Bailing out the top does little for the bottom
13 reasons Bush's bailout won't stop the recession
| We condense this expose from CBS MarketWatch of Dec. 10, 2007. |
By Paul B. Farrell
"What do you call an economist with a prediction? Wrong."First, CEOs at Citi Corp, “the best-and-brightest”, lost $165 billion but exited rich, with hundreds of millions. Next comes the mortgage bailout predicted to slow the record number of home foreclosures and ease the damage from the housing recession.
This government intervention scheme smells bad. It’s dreamed up by the same political and financial geniuses who got us into the problem in the first place. Reminds me of Viking King Canute sitting on his throne at the shore commanding the tide to stop.
Fairy-tale solutions won't stop the inevitable. Bailouts are just cosmetic PR that politicians and lobbyists spin for the masses, to gloss over Wall Street's greed and stupidity during the latest bull run-up, while pandering to voter naiveté, proving once again that our leaders cannot manage our nation effectively. Look at 13 reasons why:
1. Remember all the shareholders who invested in Wall Street's last fiasco, those bizarre, no-earnings, dot-com schemes like Pets.com and its cute sock puppet? Nobody bailed them out after the 2000 crash that triggered a 30-month recession and wiped out $8 trillion in market-cap. This time Washington's just trying to salvage an out-of-control Wall Street.
2. The dollar will sink lower. Martin Feldman, former chairman of Reagan's Council of Economic Advisers, recommends doing nothing: "Arbitrarily changing the terms of mortgages held by investors around the world would destroy the credibility of American private debt." But they're doing it anyway. They got greedy, sold junk. Now people don't trust us anymore.
3. Hypocrisy. Supply-siders pretend to trust the free market to work out problems. Yet the conservative free-marketeers on Wall Street, at the Federal Reserve, and in the White House, got government intervention to minimize mortgage credit losses created by Wall Street's excessive greed.
4. This is just a PR photo-op pandering to Middle America's fears. Only an estimated 250,000 borrowers at best will “benefit" from the mortgage-rate freeze. From mid-2007 to now, some 800,000 have entered foreclosure. From 2008 through mid-2010, there will be an estimated 3.5 million loan defaults.
5. The biggest losers may profit most, like speculators. Moreover, the damage will spill-over to the tens of millions of responsible homeowners who are current on their mortgages. Plus, if they have to sell, they'll compete against mortgagees getting bailout benefits and tax breaks in a down market.
6. Wall Street got too greedy, made mega-billions. The average managing director made $2.52 million repackaging mortgages. More than 95% of homeowners are making payments on time; it is unfair to pay more taxes to assist those who've been less responsible. They're angry. Expect a rebellion.
7. Congress, the SEC and other state regulators will demand answers, such as why was Goldman shorting the SIVs they were selling, many of which quickly went into default? What did they fail to disclose? Sounds like a massive conflict of interest with major liabilities. These hearings could drag on a long time, further undermining the credibility of the dollar.
8. Washington was hiding the truth. As recently as August, Treasury Secretary Henry Paulson, former chief of a leading Wall Street bank packaging the SIVs, and Federal Reserve Chairman Ben Bernanke both proclaimed that our subprime/credit problems were "contained." Both had the data long before August, and misled us.
9. Washington's priority? Wall Street. Paulson's first response was not to help two million subprime mortgage holders but to create a $100 billion bailout fund to help his old Wall Street cronies keep all those junk mortgage credits off their balance sheets.
10. A few years ago, Bush Sr.'s chairman of the Council of Economic Advisers, Michael Boskin, miscalculated tax revenues by $12 trillion. Remember the low-ball estimates of drug entitlements? Or the estimates on Iraq war costs? We're unable to admit to big issues. Worse, our political quick-fixes handicap future generations.
11. Law of unintended consequences. Remember how biofuels would make America oil-independent? Instead, feed prices shot up, and then the price of meat. It was payback to corporate agribusiness for campaign contributions. Same here: Wall Street's a huge campaign donor.
12. Rate freezes will drag out the recession, ultimately making it worse. Property values will drop further, new home construction will be delayed, equity-to-mortgage ratios will fall.
13. Washington and Wall Street know you can't stop the coming downturn. Recessions clean out the excesses of a prior bull market. When I was at Morgan Stanley, the Dow was around 1000. We lived through the brutal 1970s recession, and a few recessions since. We're now above 13,000. We'll live through the 2008-2009 recession. Stop fighting, go with the flow.
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Also see: Bush Administration Expecting a Recession?
The “Crash of 2007-8” is underway
Subprime Loans, Subsidized Land, and Manipulated Money |
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