In perhaps the greatest “knee-jerk” reaction in U.S. history, the Bush Administration, the Treasury Secretary Henry Paulson, and Fed Chairman Ben Bernanke have urged the government to grant a $700 billion blank check to rescue Wall Street firms from their own excesses and abuses. In making this request, the Administration seeks to grant Mr. Paulson unfettered discretion to use taxpayer money as he sees fit. There is no plan in place. Instead, the government asks that the American people trust it because they will “know it [the problem] when they see it.” The proposed plan is foolhardy for various reasons.
Reason No. 1 ? The $700 billion Wall Street bailout is merely a “drop in the bucket.” It will not correct Wall Street’s problems.
The government’s suggestion that a $700 billion bailout of Wall Street and its bad investments will somehow solidify the markets is simply unfounded. The true facts show that there are more than $12 trillion worth of mortgages outstanding in the U.S alone. Moreover, perhaps the greater threat to the American people is the outstanding number of credit-default swaps on which no one in the government has any handle. The amount of credit-default swaps outstanding has been recently reported at $63 trillion. For the government to suggest that $700 billion will cure all is ridiculous. Kenichi Ohmae, who spent 23 years as a partner at the respected consulting firm McKinsey & Co., called Paulson’s $700 billion estimate a “joke” and estimated that at least $5 trillion would be necessary to calm markets.
Reason No. 2 ? The Wall Street bailout plan smacks of cronyism.
Treasury Secretary Henry Paulson and many of his chief advisors are Wall Street alumni. A review of statements made by Mr. Paulson earlier in the year regarding government bailouts strongly suggest that his current recommendations are significantly affected by the adverse impact that the current turmoil is having on his Wall Street cronies. Consider the following:
- Earlier this year when Mr. Paulson was questioned on federal government bailouts for struggling homeowners and lenders, he was quoted as saying that those who “gambled in real estate are ‘nothing more than speculators’.” He went on to say that “while some in Washington are proposing big interventions, most of the proposals I’ve seen would do more harm than good.” Paulson then went on to say “Homeowners who gambled in the housing market and view their purchase as a short-term investment may choose to walk away…Those who do are nothing more than speculators, and they are not the focus of our efforts.”
- Several months later, Treasury Secretary Paulson stated to MSNBC: “Many of today’s unusually high number of foreclosures are not preventable. There is little public policy makers can, or should, do to compensate for untenable financial decisions.”
Notwithstanding Mr. Paulson’s apparent belief that there is “little public policy makers can, or should, do to compensate for untenable financial decisions,” that is exactly what he is now recommending to the American public. Why? Mr. Paulson’s close relationship with the Wall Street community strongly suggests ulterior motives may impact his recommendations.
Reason No. 3 ? Secretary of Treasury Henry Paulson, and his sidekick, Federal Reserve Chairman Ben Bernanke, do not understand the problems confronting the American economy and are not qualified “to be king.”
A review of statements made by Mr. Paulson and Mr. Bernanke over the past year indicate that they sorely underestimated the nature and the extent of the credit crisis confronting the American public. Consider the following:
- On March 28, 2007, Fed Chairman Ben Bernanke tells Congress he believes that the problem in subprime lending “seems likely to be contained.”
- On April 20, 2007, Secretary of Treasury Henry Paulson stated “The economic risk, the macro risk ? I don’t see it posing a serious problem. I think it is going to be contained.” Paulson went on to discuss the housing market downturn, saying “Its too early to say with any certainty, but all the signs I look at lead me to think we are at or near the bottom.”
- On July 26, 2007, Secretary Paulson commented on the meltdown in the subprime mortgage market, saying “I don’t think it poses any threat to the overall economy.”
- On August 16, 2007, Secretary Paulson said “turmoil in the financial markets will “extract a penalty” on U.S growth, yet the economy looks strong enough to weather problems without falling into a recession.”
- As recently as May 7, 2008, The Wall Street Journal reported that Secretary Paulson “sees credit crisis waning.” At that point in time, Mr. Paulson said that “the worst is likely to be behind us.
These comments from our senior officials at the Treasury Department and at the Federal Reserve show that they “just don’t get it.” As a result of their nonchalance, no significant legislative or policy changes were made to deal with the most significant problems confronting our economy: the lack of total transparency; the excessive taking of risks; and the problems with “securities ratings for sale.”
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, stated “This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson, a guy who totally missed this, and has been wrong about almost everything.”
Reason No. 4 ? The Wall Street bailout plan proposes to give Mr. Paulson unfettered discretion to do as he sees fit with no accountability to anyone and no review of his actions by either courts or administrative agencies.
Mr. Paulson’s request is so contrary to both common sense and the American governmental system that it borders on the absurd. The American government system has always been one of checks and balances to prevent potential abuses. That is the reason we have three distinct branches of government – Executive, Legislative and Judicial. Mr. Paulson’s request that his decisions should not be questioned under any circumstances is highly suspect in nature and gives rise to serious questions about his motive. Moreover, for the American people to grant him carte blanche without review is foolish.
Joshua Rosner, a managing director of Graham Fisher & Company in New York, observed that the proposed bailout “prevents judicial review that could allow the protection of decisions that create false marks, hide prior marks, or could be used to prevent civil or criminal prosecution in situations where a management knowingly provides false marks that aided the growth of this crisis of confidence.” Mr. Rosner’s concern is well founded. To create a “get out of jail free” card for anyone associated with the proposed bailout offers unlimited possibilities of abuse.
Reason No. 5 ? The Wall Street bailout plan is a “knee-jerk reaction” and there may well be better alternatives for spending $700 billion of taxpayer money.
The $700 billion plan is aimed at a very small segment of American employees ? generally the group of people that have earned excessive income over many years and who live in “ivory towers.” Congress and the American people would be well advised to consider various other alternatives for using $700 billion of taxpayer money. Should more support be provided for small businesses, which are the backbone of employment? Should part of these resources be used to bolster the large American corporations that employ far more people and affect far more lives than Wall Street firms? For example, should such support be provided to the airline industry, the automobile industry, and the retail industry? All of these industries have an important day-to-day impact on Main Street America. Why don’t we deal with their needs and the creation of jobs?
Alan Meltzer, a economic advisor to President Ronald Reagan, summarized the situation saying “This is scare tactics to try to do something that is in the private but not the public interest.”
Reason No. 6 ? Bush and Paulson have proposed a bailout plan even though they have no idea of what to do.
The proposal submitted to Congress lacks any real definition. It has been equated to a “$700 billion blank check for Wall Street.” Prior to committing $700 billion of taxpayer funds, our government should at least have a plan on what is going to be done with the money. To simply act on the “trust us” request seems particularly weak in light of prior events impacting this Administration. This country was encouraged to spend hundreds of billions of dollars to deal with what has proven to be the illusory existence of “weapons of mass destruction.” To proceed unquestioning down this “trust us” road is ill-advised. The old saying, “fool me once, shame on you, fool me twice, shame on me,” comes to mind.
Reason No. 7 ? The Wall Street bailout plan will undoubtedly result in a weaker dollar with many adverse consequences for the American economy.
David Woo, the Global Head of Foreign Exchange at Barclay’s in London, stated “the downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis.”
Reason No. 8 ? The Wall Street bailout plan is unlikely to avoid a recession.
Even experts who suggest there are long term benefits to a bailout plan note that it could take the better part of a decade before beginning to show any impact on the U.S economy. Thus, American taxpayers should be aware that the recommended bailout is not likely to prevent a recession in the United States. Thus, claims from Federal Reserve Chairman Ben Bernanke and Henry Paulson that “failure to pass the plan threatens the economy,” are misleading. Our economy faces very serious consequences regardless of whether or not the bailout plan passes. For the government to suggest otherwise is simply “Pollyanna-ish.”
Reason No. 9 ? There is no transparency to the bailout plan.
Lack of transparency is one reason our economy is in the position it finds itself today. Now the government is asking for the American people to commit $700 billion without any transparency regarding how it is to be used.
Reason No. 10 ? Under the bailout plan Paulson and Bernanke intend for the U.S. to pay above market prices for the assets that the country buys.
Today, Federal Reserve Chairman Bernanke said that, under the bailout plan proposed, the Treasury department should buy illiquid assets at so called “hold-to-maturity” prices instead of at discounted “fire-sale” (market) prices. Stated another way, Bernanke is urging that any bailout plan buy illiquid assets at values above those for which they could be sold on the open market. In other words, Bernanke wants the American people to overpay for Wall Street’s illiquid assets.
Page Perry
Atlanta, Georgia