There Is No Crisis Requiring a $700 Billion Bailout, Part II

by: David Sirota

Sat Sep 27, 2008 at 18:58

More reasons to believe that this "crisis" is not a "crisis" requiring handing over $700 billion to Manhattan fat cats:

- "Banks throughout the United States carried on with the business of making loans yesterday even as federal officials warned again that their industry is on the verge of collapse, suggesting that the overheated language on Capitol Hill may not reflect the reality on many Main Streets...many smaller banks said they were actually benefiting from the problems on Wall Street...Even some of the nation's largest banks, which have pushed hard for a federal bailout, deny that the current situation is forcing them to reduce lending. "The strength of our core businesses, capital and liquidity are enabling us to continue to support our customers," Bank of America, the nation's largest bank, said in a statement. " - Washington Post, 9/26/08

- "The Bush administration's pitch for a sweeping bailout of the financial system has centered on two simple premises: that the economy could suffer a crippling downturn if action is not taken very quickly and that this action should consist of the government buying troubled mortgage securities from banks and other institutions. But many of the nation's top economists disagree with one or both of those ideas." - Washington Post, 9/26/08

- "The Treasury plan (even in its current version agreed with Congress) is very poorly conceived and does not contain many of the key elements of a sound and efficient and fair rescue plan." - NYU economist Nouriel Roubini, 9/26/08

- "Why Paulson is wrong: Chicago Business School Professor Luigi Zingales, argues that bailing out the financial system with taxpayers' money is wrong. He discusses an alternative." - VOX, 9/26/08

David Sirota :: There Is No Crisis Requiring a $700 Billion Bailout, Part II

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Im frustrated that the negotiations are private (4.00 / 1)
we have no clear idea over what congress is arguing back and forth over.

there is an article in the nytimes that is thin on details, but there are 2 paragraphs, that as a pessimist make me nervous.

"Officials said the core of the proposal, put forward a week ago by Treasury Secretary Henry M. Paulson Jr., remained intact: The government would purchase up to $700 billion in troubled assets from financial firms as a way to free their balance sheets of bad debts and to help restore a healthy flow of credit through the economy.

Some senators, including Kent Conrad, Democrat of North Dakota, said they were pushing for an additional option that would allow the Treasury to inject capital directly into troubled firms, by giving them loans in exchange for an equity stake - a strategy similar to one Sweden used in the 1990s."

Why is that troubling? Notice how it sounds like the 'equity' portion has been broken off from the assets purchase, and is instead alternative lending authorization Congress may grant the Treasury. However, Paulson as grand master executor of the plan has shown he's clearly not interested in anything that requires banks to give up equity - so while it may be a tool in the tool box, he may just get is $700B to spend however he likes with insurance equity from banks.

This is strictly speculation on my part and it is a pessimistic view. but i've seen the Dem Congress and presidential candidates do 180s before.

The real problem is we have no idea what they are fighting over at this point.

Michael Bloomberg, prince of corporate welfare

corx (0.00 / 0)
with NO insurance equity from banks

Michael Bloomberg, prince of corporate welfare

[ Parent ]
Please watch this BBC debate (0.00 / 0)

and then think again. I fully believe you are wrong, and dangerously wrong.

I fully understand the anger and outrage but the system is in much greater danger than most people seem to realise.

youre interpreting (0.00 / 0)
the suggestion that the crisis does not need a tax payer bailout means there is not crisis.

there are a number of proposals out there that dont involve tax payer dollars but address the credit marker crunch problem. its not holocaust denial, its a search for a more responsible plan.

Michael Bloomberg, prince of corporate welfare

[ Parent ]
The problem needs money (0.00 / 0)
and that has to come from somewhere. If it doesn't come from government it has to come from the private sector. But it is precisely the private sector that is petrified with fear and frozen - the money markets are frozen and asset prices are falling.

The only place the money can come from is government.

[ Parent ]
we disagree (0.00 / 0)

Michael Bloomberg, prince of corporate welfare

[ Parent ]
Even Galbriath agrees the need for a solution of some sort (0.00 / 0)
see this comment on a Kos diary here

I'm all in favour of a responsible solution, but it is needed urgently.

[ Parent ]
i agree (0.00 / 0)

Michael Bloomberg, prince of corporate welfare

[ Parent ]
in minute 44 of that bbc video (0.00 / 0)
they agree wiping out the current bank capital holders is the right direction to recapitalize the banks.

Michael Bloomberg, prince of corporate welfare

[ Parent ]
I think you've misunderstood (0.00 / 0)
It's the other way round. Government recapitalisation of banks means wiping out current shareholders of those banks by devaluing their shares.

[ Parent ]
no, yes (0.00 / 0)
im saying the same thing.

my use of "capital holders" is probably not a good expression.

Michael Bloomberg, prince of corporate welfare

[ Parent ]
There will definitely be some sort of bailout in my opinion (0.00 / 0)
The question is whether or not it pushes forward democratic principles and how large it is.

Also whether or not it hits the root of the problem.

I think though that the Paulson bailout is completely dead.  

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FDIC WaMu Point the way (0.00 / 0)
the FDIC take over and auction of WaMu mirrors the suggestion of Luigi Zingales.

``WaMu's takeover has proven that there's an easy way, if the FDIC is involved,'' said Sean Egan, president of Egan-Jones in Haverford, Pennsylvania. ``You kick the hell out of the equity holders and bondholders. That may be the new model for bank takeovers.''  

Michael Bloomberg, prince of corporate welfare

I think your making a big mistake (0.00 / 0)
an as a fan of yours who bought your book, and listened to you speak at your "whistle-stop tour" in Seattle this summer, I'm concerned that you are going to lose credibility.

yes, the bailout plan as currently constituted is a dangerous farce. And yes, any revisions by Dodd are going to make it much better, but it will probably simply be a much better farce.

That does not at all mean that we don't have an emergency on our hands (And Nouriel Roubini, whom you selectively quote from, states that as well).

As a friend, I would urge you to concentrate your energies on getting us a different plan (even radically different, have at it!), but I'm concerned that denying the underlying crisis is going to invite a backlash at some point.

From Noriel (4.00 / 1)
"Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown."

[ Parent ]

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