Wednesday, October 1, 2008

Bailout and Bullshit


I've purposefully waited a few days before blogging about the so called "fiscal crisis". One should never commit a public action in fear or haste, be that blogging or passing laws. (I'll come back to that point.)

So, what *really* happened two days ago? There is going to be a lot of debate on that point over the coming weeks, but a melt-down doesn't suddenly reverse itself the way the stock market did yesterday.

Last night I was listening to some excellent commentary from some leading economists at the Institute for Policy studies. I highly recommend their web page if this issue at all concerns you ( In particular this policy summary is well worth reading:

One note worthy comment came from Mr. Jared Bernstein who said that using the stock market as a financial indicator is just bad economics. He likened it to "patterning your life after a chronic manic depressive." The stock market by its nature over-reacts to news and does so with massive swings. We saw that in the past few days were it went down almost 700 point and then back up almost 500.

But what triggered such a big drop? The answer is painfully obvious... our president declaring a sudden financial emergency. During Greenspan's tenure as head of the federal reserve the market used to tip based on nothing more then rumors of a change in the prime of a few tenths of a percentage point. I'd ask you to imagine how huge an impact the president of the united states declaring that we are screwed would have but you don't have to-- you just saw it.

So, discounting the swing of the stock market, what are the real dangers we face? A bunch of big banks that cried for a free market handled that market so badly that they are dying. What does that really mean to the average American? The answer is probably little to nothing. The fact of the matter is that the banking system is in little danger of going anywhere. The small community banks, that these big and reckless corporate banks almost crushed through buy-outs and crazy policies that the smaller and smarter little banks couldn't compete with, are coming back big time. So we aren't in danger of losing banking in this country any time soon.

What about all of those people with accounts at these big banks? After all, isn't this the way the Great Depression started? Yes, it more or less was, but there is one big difference today-- the FDIC. The FDIC was created in order to cover just such a situation as we have now and prevent a repeat of the disaster of the 30s. Unless you have more then 100,000 sitting in a bank account, you are safe and covered. Noone at the FDIC is saying they can't handle this. In fact, they have already asked the government to extend that coverage further, to $250,000. So take a deep breath and calm down, your are insured by the one insurer that CAN'T go out of business, the Federal Government.

Well, what if the federal Government can't handle the losses, right? The answer is that this is a nonsense question. The Government can get more money any time it needs to. If it couldn't, we'd already be bankrupt thanks to Bush's personal war in Iraq. Besides borrowing and raising revenue through taxes, the government owns the presses that print the money. We left the gold standard behind a long time ago. The government can make more money more or less at will. The government doesnt do this often because adding to the money supply is inflationary... but if we're headed into a recession then a little inflation isn't the worst thing in the world.

The 'wall street to main street' argument doesn't wash for all the
reasons above. In the end its just the same "trickle down economics"
that we've been fed by these same law-makers for so long. It didn't
work in good times, the rich only got richer. It won't work in bad
times, only the rich are going to get poorer from this. And not a lot
poorer. Don't let them kid you. These "poor bankers" are still going to
be a whole lot better off then most americans have been the past decade
or so.

Are average americans who got into bad loans suffering? Yes, they
are. And that is the only true danger I see here. But bailing out the
banks who wrote the bad loans is not fixing the problem, just the
symptom thats hurting a rich few. Instead, we should be focusing on
the real problem-- how to bail out those home owners.

There is a free market argument that says we shouldn't do that,
either. We should let them fail for their bad decisions. But there are
some compelling reasons not to. The first is that this flood of homes
onto the market actually will *hurt* Americans. Many Americans have most
to all of their savings in their homes. There is no question that we
are in for a correction and rough landing. The recession has been
inevitable for some time. (And some economists argue we've actually
been in it for a few years already, its just been cosmetically
masked.) But we can and maybe should do some things to soften the
ground we're going to land on. This isn't more 'trickle down' economics (what was called 'voodoo economics when Regan championed it.) This is hitting the heart of the matter where it really lies.

There is a second argument here, though to help out the average american. The big banks created a system that rewarded brokers for selling loans they didn't have to be responsible for. The obvious and inevitable result of this system was massive, systemic abuse. Americans were talked, cajoled and even lied to to get them to sign any sort of loan the broker could get their signature on. I don't think you can blame the American consumer for this one. Pushing people into loans they can't afford is called "predatory lending" today (the old term was usary.)

When faced with an entire predatory system, I don't think the average consumer had much of a chance. A lot of consumers I'm sure assumed that their broker "knew
more about loans then they did" and wouldn't sell them a loan they couldn't handle. That would be bad for the lender right? Normally, reasonably, the answer would be yes. But in the system the big banks created for unloading themselves of the loans, this reasonable assumption was untrue.

So, why all this noise about the necessity of a bail-out? I can see a few reasons and none of them terribly pretty.

First, a bunch of the rich friends and backers of our rich law-makers are about to lose a lot of money. To their credit, the honest free-market conservatives are saying the right thing: so what? These bankers wanted the freedom to run their business however they wanted and they got it. Well freedom means the freedom to fail as well as to succeed. Noone comes along and "bails out" average americans when they make bad financial decisions. Why should we do so for the rich few?

Another potential reason for all this noise right now. Keep in mind that its 5 weeks to the national elections and only 1 week before the first debates. The republican administration has a *terrible* history going into this race. They have just about admitted at this point that they lied to the American people to get them into a war that only served the needs of the oil companies. A recession has been looming for awhile now and all their promises that making the rich richer would make everyone else richer haven't materialized. They've had ethics scandal after scandal. They can't run on the past. But a brand new "crises" to distract the american people from what they've already done by what they claim they will do in the future? That has some tiny chance of working.

In the end, as scary as it may seem to believe our law makers would do such a thing, I find a "wag the dog" scenario here very plausible. Its classic Karl Rove, the architect of all the lies that got Bush elected to start with. (I'm not being inflammatory here, this is well known fact to anyone who actually followed the events of the past 8 years.)

Michelle Obama said that she felt proud of America 'for the first time in her life' when we nominated a black man as a presidential candidate. Today I feel more proud of my fellow Americans then I have in a long time. Why? Because so many of you refused to listen to one more lie. You said "enough with government by and for the rich" when you told Washington to vote down this bank bail-out. But the fight isn't over. In a thoroughly sickening move, the senate yesterday created a new version of the bill to try to get it passed. Did they take out the subsidies for the rich? No. Did they add more for common Americans? Nominally (they gave the fed their raise to $250,000 per account.) but the BIG thing they did was throw in ANOTHER subsidy for the rich-- a tax break for the oil companies. Those same companies that have been making record profits the past few years.

Their hope was that this blatant bribe to conservative interests would swing the honest republicans who said "no" before over to their side. But as an American I'm apalled and I think you should be too. Is this what we really want? A government that runs by bribing the people who run it and their friends? We call that a corrupt government when we see it in other countries.

So, my conclusion. They sky is NOT falling. The Bush administration has used terror to control the American populace a long time with its histrionics about terrorists. This is just another form of the same kind of manipulation and Americans should say, loudly and clearly, ENOUGH! And stick to their guns.

We should demand real help for the real victims of these bankers actions and the real economy... which is on main street and NOT wall street. And we should all tighten our belts and get ready for a bumpy ride because, like it or not, were in for a deep recession and there really isnt anything to be done for it beyond learning how to ride it out.

Finally, we should demand that greedy rich people be held accountable for their actions by the very system they championed when it was in their interests to do so. The IPS has a lot of good information on how to accomplish all of this. If your concerned about our economic future, I highly recommend their reports.

In my opinion, the most interesting thing about this whole debacle is that it HAS brought people on the far right and the far left together... in opposition to what the Bush administration wants to do as its final act of corporate charity. It also seems to be proving Lincoln right about fooling all of the people all of the time.


Mihalis said...

Nice. Well said. Now is the time for popular opinion to weigh in heavily. The bully pulpit continues to be used to propagate fear. The benefactors of this action will disproportionately benefit the wealthiest segments of our nation. The mess is made. Those who made it should clean it up. Nuf said.

Phearless said...

The FDIC limit raise is a BS distraction too. The guarantee from the Fed is $100,000 PER ACCOUNT. Meaning that if you have a checking account and a savings account you're ALREADY covered up to $200,000. Open another account at another bank and you're covered to $300,000.

Some banks will let you have a near infinite number of different accounts of the same type. Again, each guaranteed to $100,000.

In the era of online banking there's almost no difference between 2 accounts at the same bank. At most institutions you can move money between them instantly.

The reality is that there's no reason the FDIC guarantee should have ANY limit anymore. Nobody keeps millions of bucks in a single account of the type that is guaranteed.

CyberQat said...

Excellent point in your comment :)