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And Washington Mutual and maybe even Wachovia would have collapsed too. But so what? Small depositors are insured by the FDIC, which was not the case until 1933.

Second, once the financial institutions collapsed, the federal government could have acted to infuse money into the economy without giving a dole to big corporations. The biggest problem in 1929 was the government did nothing for 4 years.

Instead of giving $700 billion to the people who created this mess through bad investments, the federal government should send the money directly into the economy by building things like bridges, mass transit, schools, hospitals and infrastructure. At least then the taxpayers actually get something for their investment. As it is now, a small percentage of people (who also enjoyed luxurious tax breaks over the last 7 years) are being propped up by everyone else.

The bail out is paying for the mistakes of the American aristocracy while straddling the proletariat with their debt. Now the federal government is saying, "if you make risky investments, make sure you do it so wildly recklessly the entire economy will collapse, because then you will get free money." Where is the incentive to make smart investments if the federal government will hand over tax dollars every time you make bad decisions?

Wibbit - I thiink the problem is valuing the assets. Wall St banks aren't playing nice with each other because they really don't know what value to put on the assets. Furthermore the structures are quite complex making pricing very subjective. If I were to bet on who comes out a winner in a trading competition between wall st sharpies versus the govt - my money is on the wall st sharpies every time.

I think the govt will get soaked on the deal. No different than RTC back in the early 90s. This problem was 20 years in the making as banks became less regulated, why hurry to "solve" it in a week? The whole thing is just the opinion of 2 people, whom I wouldn't say are totally impartial....

(Note that this was written two years ago.)

The Paulson Payoff at the Bush Treasury Department

David Sirota
The Huffington Post
July 4, 2006

Reuters reports today that "The incoming Treasury secretary, Henry M. Paulson Jr., was awarded an $18.7 million cash bonus for half a year of work as the chief executive of the Goldman Sachs Group." The massive bonus was, not surprisingly, approved by Goldman Sachs at the very same time Paulson was both CEO and Treasury Secretary designate. This raises a very simple question: What is Goldman Sachs buying with this brazen payoff to someone they knew was headed to one of the most powerful government posts in America?

In my book Hostile Takeover, I note that these sorts of payoffs happen all the time -- and they are made with public policy favors in mind. The most high profile before Paulson's was the payoff Halliburton gave to Dick Cheney in the form of a truckload of "deferred compensation" valued in the tens of millions. At the time, those who raised questions about what such a payoff would buy were dismissed by the Washington Establishment as conspiracy theorists . The insiders who populate this Establishment, of course, are addicted to the revolving door, and they didn't want anyone questioning it. Now, just a few years later, we found out that, indeed, Halliburton's generosity to Cheney was a payoff, as the Vice President used his office to help the oil company secure huge government contracts in the aftermath of the Iraq War.

So again, a simple question: With Goldman Sachs handing incoming Treasury Secretary Henry Paulson an $18.7 million bonus for six months of service, what is the company looking for in return? After all, Goldman Sachs has had a lot of business before the government that Paulson's Treasury Department has been involved in and can influence. Here are just a few factoids about the Goldman Sachs-Government connections that raise questions about the Paulson payoff:

- The nonpartisan Project on Government Oversight (POGO) noted in a major 2002 study that Goldman Sachs is one of the largest beneficiaries of government contracts in America. It is also one of the contractors that POGO noted "have been found to have repeatedly broken the law or engaged in misconduct," yet still receives government contracts.

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So well, well, well, what do we have here?

Paulson Debt Plan May Benefit Mostly Goldman, Morgan

By Jody Shenn
Bloomberg
September 22, 2008

Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.

``Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment,'' Jeffrey Rosenberg, Bank of America's head of credit strategy research, wrote in a report dated yesterday, without identifying particular banks.

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1) If no action were taken last week, aig and morgan stanley would collapsed, resulting in the total meltdown of the us financial system. Last time such event occured in the 1929-1930s, unemployment shot up to ~30% and it was very bad for everyone in the country. Same would occured in this case.

2) Although the government is putting up taxpayers money for the bailout, most of the lemmings fail to see it's not money LOST. Yes the money will be at risk, but the government is getting a VERY steep discount on those assets. Most private equity firms (they cannot due to regulation) will fall over each other to get the deals the government received.

Based on same events historically, government always ended up MAKING money not losing taxpayer's money on those assets. Yes the money is at risk, yes it wont be until probably after 2010 when the house market stabilizes that the government will be able to unload those assets at a profit. But it's still a much better investment than almost any other banks are getting, because the govt could bend the rules and force the banks to give such a deep discount.

So overall i really dont think the government made off too bad, contrary to all the headlines of bailouts etc...as if the government were simply giving taxpayer's money away to the wallstreet firms. The firms that received the bailout were FAR WORSE off, their shares were completely wiped out and forced into liquidation. The govt were just using taxpayers' money to buy those assets at a very steep discount. It's actually a good investment in the long run.

The key concern is that if all the actions are enough to calm the market down, because if the market continues to freefall there really isnt much anyone can do short of shutdown the exchanges like russia did last week.

Of all the financial crisis this country has faced in the past, none is even close to as bad as this one, with the exception of maybe the great depression era crash.

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Sure he did, he told him to deregulate banking which got us into this mess in the first place. McCain is as much a leader as Micheal Jordan was a baseball player. Groovejet you realy like to rape the truth, nice avatar!

Great news, now there'll be 2 officially infallible humans on earth!

You gotta love that the Bush Administration put this in the bailout proposal:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

No problem. It's not like I don't trust these guys.

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This does sound a tad crazy. You can already see the articles detailing how this $700,000,000,000 bailout was a rash, ill conceived fiasco that was pushed through in the final months of an election.

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I think we should worry more about Democrats in Congress feeling pressure to do the safest political thing and just go with the flow.

I won't give my two cents because 1. global finance is way above my head and 2. I'm not sure that doing nothing wouldn't lead to a 1929 like stock market crash.

But can someone explain this to me?

Paulson Says Foreign Banks Can Use U.S. Rescue Plan

By Mark Felsenthal
Reuters
September 21, 2008

WASHINGTON - U.S. Treasury Secretary Henry Paulson said on Sunday that foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis.

"Yes, and they should. Because ... if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said on ABC television's "This Week with George Stephanopolous."

Paulson was appearing on the Sunday television talk show circuit to fill in some of the details of the U.S. government plan for a sweeping bailout to mop up hundreds of billions of dollars in toxic mortgage debt.

The moves capped a week in which financial markets faced their most serious confluence of crises since the Great Depression in the 1930s and threatened national economies and the worldwide banking system.

the plan is terrible. Notice how foreign governments are refusing to jump on the bandwagon. All this does is bailout the idiots who knew better as they were securitizing all sorts of crummy loans. All this does is prolong the root of all these problems: that Real Estate is still way overvalued when compared to current income levels. So rather than cleaning out the system in a free mkt manner, the govt is prolonging the slow grind down that we've been experiencing the past couple years. It's ridiculous to rush something through in a week that took years to build up. It's just not that simple and democrats should feel no pressure to do the patriotic thing and just go with the flow.

A joke. A bunch of fat cats protecting other fat cats. Where are the goals for better transparency. Why not make it partly contingent on some of these executives making restitution as part of the bailout and disgorging ill-gotten gain. The fox cannot guard the hen house.

Op-Ed Columnist
A Fine Mess
By WILLIAM KRISTOL
A friend serving in the Bush administration called Sunday to try to talk me out of my doubts about the $700 billion financial bailout the administration was asking Congress to approve. I picked up the phone, and made the mistake of good-naturedly remarking, in my best imitation of Oliver Hardy, ?Well, this is a fine mess you?ve gotten us into.?

People who?ve been working 18-hour days trying to avert a meltdown are entitled to bristle at jocular comments from those of us not in public office. So he bristled. He then tried to persuade me that the only responsible course of action was to support the administration?s request.

I?m not convinced.

It?s not that I don?t believe the situation is dire. It?s not that I want to insist on some sort of ideological purity or free-market fastidiousness. I will stipulate that this is an emergency, and is a time for pragmatic problem-solving, perhaps even for violating some cherished economic or political principles. (What are cherished principles for but to be violated in emergencies?)

And I acknowledge that there are serious people who think the situation too urgent and the day too late to allow for a real public and Congressional debate on what should be done. But ? based on conversations with economists, Wall Street types, businessmen and public officials ? I?m doubtful that the only thing standing between us and a financial panic is for Congress to sign this week, on behalf of the American taxpayer, a $700 billion check over to the Treasury.

A huge speculative housing bubble has collapsed. We?re going to have a recession. Unemployment will go up. Credit is going to be tighter. The challenge is to contain the damage to a ?normal? recession ? and to prevent a devastating series of bank runs, a collapse of the credit markets and a full-bore depression.

Everyone seems to agree on the need for a big and comprehensive plan, and that the markets have to have some confidence that help is on the way. Funds need to be supplied, trading markets need to be stabilized, solvent institutions needs to be protected, and insolvent institutions need to be put on the path to a deliberate liquidation or reorganization.

But is the administration?s proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for ? or even promises of ? disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.

And I?ve been shocked by the number of (mostly conservative) experts I?ve spoken with who aren?t at all confident that the Bush administration has even the basics right ? or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.

But will political leaders dare oppose it? Barack Obama called Sunday for more accountability, and I imagine he?ll support the efforts of the Democratic Congressional leadership to try to add to the legislation a host of liberal spending provisions. He probably won?t want to run the risk of actually opposing it, or even of raising big questions and causing significant delay ? lest he be attacked for risking the possible meltdown of the global financial system.

What about John McCain? He could play it safe, going along with whatever the Bush administration and the Congress are able to negotiate.

If he wants to be critical, but concludes that Congress has to pass something quickly lest the markets fall apart again, and that he can?t reasonably insist that Congress come up with something fundamentally better, he could propose various amendments insisting on much more accountability and transparency in how Treasury handles this amazing grant of power.

Comments by McCain on Sunday suggest he might propose an amendment along the lines of one I received in an e-mail message from a fellow semi-populist conservative: ?Any institution selling securities under this legislation to the Treasury Department shall not be allowed to compensate any officer or employee with a higher salary next year than that paid the president of the United States.? This would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble.

Or McCain ? more of a gambler than Obama ? could take a big risk. While assuring the public and the financial markets that his administration will act forcefully and swiftly to deal with the crisis, he could decide that he must oppose the bailout as the panicked product of a discredited administration, an irresponsible Congress, and a feckless financial establishment, all of which got us into this fine mess.

Critics would charge that in opposing the bailout, in standing against an apparent bipartisan consensus, McCain was being irresponsible.

Or would this be an act of responsibility and courage?

Hate it.

Bailout Bad.

If it's that important, nationalize the banks like they did for Fannie, Freddie & AIG, and let the shareholders who enabled the mayhem lose it all. If it's not, let them sink or swim on their own. The prospect that the management who presided over this nonsense being able to apply for bailout AND keep their jobs is disgusting.

Can someone with good understanding of the whole subprime mess tell me if I've gotten this part straight:

The reason the mortgage holders have been unwilling to readjust subprime morgages that ballooned past the buyers ability to pay to a reasonable market rate, is that since they already resold the mortagages based on the ridiculously high after balloon rate, they would have to eat the difference and be dead either way, by defaults or by the point spread. So this was the reason to play the game to the very end in hopes of a bailout. Which they got.

The piece of the puzzle I'd like to see put into place is for the bond raters to follow Arthur Anderson into the corporate malfeasance gas chamber. They took money to close their eyes and rubber stamped junk as AAA. If they didn't understand it, or were unsure, they had a explicit responsibility to say no.

The system should have been reformed years ago. Bush has been asleep at the wheel. McCain warned him that this matter needed to be addressed before the election.

The bailout will probably take place. Hopefully congress will put pressure on the government to ensure that this will never happen again. The (democratic) congress will drag this out for a few weeks - causing McCain to fall another few points.

Bush is still antagonizing Russia by sending aid to Georgia. (Russia's sending a fleet to Venezuela, just to piss us off) He's authorizing raids into Pakistan, (causing the retaliatory bombing of the Marriott.) He's spending money hand over fist in a long and protracted Iraq war that should never have happened. Afghanistan should have been wrapped up in a year, but he sent in an army that is smaller than the number of cops currently in NYC.

Bush is pretty much doing everything he shouldn't. I can't wait until the retard is sitting in his rocking chair in Crawford, Texas.

Yeah, this bailout is costing the average taxpayer $5072.

I've both struggled financially and lived prudently, never beyond my means. I loathe the idea of forking over $5k (actually, more cuz I'm well over the median income now) to cover the irresponsibility of both banks and middle-class over-consuming average American morons.

Seriously - it's been maddening watching people spend WAY over their means for years. I've been unable to comprehend how people with half my income could spend twice as much as I do... Now the consequences of others' fiscal carelessness finally hit, and it costs me money. Great.

Imagine how many home owners with a mortgage those billions could have bailed-out directly.

I thought we live in a capitalist society where you sink or swim !

There should have been a meltdown. Everything should have been allowed to collapse, and encouraged to do so rapidly. There might still be a meltdown, only now with the government laying out hundreds of billions of dollars to do so.

Dear Congress

Treasury Secretary Paulson is asking you to rush through a $700 billion package because "we?re literally maybe days away from a complete meltdown of our financial system".

Paulson states that it must be done quickly and that it is better than the alternatives. Fed Chairman Bernanke agrees.

The first question Congress should ask is how would Paulson or Bernanke know?

It was only a month ago Paulson was reiterating to anyone who would listen how sound our banking system is. The fact of the matter is that neither Paulson nor Bernanke saw this coming, yet now Congress is supposed to trust they now "know" the solution.

Problem Defined

Before one can work out a solution, the first step is to identify the problem. The problem is not a lack of liquidity, it is not a lack of trust, it is not lack of consumer confidence, it is not subprime lending, and in fact the problem is not housing at all.

The problem is consumers and corporations are deep in debt with no way to service that debt.

Attempts to bail out banks and brokers at taxpayer expense will do nothing but add to consumer debt, weaken the US dollar, and literally waste $700+ billion dollars that can and should go to more productive uses.

What Caused The Problem?



The Fed
Congress
Fractional Reserve Lending
The Treasury


The root cause of this problem is the Fed micromanaging interest rates, the Treasury cheerleading every step of the way, and Congressional sponsored spending that went wild. The critical issue that ties everything together is fractional reserve lending allows banks to borrow money (credit really) into existence with insane amounts of leverage.

To top it all off, Greenspan slashed rates to 1% fueling the biggest global housing bubble the world has ever seen. Congress needs to figure out a way to eliminate the Fed.

Fed Uncertainty Principle

I kindly ask of you to please read the Fed Uncertainty Principle written April 03, 2008 before any hint of this meltdown occurred. Here is Corollary Number Two.

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Why The Paulson Solution Fails

The Paulson solution fails because it does not help consumers or businesses service debt, it does not create any jobs, it increases the national debt, and it encourages more reckless lending by banks. Attempting to bail out banks on the back of cash strapped consumers is simply doomed to fail.

If printing money was the solution to all problems, Zimbabwe would be the most prosperous country in the world.

The Barney Frank Non-Solution

"We're going to be buying up a lot of mortgage paper" said House Financial Services Committee Chairman Barney Frank.

Sadly, that will not do a single thing in and of itself to stop foreclosures. All that will do is bail out banks and brokers at taxpayer expense.

Barney Frank also stated ?We should be more willing to write down the mortgages. We?ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.?

Congress needs to ask "How much extra will Barney Frank's proposal cost taxpayers?"

Were does the madness end?

As stated earlier the problem is not housing in the first place, and besides taxpayers who pay their mortgages on time should not be subsidizing those who don't!

Banks Need To Recapitalize

Paulson wants to recapitalize banks so they can keep lending. Ironically, one of the problems is lending. The US has been on a credit binge to such an extent that I have to ask what more do we need? More Pizza Huts? More Home Depots? More Houses? More Nail Salons? More Car Dealers? What?

What is the urgent need to lend still more?

We are in this mess because of too much reckless lending. We do not need more lending, we need more saving!

Paulson's idea that more lending is needed is ass backwards. Paulson's proposal cheapens the dollar, and discourages the one thing that is desperately needed: saving.

Alternatives Discussed

In the mad rush to push through this package, Paulson states it is better than the alternatives. That is an interesting statement because no alternative have even been presented to Congress, let alone discussed.

Shouldn't there be a discussion of alternatives before doing a mad dash to sign a $700 billion package?

Paulson is attempting to hoodwink Congress to pass his plan without any discussion of alternatives. I believe the Paulson proposal is the worst of all solutions in that it bails out banks at the expense of the taxpayer and the taxpayer gets virtually nothing out of the deal: no jobs, no tax relief, no health care.

Paulson claims that taxpayer will benefit by the bailout indirectly because one the government owns the debt, servicers will be more willing to negotiate terms. Once again, it will be taxpayers on the hook for any negotiation granted. Paulson conveniently ignores this cost as does Barney Frank.

Taxpayer Gets Nothing From Current Bailout Proposals

The taxpayer gets nothing for this bailout $700 billion. Actually the taxpayer gets a negative benefit because the Paulson and Frank proposals will cheapen the US dollar, increase the deficit, and ultimately cause prices of imported goods to rise for everyone, while saving a relative few.

The solution is to address the recapitalization of banks in a fair way that does not jeopardize the taxpayer but instead puts the onus of responsibility on banks making reckless lending.

Recapitalizing Banks

Banks are undercapitalized. They need funding badly. Here is what I propose.


Reduce the capital gains tax by 50% for any investor willing to cash out stocks and invest in 5 year bank CDs.

Eliminate the difference between long term and short term capital gains.

Eliminate taxable interest on savings accounts, CDs, and US treasuries.

The above would promote saving rather over speculation and provide a big boost in government revenues as well. Stock prices will not be affected over the long haul by these measures.

Jobs, Jobs, Jobs

I am a libertarian. I do not believe in makeshift government proposals. However, I would rather get something than nothing for $700 Billion. Paulson's proposal scores a big fat zero in term of providing an jobs or any real economic stimulus.

It is no secret that infrastructure in the US is decaying and needs to be fixed. A collapsing bridge in Minnesota is one key example. And what out our aging energy grid? Instead of giving $700 billion to banks that deserve to go under, I would rather give half that for jobs programs.

To create as many jobs as possible at the least cost Congress needs to scrap the Davis-Bacon Act. It would be better to create 3 construction jobs at $12 an hour than 1 job at $36 an hour. The idea here is to get as most bang for the buck and create as many jobs as possible for the money spent.

Waste In Iraq

We need to admit the mistakes in Iraq. The public never supported this war and the public was correct. The war in Iraq easily cost $1 trillion dollars if you count future medical bills. That is $1 trillion dollars that could have been spent right here in the US.

I propose we declare the war won and get out, totally and completely. Offer returning veterans first crack at any infrastructure rebuilding jobs. It is the least we can do to those who are likely going to be emotionally if not physically scarred for the rest of their lives fighting a war that never should have been fought.

Congressional Spending

Congress needs to admit its own role in this mess. Congress passed hundreds of programs to make housing more affordable. They all failed including the biggest failure of all: Fannie Mae and Freddie Mac.

It should not be the role of Congress to promote housing vs. renting. The very act of doing so creates an artificial demand for housing. Ownership society madness culminated with many financially unqualified to buy a house buying house anyway because Congress and the White House promoted the idea.

Congress is also directly responsible for deficit spending and that weakened the US dollar. Indeed there was virtually a panic out of dollars for this reason. Adding another $700 billion to the deficit as Paulson is asking you to do is adding insult upon injury. Don't do it.

Instead balance the budget. It can be done.

span style="font-weight: bold;">Who Am I?

Who am I to suggest what Congress should do? I am nobody. However, this nobody and a bunch of fellow nobody bloggers and bunch of nobody fund managers who I respect all saw this all coming 3-4 years ago. Paulson did not, Bernanke did not, and almost everyone in Congress did not.

So the choice Congress needs to make is who to believe. Congress can believe Bernanke and Paulson who have been totally wrong about everything for years, or Congress can listen to people who not only understand what is happening but predicted it.

Desire To Believe

You desperately want to believe that Paulson and Bernanke are telling the truth. You have for years put your faith and trust in them. It is a very difficult thing to do to admit you are wrong.

However, it is critical that you look at the simple facts for what they are.

The fact is Paulson is grasping at straw in a tornado. So is Bernanke. Problems cannot be cured by printing money, and problems cannot be on the backs of already overburdened consumers.

No problem is fixed by madly and blindly rushing into solutions where no alternatives are discussed. You now have alternatives.

I will also offer one more alternative but it is not from me. I kindly ask Congress to consider An Open Letter to the U.S. Congress Regarding the Current Financial Crisis by John P. Hussman, Ph.D., an economist and investment manager whose opinion I trust.

Hussman too has an opinion as to how to address this issue without impacting the taxpayer. For the record, I have no idea what he might think of my proposal.

However, between the Hussman proposal and mine, I am sure there is fertile ground for further discussion and for doing something other than what I believe to be the worst possible alternative, the proposal submitted by Treasury Secretary Paulson.

No problem is too big that a solution has to be rushed into without considering the alternatives. I ask that you consider these alternative proposals either over an extended session or by letting the next Congress tackle the issue.

Heaven help us if recess is more important than taking the time to seriously consider all reasonable alternatives.

Sincerely

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com