Tuesday, October 7, 2008

Are you confident now?

When Hank Paulson, former head of Goldman Sachs and the current Treasury Secretary for the Bush administration went on ABC's This Week with George Stephanopoulos on Sunday, September 21st to sell America on the need for a 750 billion dollar "bailout" for the financial industry (the freest of all free market institutions), he explained that it was absolutely essential, in order to instill confidence in the market and that if congress did not approve these funds so that the tax payers could relieve these investment bankers from their "illiquid" assets (that means assets no one else will buy), this crisis threatens to inflict serious damage on the economy, and that would hurt not just Wall St., but Main St. also. He ensured us this, and only this government solution would stabilize the economy.
When Mr. Stephanopoulos asked "what will you do if this does not work?", Mr. Paulson's response was "it's got to work!". Of course that's not an answer, but it does tell you that they 1) don't have a clue, and 2) they have no plan B.
When Congress failed to pass the first bill, the market lost over 700 points, which some argued was evidence of the need for this government solution to a free market problem. Well congress passed the bail out, and it looks like the market is going to crash anyway.
If you've had enough of trickle down solutions, here are some more rational voices:

on what's really happening....

Doomsday warnings of credit collapse are lies

Ari J. Officer,Lawrence H. Officer

Sunday, October 5, 2008

There's only one reason that Congress passed the financial bailout measure this past week: Wall Street and politicians kept warning of an impending credit collapse that could be solved only by rescuing some irresponsible investment banks and by purchasing securities that have become "bad paper."

Don't believe the lies!

Pouring money into the investment banks at all - and especially by buying up their bad paper - is not a good way to maintain liquidity and credit. Fed and Treasury money should be used more directly to avert any potential financial collapse.

If the Fed needs to inject liquidity into the market, there is a conventional way to do that: providing funds for the money market by making loans or buying good (emphasize "good") securities of commercial banks and similar financial institutions. To begin by providing $700 billion to risk-taking financial institutions is an indirect, inefficient and inequitable solution to any impending "credit crunch."

Perhaps the most confusing thing for us on Main Street is the supposed link between the mortgage-backed credit securities and the regular credit that affects our everyday lives and American businesses. What's the direct connection?

There is none! We repeat: There is no direct connection between the credit represented by mortgage-backed securities and the other credit markets that affect our everyday lives. The normal credit extended by banks to businesses and households in good credit standing has nothing to do with these "credit derivatives" - the bad securities that Congress has authorized the Treasury to purchase.

It is true that some large institutions lost a considerable amount of money. However, it is a fact that they lost that money on mortgage-backed securities. Most of these instruments represented pure gambles against homeowners' defaulting on their mortgages. As far as the public should be concerned, one can just as well think of these financial institutions as having lost the money betting on mortgage defaults in Las Vegas. Today, however, having suffered such massive losses, these banks are unwilling to extend normal loans to businesses and households.

Or so the banks claim!

The mortgage credit crisis has put some investment banks at a huge loss over the derivative investments, and has made them less willing to make conventional loans because of it. That overly risk-taking institutions lost money on "credit derivatives" is irrelevant; again, there is no direct connection between the credit of mortgage-backed securities and other credit markets.

The so-called rescue plan does not address liquidity directly. Instead, it seeks mainly to bail out some irresponsible financial institutions. The rationale for the bailout measure is that, if the government buys up these sour securities, the banks will no longer be operating at an enormous loss and will once again be willing to make loans. But not all the banks are failing, and the Fed has better ways to inject liquidity into the market so that banks will still give sufficient loans to individuals and institutions in good credit standing.

Saving a few financial institutions - at American taxpayers' expense - will not necessarily help the credit situation. There is no guarantee that the rescued institutions will even participate in the loans customarily made to people and businesses.

The only thing the Fed will be sure of accomplishing is buying up crummy paper!

Ari J. Officer, son of Lawrence H. Officer, has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is professor of economics at the University of Illinois at Chicago. Contact us at insight@sfchronicle.com.


and on what we should be doing for our economy...


Bottom-up economic theory

Robert B. Reich

Sunday, October 5, 2008
Robert B. Reich, UC professor of public policy, former se...

The Mother of All Bailouts may be necessary to unfreeze our capital markets, but it won't unfreeze the American economy.

Bailout or no bailout, we're heading into deep recession. One of the first initiatives that Congress and the next administration will need to take will be an economic stimulus package. But not even this will remedy the underlying problem: The earnings of most Americans haven't kept up with the cost of living. That means there's not enough purchasing power to keep the economy going.

Adjusted for inflation, the incomes of nongovernment workers are lower today than in 2000. They're barely higher than they were in the mid-1970s. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago.

Per-person productivity has grown considerably over the past three decades and has continued to rise even in the lackluster recovery of this decade.

But most Americans haven't reaped the benefits of these productivity gains. The benefits have gone largely to the top.

The top 1 percent of American earners now take home about 20 percent of total national income. In 1980, the top 1 percent took home just 8 percent. Inequality on this scale is bad for many reasons, but it is also bad for the economy.

The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they're rich and already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.

The last time the top 1 percent took home 20 percent of total income was 1928. After that, the economy caved in.

The underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. The first coping mechanism was to send more women into paid work. The percentage of American working mothers with school-age children has almost doubled since 1970, to more than 70 percent. But there's a limit to how many mothers can maintain paying jobs.

So Americans turned to a second coping mechanism - working more hours. Americans have became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there's also a limit to how many hours Americans can work. So we turned to a third way of coping. We began to borrow. With housing prices rising briskly through the 1990s and even faster this decade, we turned our homes into piggy banks.

But now, with the bursting of the housing bubble, we're reaching the end of our ability to borrow, just as lenders have reached the end of their capacity to lend.

That means there's not enough purchasing power in the economy to buy all the goods and services it's producing. We're finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the real earnings of middle- and lower-middle-class Americans.

The answer isn't to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

Nor is it to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We've tried that and it hasn't worked. Nothing trickled down.

The long-term answer is for America to invest in the productivity of our working people - enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding our infrastructure and investing in the clean-energy technologies of the future. We must also adopt progressive taxes at the federal, state and local levels.

Call it bottom-up economics.

It would be a sad irony if the Wall Street bailout robs us of the resources we need to invest in average Americans and rebuild America from the bottom up.

Robert B. Reich is a UC Berkeley professor of public policy, former U.S. secretary of labor and author, most recently of "Supercapitalism," now available in paperback. E-mail us at insight@sfchronicle.com.


This article appeared on page G - 2 of the San Francisco Chronicle


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Carson Park Ranger said...

We've seen how well it turned out the last time the Bush Administration embarked on an expensive adventure without a "plan B."