Piloting The Bailout: Pirates At The Wheel

Treasury Secretary Henry Paulson has spent his initial allotment of $350 million in bailout funds, and it doesn’t seem as if there has been any impact on the economy. Banks are still not making loans, businesses large and small have seen revenues decline, Detroit is about to implode, American workers are being layed off, left and right, and everyone is girding for a lean holiday season.

During his testimony before the House Committee on Financial Services yesterday, Secretary Paulson stated:

Recently I’ve been asked two questions. First, Congress gave you the authorities you requested, and the economy has only gotten worse. What went wrong and why won’t you use this authority for other industries? Second, if housing and mortgages are at the root of our economic difficulties, why aren’t you addressing this?

The answer to the first is that the purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties. The crisis in our financial system had already spilled over into our economy and hurt it. It will take a while to get lending going and repair our financial system, which is essential to an economic recovery. This won’t happen as fast as any of us would like, but it will happen much, much faster than it would have had we not used the TARP to stabilize our system. Put differently, if Congress had not given us the authority for TARP and the Capital Purchase Program and our financial system had continued to shut down, our economic situation would be far worse today.

The answer to the second question is that the most important thing we can do to mitigate the housing correction and reduce the number of foreclosures is to increase access to lower cost mortgage lending. The actions we have taken to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, together with our bank capital program, are powerful actions to promote mortgage lending. We are also working actively to reduce preventable foreclosures.

…We have done what was necessary as facts and conditions in the market and economy have changed, adjusting our strategy to most effectively address the urgent crisis and preserving the flexibility of the President-elect and the new Secretary of the Treasury to address the challenges in the economy and capital markets they will face in the coming months.

According to Secretary Paulson he and his crew have stabilized the situation, they have prevented the dominoes of our financial system from all falling. Stabilizing the situation does not make the problems in the financial houses go away, it only postpones an ultimate reckoning. It seems that Secretary Paulson, like his boss, is going to blithely walk-away from the mess, and leave it to the Obama administration to figure out how we (ultimately the taxpayers) will prevent any further hemorrhaging and repair our flawed financial system, and apply preventive measures so there is no recurrence. Thank you George W. Bush for your leadership as you steered our ship in to these financial shoals, have a nice retirement.

While Secretary Paulson claims the situation has been stabilized, perhaps the secretary and his boss should be required to complete a lessons learned exercise. Never mind a root cause analysis, we know what caused the problem, a greedy financial sector aided and abetted by an incompetent, and criminally negligent administration. To help the secretary and the lame duck with their assignment here are a few lessons they can compile for the next administration and Congress:

  1. Do not appoint a pirate to regulate the pirates.
  2. Study the legacy regulations, many of which were repealed but which had protected American tax payers for generations and bring back sensible and necessary regulations on any entity engaging in business in the financial sector.
  3. When the financial sector dreams up investment “products” that sound too good to be true (e.g. credit default swaps) release the forensic accounting hounds.
  4. Aggressively investigate and prosecute systemic financial fraud, holding senior corporate officers personally accountable for the abuses committed by their institutions.

In terms of the strategy for managing the disbursement of the remaining $350 million of the bailout fund, we can only hope that the Obama administration and the new Congress exercise due dilligence, and not feel constrained to continue any of the strategies or tactics employed by the current administration. Just as there is more than one way to “skin a cat” there is more than one way stop and repair the damage done by pirates.

Someone who has a strong opinion on all of this is former Secretary of Labor and current professor at the University of California, Berkely, Robert Reich, who thinks the remaining bailout funds should be focussed on bottom-up spending.

I am no economist, no accountant or financial genius, I am just an American tax payer and soon to be beneficiary (hopefully) of Social Security and as far as I am concerned, I expect my government to prevent piracy on Wall Street, after all there are already plenty of pirates out and about, we don’t need it at home too.

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4 Responses to Piloting The Bailout: Pirates At The Wheel

  1. libhomo says:

    Another problem is Paulson’s blatant conflict of interest. He actually opposed shifting only $25 billion of the bailout to the auto industry, which is far more important to the real economy than the big banks and brokerage firms. Instead, he insisted that every penny go to his industry.

  2. Big Fella says:

    Thanks for the comment, libhomo-

    The more I think about it, the more it seems to me the bailout of Wall Street will do nothing but perpetuate their bad behavior. Paulson and his colleagues all seem to want us to think that if we allow even one big Wall Street firm to sink, that it will take down the entire economy. I am not so sure that is an honest, accurate assessment.

    In my mind if we allowed one Wall Street firm, that through its greedy managers bet on ridiculous, in some cases fraudulent mortgage loans, “liars’ loans”, loans that never should have been underwritten, to totally fail, and to destroy all of its investors’ equity, it might just send a message that stupid, greedy, bad business behavior will not be rewarded, that if you, as an investor, encourage that behavior in a manifestation of your own greed, then you rightfully, should suffer the consequences.

    Maybe then the prevailing “conventional wisdom” will shift, just a little bit, from worship of the almighty Dollar, to one of building a reasonable life that is not totally validated by relative wealth.

  3. Vic says:

    So, let me see. The poor slob who earns anywhere from $7/hour to $73 per hour is asked to bail out these jokers with law and MBA and Harvard business degrees and who lived high on the hog for decades, and who are still earning ten times our salaries, and none of them is asked to sacrifice their jobs or a penny of their salaries.

    What is wrong with this picture?

    On top of which, these jokers are being hired to SOLVE the problem. Alice truly fell down the hole and met the white rabbit.

  4. Vic says:

    Erm, none of them *were* asked. Dayum, I wish you had an edit button. In addition, let me state that these businesses have come running to the taxpayer to help bail them out, but I don’t see any of them dropping their piss poor business practices. These losers should be run out of town hog tied, not rewarded for their abysmal and greedy performances. I would only bail them out AFTER every single top management person is FIRED and their golden parachutes are confiscated. Isn’t that what they do to the small guys?

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