theory stuff is old and overly simplistic. This complex problem needs a solution. The issues Alan has with the "super-rich" will be addressed by (a) natural forces of economics (lots of Wall Street folks are losing their jobs) (b) the bill itself which includes stronger language on executive comp, (c) the FBI who is investigating fraud at Fannie, Fredie, Lehman, etc, and (d) by President Obama's tax policy which will surely tax the rich more than Bush did.

Anonymous said...

I am not saying that the crash and depression won't be felt, but rather that the top 1 % realized on September 16th that it was INEVITABLE and that this plan is a method of boosting their power before the crash hits. The motivation for a private financial institution is to make a return on investment. Why will the recipients of this bailout want to throw their free wealth down the toilet of an economy spiralling into a deep recession. Now that just does not make sense. Far better from their own companies' perspective to use this money as a safe asset for when the speculators try to topple them. I don't think isuyankee has logic on his side, and I think we will see in the next few months if economic/ social power is connected in ways that isuyankee thinks is a conspiracy theory.

By the way if you are considering bailing from the stock market, do it before the bailout. The world's Titans are holding the world's markets up at an "unnaturally" high price to get this bailout through. Once the bailout passes, their interest will then be to get out of the ponzi scheme before everyone else. The issues I have with the super rich will be settled on their part by more power grabs and their utilising every bow in their quiver to consolidate their power during a time of stress and trouble. I just worry they don't take the gamble of solving the downward spiral through conquest and war.

Anonymous said...

I have a question for the 3 of you: why would Bernanke decide to LOWER interest rates? Today's news said that the banks would charge more fees and that they would return less interest on deposits. It seems to me that those with money to lend would be more willing to put it in a bank if they were getting some half-decent rate of return.

isuyankee said...

The government is going to buy some assets from the banks. The cash the banks receive will be used to make loans and conduct business. What do you think they are going to do with the money? Banks make returns on invetment by making loans not by hoarding cash. Have you noticed what the stock prices of every major bank in the U.S. has done over the past year? They lose money when they make bad investments. Shareholders (the evil rich guys) have lost a fortune on their stock holdings. Oh and by the way, Warren Buffett (super-rich, no?) said today he'd personally take on 1% of the bailout. This super-rich guy thinks the bail out will work and the government will make money on the deal. Alan, I appreciate your passion and you have a right as we all do to be angry. Your economic arguments, however, make zero sense. The bailout is about adding liquidity, which affects us all, to a failed banking system. Some banks will benefit by getting bad debt off their books. Some rich guys will make money, some will lose money. This is not a vast rich guy conspiracy. It is a plan to inject liquidity and save the banking system. Without a banking system, people don't get paychecks on Fridays, small businesses don't get loans, families don't get mortgages.

Dave O'Gorman said...

The Federal reserve's job is to regulate the size of the US money supply. They lower the interest rates they charge to banks when they want to signal the rest of us that they're infusing the markets with liquidity. Its principal function is not to tweak the profitability of the banking sector -- but, if it were, bear in mind that the interest rate the Fed is lowering is the rate the banks would have to *pay* on their own borrowing, so yes, in fact, it would help their profitability by lowering their expenses. (If that was indeed what it was for.)

Anonymous said...

Hey, D. why aren't you calling for the Dems to use govt power to take such an important function from private interests. The commercial banks will not be lending during an unpredictable recession. The basic laws of greater good through private free will transactions will not be able to drag society out of a downward spiral. 80 years ago it took world war and the destruction of a large portion of the world's economy to bring US economy back on track. Do you think the Titans will be lending to individuals and small businesses, even after they transfer the crap for our money?