Economics and Pocketbooks
The Wall Street Bailout: What About Main Street?
The Wall Street bailout needs to be something other than a blank government check for erstwhile free-marketeers like Treasury Secretary Henry Paulson and Federal Reserve Bank Chairman Ben Bernanke. Here are a few ideas on how to make it at least a little bit fair to you and me and Main Street.
By Jonathan Weber, 9-23-08
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| Caption: Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke (right). | |
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As Treasury Secretary Henry Paulson, the former head of Goldman Sachs, seeks $700 billion in taxpayer support to bail out his former colleagues in the money business, the question on my mind - and probably on yours too - is, What about me? Where’s the bailout for my cratering IRA, or for my suddenly-way-less-valuable house? Where’s the help I could sure use in keeping my company, and the jobs (with benefits) it provides, healthy and growing? And what will this all mean for the economy of the Northern Rockies?
On that last question, I’ll offer a plug: come to our Real Estate and Development in the Northern Rockies conference, this Oct. 23-24 in Missoula. We’ll be featuring four leading regional economists: Chris Thornberg of Beacon Economics, who largely predicted the current situation when he spoke at this event two years ago; Toby Madden of the Federal Reserve Bank, the institution which will be largely responsible for the rescue plan; Larry Swanson of the Center for the Rocky Mountain West, who for years has tracked the underlying dynamics of growth and change in the West; and Dave Eacret, the go-to economist for anyone investing in North Idaho.
We didn’t plan it this way, but the conference is shaping up as an exceptionally valuable venue for understanding the financial crisis and what it means on Main Street.
On the first two questions, I don’t have such simple suggestions. But I do think the obvious unfairness inherent in the rescue plan will have a dramatic, long-term impact on our perceptions of the proper role of government in the economy. For starters, let’s hope that Congress can make the bailout something other than a blank government check for erstwhile free-marketeers like Paulson and Federal Reserve Bank Chairman Ben Bernanke. A backlash has already begun over the initial version of the bailout bill, which gives Paulson breathtaking authority and does nothing to address the causes of the crisis.
It already seems likely that the rescue package will include some kind of mortgage relief for homeowners facing foreclosure. That seems like basic common sense. But for now at least there is nothing on offer for the vast group of people who are neither so rich that none of this matters, nor so poor that they’re about to be on the street. .
Paulson and Bernanke are smart guys, and history suggests that dramatic government intervention is probably a good idea. So I’m not against the bail-out per se. But here are a few thoughts (mostly from people smarter than me) on how it could be made at least a little bit fair:
- Limits on executive compensation, and recapture of large fortunes that were, in hindsight, earned fraudulently.
There is already a clamor for the bailout bill to include limits on executive compensation and golden parachutes at companies that are getting help. Paulson and President Bush currently oppose this - it’s their friends after all! - but they’ll almost certainly have to cave on this issue. The patent absurdity of executives earning eight-figure sums while taxpayers foot the bill for their failed business strategies will just be too much (even if they do have employment contracts which guarantee them money unless they are fired “for cause,” with driving the company to bankruptcy not quite qualifying as “cause.")
But these provisions don’t go far enough. The government should also go after at least some of the money earned by people like Stan O’Neal, the former CEO of Merrill Lynch who was done the huge favor of being fired before the things hit the fan. He earned hundreds of millions of dollars during his tenure, much of it in bonuses tied to profits which later turned out to be illusory. If a CEO received bonuses for hitting earnings targets, but those earnings were based on accounting slight-of-hand or wishful thinking and had to be eliminated through later “restatements” and write-downs, the executives shouldn’t get to keep that money. Obviously. I wouldn’t necessarily argue for jail time, but there’s an argument to be made.
Limiting compensation and clawing back undeserved earnings is not just a fairness issue, either: only if those in charge suffer personal consequences when things go bad will their successors have an incentive to be more prudent.
- Government (i.e. taxpayer) ownership in companies in exchange for help.
The current proposal calls for the government to buy the bad assets (mainly bundles of mortgages that are worth just a fraction of their face value) held by a wide range of financial institutions. This is in effect a giant cash infusion for these institutions. And as any business-person knows, if you get a cash infusion when your company is on the brink, the entity providing that cash is going to expect a rather large pound of flesh in return. The Treasury should demand equity ownership in exchange for its money - not because it’s a good idea for the government to own these financial institutions, but to assure that taxpayers get fair value and a share in any future recovery. This seems pretty basic too.
- A crackdown on usurious practices by credit card companies.
Lost amid the clamor about mortgages is the fact that many people have relied increasingly on credit cards to stay afloat, and there is undoubtedly a ton of bad credit-card debt out there. Sadly, the credit card industry (which includes at its core many of the very same institutions that are getting government help) have responded to this by putting the screws to anyone who can still scrape together their payments.
When the Bush Administration pushed through legislation a couple of years ago that made it harder to get relief from credit card debt via bankruptcy, the industry claimed this was necessary to keep interest rates down for everyone. What a joke. Credit card interest rates are now routinely in the 25% range or even higher, at a time when core interest rates are quite low. Banks are paying depositors 2% interest, and turning around and loaning that money out to the cash-strapped middle class and small business owners at 25%. This is not only unreasonable on its face, it’s likely to exacerbate the economic downturn, both by crimping consumer spending and by inhibiting the day-to-day operations of many Main Street enterprises.
- Temporary tax relief for early 401K and IRA withdrawals.
For a lot of people, retirement accounts are a funding source of last resort. If you withdraw money from them before you turn 59 1/2, you pay taxes plus a 10% penalty. Temporarily suspending the penalty would provide relief for people who have some assets but are nontheless facing a day-to-day cash crisis.
I’m not an economist, and I’m sure there are more and better ideas on how to assure that the middle class, and Main Street, don’t get totally screwed in the rush to bail out Wall Street. With the Bush Administration using extreme doom-and-gloom scenarios to push the rescue package through Congress with as little scrutiny as possible, now is the time to demand that it benefit people other than those who created the problems in the first place.
[End of article]one more provision- outlaw all payday loan and vehicle title places. in montana they are allowed to charge 25% per two weeks for these predatory loans. this is 650% interest per annum.
if you took out a loan for 300.00 and all you could pay was the interest for a year it would be 75.00 X 26 = 1950.00 in interest alone for 300.00 loan and the loan would still be not paid off.
as far as the bankers coming hat in hand to the government to bail them out i see this as nothing more than rewarding bad behavior and thereby perpetuating it. when the bankers talk about how the "financial system will be endangered if we don't do this" i say good. it's a rotten system. let it die so something good can have a chance to form- like maybe rewarding good behavior and punishing bad. what a novel idea!
Last week I bought a new TV. Best Buy gave me a new credit card, $4,000 interest free for two years.
Today I got offers from Citi and Chase for new credit cards.
Note to greedy bankers: if you are trying to convince the American People that there is some sort of credit crunch, maybe you should quit slathering them with easy credit for a couple minutes.
Sit down flounder, I agree with you. I get so many offers of free credit cards loan transfers, etc, that I burn all of those offers so someone else won't find them in trash and use them. If I maxed out even the cards I have, to say nothing of the ones I am offered, it would be difficult to pay them off. The whole crisis counds to me like the meeting of two fools, thsoe who would take the big loans and those who would make them.
I was reading an article this morning about a lady they have been working to negotiage her loan down from $2700 to $1800/month, her income? $3300/month from disability SS for herself and 4 disabled grandkids!!!!
I don't think there should be a bail out at all. What there needs to be is an accounting of the failure of the Dems to act on the situation when it started to blow up in 2005. But no, they wouldn't allow a tightening of regulations then because it would "discriminate" against "low income" people, so they blocked the legislation in Congress. And the GOP was too spineless, afraid of their majority, to put the legislation through anyway, or make it much of an issue.
This is throwing bad money after worse, and now it's being larded up with student loan forgiveness provisions and other whatnot. This is insane and will have unintended but certain impacts as a drag on the longer-term economy.
Just let those idiots responsible suffer, preferably suffering earned unemployment.
"What there needs to be is an accounting of the failure of the Dems to act on the situation when it started to blow up in 2005."
Comrade Paulson is hardly a Democrat. He is on record as saying that the mortgage crisis was "largely contained" well up to about last month. There are other people who were saying the economy was awesome up until last week, and they are hardly Democrats. And while Democrats certainly aren't saints in this whole mess, it was largely Republicans who have been against regulation of business since 1900 or so.
The prime reason we are in this mess isn't crappy mortgages, it is that the Gramm-Leach act deregulated financial corporations and allowed them to leverage themselves very heavily (this means they borrowed money to loan it out and buy each others products). Gramm and Leach are Republicans, and Gramm wrote McShame's economic plan. He is also widely credited with creating the Enron mess.
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
P.S. In 2005 Republicans were in charge of the House, Senate, and Presidency.
How can you possibly say it isn't crappy loans, look at the example I gave earlier. Who in their right mind would eithr give a loan of that size to someone with an income of $3300...or take out one?
Comment By problembear, 9-23-08let the ones who created this mess in the investment banking industry suffer. if you want to rid a field of weeds you don't irrigate it- you let it wither and die - then you burn it in the fall so that in the spring new healthy growth can occur.
that congress is even considering this idiotic idea is proof that there is no intelligence in washington. bush and his wealthy criminal friend the treasury secretary (personal fortune of 700 million) hatch yet another brilliant plan leaving the american public
holding the bag.
flounder you are right - credit cards don't have much to do with this particular problem. greedy criminals just gambled too much with the assets of the banks they operated. that's all. and bush is and mccain are thick with all of them.
I'm saying the crappy mortgages weren't the disease, they were a symptom of Republican deregulation. same as Enron. Blaming a problem that started in 1999 on a law from 1977 that helped provide low income mortgages is a weird proposition, you should keep trying it. Here's why it doesn't work though.
http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis
I'd like to know how much of this financing went to speculators and vacation home buyers. I've heard that in 2006 some 40 percent of all home mortgages were for non-primary residences. There may be a societal benefit to encouraging home ownership, but I see no reason taxpayers should subsidize house-flippers or fat cats buying into the Yellowstone Club.
This whole deal smells familiar, Remember when Montana Power executives pushed deregulation through a bunch of dim-wits of both parties in the legislature, and then parlayed themselves into eight-figure retirements? In both cases, honest investors lost everything and taxpayers get stuck with the tab.
"Remember when Montana Power executives pushed deregulation through a bunch of dim-wits of both parties in the legislature, and then parlayed themselves into eight-figure retirements?"
JAYoung, the person that push laws enabling state and federal deregulation of the power companies is Phil Gramm. He was also chief architect of the financial deregulation I cited in the post above.
Phil Gramm is currently John McCain's chief economic adviser, and wrote McCain's economic policy. They have tried to hide this ever since Gramm called Americans "whiners" and claimed they were delusional for not liking his economy, but he is still McCain's chief economic adviser. Last week Gramm called up Ron Paul on "behalf" of the McCain campaign to ask for Paul's endorsement. Paul told him to go Cheney himself.
Jay, if you listen to Dave Ramsey on the radio you will hear a lot of folks who have bought several EXPENSIVE houses that have been renting, and these are houses they are paying over a thousand for each in payments, and of course even one moneth of not renting throws them behind. There is a law that was passed by our liberal friends that no one could be "red lined" on a house loan, even if they had a terrible credit history. Those examples are where the problems are, at least a good part of it. However the thing about free enterprise is if you can't keep your business afloat you go broke. Credit may be tight, especially for marginal credit risks, but eventually things will settle out if we let them take responsibility.
Comment By flounder, 9-25-08I can't believe you would bring up "red lining". Redlining is the process of denying minorities mortgage loans that whites would qualify for.
http://en.wikipedia.org/wiki/Redlining
Trying to blame what happened to our economy by saying that not enough minorities were discriminated against is simply racist. In fact, the racism still inherent in the mortgage industry ADDED to the problem, because it has been shown that if a black and white family had identical credit scores, the black family was way more likely to get offered a higher interest rate or get pushed toward a sub-prime loan. Here is the House testimony of one of the most well-regarded housing statisticians in the country on the topic:
http://oversight.house.gov/documents/20070323143551-92598.pdf
Marion, you whined that I was calling you a racist because you took the time on a post that was about Obama to go off on how you didn't think MLK was the type of American that should have a holiday.
Well now I understand. MLK marched in 1966 in Chicago to stop "redlining". one result of his peaceful march was being met by an angry mob and getting hit in the face by a brick. Another result was the Fair Housing Act of 1968. Another, later, result of his movement was the Community Reinvestment Act (CRA) of 1977.
Now hate radio is trying to pin the mortgage meltdown on the CRA. I've heard it. Heck, maybe you rednecks can argue that MLK is in fact responsible for the mortgage meltdown. You should call Limbaugh today and let him know!
repubs are throwing everything but the kitchen sink at this one to distract us from the obvious fact that their congress for 6 years and their president for 8 years did nothing but rape and pillage the treasury of this country for the benefit of their rich friends, so it comes as no surpise that they blame poor people for this debacle. it turns logic upside down of course but it helps them feel better about supporting these traitors and criminals that they voted for. we have our young people protecting us from terrorists while these hypocrites and their rich friends undermine our economy to enrich themselves. and now that they are about to lose control of the reins of government they want us to put ourselves in perpetual hock to give them another trillion to waste.
Comment By Marion, 9-25-08If you are right (and I will look it up on google) I stand corrected. I understood it was a case of marking those with a poor credit or job history and/or bankruptcies.
It is beyond obvious that they have been passing out loans to thsoe unqualified to have them. When that is coupled with their huge compensation packages, their questionable loans to politicians at reduced rates, and their political donations to politicians, they were absolutely certain to fail.
As to Dr. King, here are the reasons I do not feel he should have been honored with a holiday, first his habit of plagarism is well documented even though many insist it was irrelevant.
http://setanta.unl.edu/mlk/dn_column.html
here is part of that article and there are many:
"In 1988, the Martin Luther King Jr. Papers Project made a discovery that shocked it to its core.
The Project, a group of academics and students, had been entrusted by Coretta Scott King with the task of editing King's papers for publication. As they examined King's student essays and his dissertation, they gradually became aware that King was guilty of massive plagiarism - that is, he had copied the words of other authors word-for-word, without making it clear that what he was writing was not his own.
The Project spent years uncovering the full extent of King's plagiarism. In November 1990, word leaked to the press, and they had to go public. The revelations caused a minor scandal and then were promptly forgotten.
Indeed, I had never heard of them until I read a student letter to the Daily Nebraskan three weeks ago. That letter sent me in search of the truth about Martin Luther King Jr.'s student career.
Like most graduate students, King spent the first half of his doctoral work taking courses in his degree area, theology. His surviving papers from that period show that from the very beginning he was transcribing articles by eminent theologians, often word for word, and representing them as his own work.
After completing his course work, graduate students usually write a dissertation or thesis, supposedly an independent and original contribution to scholarship. King's thesis was anything but original. In fact, the sheer extent of his plagiarism is breathtaking.
Page after page contains nothing but direct, verbatim transcriptions of the work of others. In 1990, the King Project estimated that less than half of some chapters was actually written by King himself. Since then, even more of his "borrowings" have been traced. "
I remember one of those being plagarized saying he was honored at the time it was discovered. That is a terrible thing to teach our young people. Also it was claimed at the time that he cheated on his wife and was known to knock some of the women around.
To me that is not a hero, no matter what color, releigion, or political bent they have.
I just want to add that altho many of us are sort of allergic to history, it was the "sainted" Republican Ronnie Reagan who began the deregulation of everything financial and environmental. Clinton was a huge enabler (and I loathe him for his role in all this, including signing the NAFTA treaty).
Gramm and Bush and co added the finishing touches. McCain is in this eyeball deep.
I have been saying "just say NO" to our representatives. It seems to me that this "crisis" always happens at the end of a legislative session. I think that is on purpose. The purpose is to force feed the legislative branch, the media, and the public fear based politics leading to laws that were supposedly drawn up and reviewed months ago by the Bush Admin. I am sorry, but that is not right.
If someone is going to spend $700B of tax payer money to help the banking system, then it better be a sure thing. Not one reputable economist (except the shrills for Bush and friends) can tell you that this will be money well spent and providing SUSTAINABLE, ACCOUNTABLE, AND TRANSPARENT solutions.
Additionally, not one economist can predict what will happen "Monday" if a bill is not passed. Oh, there is plenty of gloom and doom. No one will be able to get credit? Please. The banks are not going to extend credit to those who are able and can pay it back with interest? Based on the experiences above with credit cards, we all know that is just not going to happen. Banks will always extend credit to those that need it and can pay it back... THAT is the business they are in. Then we have the government who says that failure to pass this bill will stop or severely restrict credit. Isn't that a good thing? Isn't that exactly what the doctor ordered??
Any legislation of this size requires WEEKS of discussion... not hours or days. Just say no to crisis and panic. Rational thought is called for.
On another note...
I have a better short term solution to restore confidence in the US markets, and tell markets and people we mean business.
Last year, The former head of China's State Food and Drug Administration, Zheng Xiaoyu, was executed for corruption associated with food safety. You know melamine in dog food, and such...
http://news.bbc.co.uk/1/hi/world/asia-pacific/6286698.stm
Now there are some executives who knew months ago that melamine was being added to baby formula and other milk products to falsely indicate higher protein content. Babies and children are sick and dying. Milk is being removed from the shelves. Chinese goods are being removed from shelves all over the world. Talk about a major disruption. The fate of those executives? Public execution.
CEO's, financial heads, people in congress who encouraged and overlooked these bad loans and behaviors.... Just saying....
no more benefits.
Just another little blurb.. last paragraph most relevant.
http://www.dailymail.co.uk/news/worldnews/article-1057495/Fourth-baby-dies-12-people-arrested-China-toxic-milk-scandal.html
Last year China was beset by domestic and international scares about toxins and dangerous faults in its food and products. Deaths of dogs in the United States were blamed on pet food ingredients from China tainted with melamine.
At that time, China launched a crackdown that culminated in the execution of its sacked food and drug safety chief. With renewed public dismay over food safety, Beijing is following a familiar script.
"Resolutely punish law-breaking criminals and conscientiously pursue the culpable businesses, supervisory agencies and administrative heads," declared the State Council.
boy has this string devolved. Execution? are you insane? i say we immediately have the fbi seize all the assets of everyone who served on the boards of these banks and deposit it into the treasury to pay US back right now for all the theivery of the past thirty years. It should easily amount to well over two trillion dollars.
each executive would be allowed to fill one large suitcase with personal belongings before we seize and lock the doors of their various homes, condos, yachts, helicopters and jets. escort them to the nearest homeless shelter where they can do chores for room and board until their first checks come in from their minimum wage jobs. all their credit cards would be cancelled of course, since they obviously cannot be trusted to handle money responsibly. then i would feel much better about america's future.
How's about a very small tax on every Wall Street transaction to pay for their sins? Small like 10 or 20 cents. There are something like 4 billion trades a day on the NYSE. That adds to some serious cash.
Now I probably make 3 trades a month, this costs me something like a couple bucks a year. Rewards good buy and hold behavior. However, the traders that aren't really adding value, and are just working the thing like a casino get punished. I think the best taxes punish people that are engaging in antisocial behavior.
Hello,
I found this forum when searching for some numerological info and was gladly surprised. I like very much the idea of talking to others about changing yourself and society for the better. It's needed, for most of us. Hope to find some good discussion here!
Regards