No Bailout: Stop Rewarding Incompetence
A friend recently sent a note reminding me that back in 2003, when some of us were warning about the dangers of the housing bubble, Alan Greenspan, the person most responsible for the housing bubble, was being knighted by the Queen of England. If we look at the list of banks and financial institutions that have crashed or now threaten to crash, we can find a long list of people who brought their companies and the economy to the brink of disaster and yet have received tens or hundreds of millions in compensation.
We can also find a long list of people in top policy positions, including the current Fed chairman, Treasury Secretary, and President, who celebrated the soaring house prices and loan excesses of the housing bubble. These people now expect to receive even greater authority due to the failure of their policy. This must stop.
There is no doubt that the world financial system faces unprecedented strains as a result of the incompetence of our business and economic elites. The collapse of the system of finance that we started to see last week would be a genuine disaster. We would not be able to carry through the normal financial transactions -- using credit cards, making payments with checks, or getting money from ATMs -- that are the basis of modern life.
However, we did get through the crisis last week with quick actions by the Fed and Treasury. There is no reason to believe that with comparable steps in the future, coupled with the raising the $100,000 limit on deposit insurance, as suggested by Jamie Galbraith, that we cannot keep the financial system operating.
Keeping the financial system alive, but in the intensive care unit, is not desirable. However, given the integrity and the competence of the individuals involved, it may be the best option.
Secretary Paulson originally requested a $700 billion blank check that he intended to shower on his friends and former colleagues in the financial sector. Fortunately, the Democrats in Congress balked and forced the Bush administration to back away from this position. President Bush is now willing to accept greater oversight, restrictions on CEO pay, and some commitment for giving equity in exchange for bailouts.
This is good progress, but reports indicate that President Bush is still refusing to change the bankruptcy code back to the pre-1991 rules and allow judges to rewrite mortgage terms in bankruptcy. This is not hugely important -- the overwhelming majority of foreclosed homes do not end up in a bankruptcy -- but President Bush's refusal to budge on this issue doesn't sound like the behavior of someone who is worried about the collapse of the financial system.
This raises the basic point that it is extremely difficult to trust this administration. It was good to hear President Bush say that he doesn't want the CEOs that wrecked their companies profit from this bailout, but does anyone believe that he will structure the bailout to ensure that this does not happen? Similarly, he has gone along with the idea that the government will get an equity stake in financial companies in exchange for buying their junk, but does anyone believe that we will get as good a deal as Warren Buffet did when he bought a stake in Goldman Sachs?
There can be no presumption of good faith from this administration. Unless the conditions are written in stone, for example specific rules that limit executive compensation using the same type of language that CEOs use when they sign contracts with their companies, there is no reason for the public to believe that they will get a fair deal in this bailout. The public should also demand that some genuine outsiders, representatives of labor, consumer groups and other non-Wall Street segments of society, have a direct oversight role in this deal.
If these demands are too extreme for the Bush administration, then they are not telling the truth about the financial crisis. If the risks are really as great as President Bush claims, then he should unhesitatingly agree to guarantees that will prevent the incompetents from profiting further from their incompetence. We shall see.
Democracy works only when the people are good. We aren't very good anymore and we are getting what we deserve. We have let the sick and homeless fend for themselves while those in the stock market world have been paid literally hundreds of millions per year, sometimes billions in "bonuses". Why have we sat back and watched this? Because our IRA's and pension plans went up while the stock market was rising. No one wanted to rock the boat, so we collectively turned away from the sick and homeless. Shame on America.
September 25, 2008 8:00 AM | Reply | Permalink
As a Democrat, I feel continuously disillusioned and disappointed by reading the blather in your posts. I know your Center for whatever is an ultra-left organization of some sort and never have I read of a constructive solution to the current problem. OK, we're mad at Alan Greenspan and so am I , have been for many years especially for gratuitously creating recessions in 1990 and again in 94/95. Everyone should accept that instead of being lionized he should be banned from the public media. But why go on about it.
Your blog is an ongoing backward look trying to place blame. We have to look forward, not back. History teaches us nothing.
Executive compensation is set by employers, by the Boards of Directors, not by Congress. Directors are elected by stockholders. Most large corporations are owned in huge percentages - 80%,90% by mutual funds, pension plans or other institutions. These people would elect Hitler as CEO if he delivered profits a penny over expectations and moved the stock higher. Their belief is that they vote with their feet and that their fiduciary duty is to return value to the fundholders, retirees etc. This is what the fundholders and retirees want.
You have got to get stockholders - the American people - involved in the process, but no one has the time or ability to be informed to care. Only when something goes wrong do they seek to place blame. This is the process that has gone sour.
Most people, excluding you of course, long for the investment that goes up more than their neighbor's; don't care what companies do as long as they can make a buck; would certainly love to own a Miami condo with no money down and below-market interest rates; buy gas from and support Hugo Chavez every day by filling up at CITGO stations (owned by government of Venezuela); and would probably throw their grandma under a bus if that would get an extra 20 basis points on a money market fund.
No one, and I mean no one in Congress, or TPM or the media or public understands the complexity and dynamics of the securitization problem and financial crisis. It is apparent that Paulson and Bernanke have come to understand it quite late, but at least they do to the extent possible.
This rescue bill is absolutely essential in its comprehensive present form. Keep these side issues out of it and get behind it.
September 25, 2008 8:32 AM | Reply | Permalink
prmco wrote,
Wrong. History in this case teaches us that certain people (a) have no positive track record, and (b) have conflicts of interesting. Reason in this case tells us that these people should not be listened to. (Especially when it's clear that the consensus among economists across the political spectrum is strongly against the Paulson bailout.)
That's fine. And Congress, in this case, is doling out the money. If a firm doesn't want to comply with a condition on executive compensation, they don't have to take the money. You're just putting a nice gloss on extortion.
Logical fallacy; argument by appeal to authority. People want all sorts of things that, if implemented, would be neither just nor would contribute to an efficiently functioning economy.
Evidence presented to bolster this claim: nil.
September 25, 2008 9:49 AM | Reply | Permalink
History teaches nothing??? So pointing out that we cannot trust these people to work this out is not productive? It's the very essence of the big picture. You fire them and put in a new team. You replace the quarterback who has fumbled the ball one too many times. You fire the guy that took the cash from the company's petty cash box. You don't wait until he cooks the books and takes off with thousands of dollars.
You say "Enough".
Oh, and also. Dean Baker has been giving specifics in his posts and in his book "The Conservative Nanny State". He gets the big picture in his book on Reaganomics"The United States Since 1980".
Here's some specifics from this post about how we deal with this if we can't fire these con artists.
I like having big hunking labor guys in the room with them at all times preferably holding large objects. The visual is delicious.
September 25, 2008 10:14 AM | Reply | Permalink
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December 16, 2010 5:57 AM | Reply | Permalink
Geez prmco, are you under the impression having the US Treasury run a $700 hedge / bailout fund is normal? No? Then stop explaining how capitalism works.
Let the losers lose. Let America have a nice, old fashioned recession. How much nicer this would have been a few years back, instead of spending trillions in borrowed money to delay it a few years.
September 25, 2008 8:42 AM | Reply | Permalink
You don't understand. The "nice, old fashioned recession" you ask for would turn into a global depression for which the government would have no tools with which to intervene. Your credit card would not work; the gas station where you fill up would have no gas; the super sized market where you would want to use your credit card would be closed; etc. There is no "nice, old fashioned recession" where GM and Bethlehem Steel and Maytag lay off some workers. This is not an old-fashioned world.
September 25, 2008 9:01 AM | Reply | Permalink
pmco, can you take the securitization problem out of the equation and explain the financial crisis part. Because I'm not seeing it. Bleeding, yes -- but not fatally.
September 25, 2008 9:48 AM | Reply | Permalink
Grow up prmco. We are not your kids and don't need your simple mindedness. I have worked in financial services for decades and realize the strain on the financial system.
You are spewing nonsense to pretend another trillion in debt will get us off the hook. It merely delays the ineveitable. At some point, US creditors will want to be paid back. That is when the real trouble begins, assuming the $700 billion in new debt gets sold.
September 25, 2008 10:27 AM | Reply | Permalink
The collapse of the system of finance that we started to see last week would be a genuine disaster. Dean Baker
Did we? Did we see the system "start to collapse"?
This isn't 1930. Armored trucks carrying the weekly payroll don't roll up to the gates of the plant; mothers don't keep the household cash in a cookie jar. Today, transactions are electronic bookkeeping entries (0s and 1s) -- debits and credits among buyers and sellers, payors and payees.
Last week, as every other week, credit card debtors directed that "0s and 1s" be entered, that is, that "monies" be transferred from their checking accounts to bank credit card issuers and those banks then transferred the "monies" they received into the accounts of merchants.
The computers continued to enter debits and credits between the accounts of workers and employers. Banks continued to send their gophers out to the parking lot to refill the ATM machines. Checks which are nothing but directions to banks to transfer funds between accounts continued to be processed.
Where's the "disaster"?
Note: Certain large corporation CFOs do keep their company's money in longer term debt which they use as security for very short-term ABSs which they sell to money market funds -- expecting to earn the "vigorish." Those corporations can wind up being squeezed if the money market funds don't reinvest (accept "rollovers") -- that day, that week. But those corporations have close relations with the big banks and the big banks have close relations with the Fed. Among the three -- corporation, bank, Fed -- the money flows.
September 25, 2008 10:30 AM | Reply | Permalink
There seems to be broad agreement that
1) we have a crisis and
2) some form of takeover of the banking/financial system is needed (whether it's a 'bail-out' perhaps depends on how much of the discredited system and leadership remains in place).
What we don't know is
- whether the crisis requires action in the next 2 days or 2-3 weeks
- what form that takeover should take.
What would a trillion dollar public banking system be able to do (capitalized by a tax on financial wealth or similar tool making the beneficiaries of the wrecked system pay the brunt) that pumping money into the existing institutions couldn't, and vice versa? Does the immediate fix have to be long-term, or is there a cheaper, short-term plan that allows some months to redesign our banking system, plus address the crises in housing (the price bubble must deflate somehow), pensions, jobs, etc.
September 25, 2008 11:20 AM | Reply | Permalink
To say that Dean Baker is "ultra-liberal" is meaningless and non-productive. His consistent point has been is that the proposal of the administration is a bad deal and should not be accepted and he has explicitly offered some alternative terms. You can disagree with his assessment and counter-proposals.
To say that there is a "crisis" is only partly right. Maybe it can be called a panic and panic does make a bad situation worse, particularly the way our so-called efficient markets are structured and run.
The root cause is the removal of laws that made it very difficult for what amounts to legally sanctioned criminal behavior to go on unabated.
The legislature probably has months to work out some stop gap solution to the immediate problem. The immediate problem is the potential for panic as these assets of unknown value show up on someone's books and cause a sell off that has nothing to do with the value of underlying assets. Paulson and Bernanke are tired of putting out the fires they started and fanned. They could just keep doing it for a while. I doubt that a lot of the firms involved want to go the way of Lehman and Merril Lynch so they will work a bit harder to keep the lid on.
Everybody has become an economic expert, it seems, and knows how to fix the problem. It's not that the solutions proposed do not have merit and many certainly show that many people understand what is important to them. The problem is thirty years of deregulation and economic policy passed on bad theory. It will take a lot of work to correct the problem and clean up the mess. Paulson, Bernanke and the Congress are just trying to buy some time and to avoid really dealing with the mess. I don't think they could do this if they thought there was any real political risk involved. We are getting theatre but I think it is the voters who are enabling this.
McCain and many Republicans currently in office will now play populist to distance themselves from a faux solution. It's easy to do, given the terms of the deal. Bush will "disappoint" them and sign it. These people are political actors. They are very good at striking the balance between their contributors and constituents want. The public has been signing up for this economic policy for at least thirty years. Now they are unhappy. They are being offered--and apparently will accept--another patch on the bubble machine. The really big money doesn't take much risk. They take their cut up front and as much of any upside they can get. Look at the enormous shift in the distribution of wealth and income. The status quo has been working for them just fine, thank you. If everything goes according to plan, they'll all go to lunch, spend more time at the gym and collect a nice bonus for a job well done.
September 25, 2008 1:52 PM | Reply | Permalink
This is another way to bail us out
By James Messina
First let’s go back to the beginning starting at bubble, although I’d rather refer it to a balloon. In the year 2000 just after post doomsday Y2K the balloon was just placed on stem of the tank of air. During that year a house, let’s say in Holiday Florida would average at $50-60k. During that same year there were many types of easy loans such as HUD and Veteran (it wasn’t necessary to actually be a Vet, one just got a little better rate if you were) which made it very easy for the average individual with $500 and job to obtain approval. Section 8 had a role in this also. If they had 20% of the price of the home they didn’t even need a job. Actually they did, but what was referred to as a “no doc” all they had to do is just say they had an income.
Now here is where the air valve just barley inflates the balloon. Keep in mind that Holiday Florida is just a reference point and places like California and Miami holds the same principle just different prices. These loans usually carried an ARM which meant 5 years down the road Fannie Mae & Freddie Mac would be tacking on another 2.5-3% interest. These easy loans that owners had to put their signatures on, selling their souls sort of speak, compounded by falling prices.
Before they got to that point there was a “get rich quick” craze going on and everybody and his brother became an overnight realtor by “flip that house.” or two or three or four, renting them or just fixing them up, and profiting by the fast rising house prices caused by the craze.
We can argue who is to blame, apparently both the home buyer and the lender is at fault. The lender acted recklessly and lent and lent and competed to lend. Mortgage and title companies were popping up all over leading the owners like sheep before the slaughter.
The balance of fault lies on the degree of greed. Could you blame the average Joe that wanted to get rich quick or the banks who should have had more sense?
Now we know how we got there lets propose how to get out. Giving 700 million to the same banks who got us here, paid for by the average Joe’s taxes and not only that but, Joe must barrow the money with interest just to give it to the ones who lent Joe the money for the house that he is now foreclosed on. That’s like Joe borrowing money to give to heroin dealers in order to make sure they have a steady supply of heroin that they could sell him.
We have another option but of course it will not be considered because the government thinks it is in their best interest to help the banks thinking it will save Wall Street. We have to let the air out of the balloon by getting the prices of homes closer to the year 2000. The way we can do that is instead of giving the money directly to the banks; give it to the notes that are over priced. Let’s start with Joe’s house and his only house for now. If he paid let’s say $200,000 and he is in foreclosure, reset the value to the year 2003. That means rewriting the note. The year used adjusting the house value would be determined on until the 700 billion is allocated to first every homeowner that will occupy that house(700 billion will just an arbitrary number for now or just a limit). This will in no doubt cause values to come down all over. This plan could be implemented to the relevance of importance. The homeless first then to the struggling families aiming at the outrageously over priced homes, this will hurt the rich and humble undeserving. There are Joe’s out there that flipped houses until he bestowed on half a million dollar house with an income that can’t support it. He should eventually be included in this bill.
It all comes down to the basics, supply & demand. Now the supply is high. By slashing prices will create gamut of demand. New loans, transparency and credit will flow like neighborhoods at a block-party. This is the way to bailout Main Street & Wall Street.
September 25, 2008 2:24 PM | Reply | Permalink
Imagine 10 humans stranded on an island. After awhile, a type of money is developed, labor is divided and basic trading takes place. One of the 10, somehow, gets the upperhand and the 9 owe him more than they can pay him. It gets so bad, that he forecloses on all their assets and puts them all out of work. Will the 9 subject themselves to this economic slavery? No, they will tell him the party is over. The American people should do the same.
Solve this silly problem with a massive redistribution of wealth. Tax the top 1/10th of 1% about 95% of their wealth.
On point, the Chairman of Lehmans received over 1/2 billion in compensation the past few years. That our congress and "system" let that happen is rediculous. Take that 1/2 billion, line up the rest of the Wall Streeters who have done the same shanagans, and take their money. It probably amounts to at least 700 billion.
September 25, 2008 8:07 PM | Reply | Permalink
Imagine 10 humans stranded on an island. After awhile, a type of money is developed, labor is divided and basic trading takes place. One of the 10, somehow, gets the upperhand and the 9 owe him more than they can pay him. It gets so bad, that he forecloses on all their assets and puts them all out of work. Will the 9 subject themselves to this economic slavery? No, they will tell him the party is over. The American people should do the same.
Solve this silly problem with a massive redistribution of wealth. Tax the top 1/10th of 1% about 95% of their wealth.
On point, the Chairman of Lehmans received over 1/2 billion in compensation the past few years. That our congress and "system" let that happen is rediculous. Take that 1/2 billion, line up the rest of the Wall Streeters who have done the same shanagans, and take their money. It probably amounts to at least 700 billion.
September 25, 2008 8:13 PM | Reply | Permalink
If these demands are too extreme for the Bush administration, then they are not telling the truth about the financial crisis. If the risks are really as great as President Bush claims, then he should unhesitatingly agree to guarantees that will prevent the incompetents from profiting further from their incompetence. We shall see.
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