Bailout for Bankers, Sellout for Taxpayers

In an IHT article, Paul Krugman, Op-Ed writer for The New York Times and professor of Economics and International Affairs at Princeton University, dissects in a succinct way the unprecedented financial crisis, which he sees as unfolding in four steps, and comments on the pitfalls of Henry Paulson’s US$700 billion bailout plan.

“Well, it might - might - break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn't clear: The prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.”

“Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms - and their stockholders and executives - a giant windfall at taxpayer expense. Did I mention that I'm not happy with this plan?”

“The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to - a share in ownership, so that all the gains if the rescue plan works don't go to the people who made the mess in the first place.”

“But Paulson insists that he wants a ‘clean’ plan. ‘Clean’ in this context means a taxpayer-financed bailout with no strings attached - no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Paulson is also demanding dictatorial authority, plus immunity from review ‘by any court of law or any administrative agency,’ and this adds up to an unacceptable proposal.”

Karl Denninger of The Market Ticker gives a sobering analysis of what the US$700 billion bailout proposal might mean for the average American in his post entitled “The Mother of All Frauds”.

“If you think the cost of this bill is $700 billion, you're wrong. The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme. Paulson can (and presumably will) buy up to $700 billion of these ‘assets’, then sell them. Let's say he decides to buy them at 60 cents on the dollar and sell them for 10. You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars. Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.”

“In fact, he can do this without limit, other than possibly due to the federal debt ceiling, which of course Congress will raise any time we get close to it. Oh yeah, this bill does that right up front too. No need to bother with it the first time around.”

“Folks, $700 billion isn't even close to the total cost of this monster. If Paulson and his successor decide to, they could literally cycle all $5.3 trillion of Fannie and Freddie's debt through this scheme, potentially sticking the taxpayer for 20% or more of the total, plus as much private debt on various bank balance sheets as they can manage to nationalize until (and possibly beyond) the point where the bond market tells him to go to hell ….”

“The claim is that this is intended to ‘promote confidence and stability’ in the financial markets. It will do no such thing. It will instead strike terror into the hearts of investors worldwide who hold any sort of paper, whether it be preferred stock, common stock or debt, in any financial entity that happens to be domiciled in the United States, never mind the potential impact on Treasury yields and the United States sovereign credit rating.”

David Walker, former Comptroller General of the United States, explains in his FT article how the US government and Congress lobbyists should be held accountable for getting Americans into the present financial mess and how they are trying to make Americans or future generations of Americans pay for their unconscionable decisions. He also throws in some bone-chilling facts and figures.

“Are there lessons from the sub-prime crisis? The answer is yes. The recent actions had to be taken because the government failed to establish an effective regulatory structure in connection with mortgages, derivatives and other securities. Greed was rampant. Fannie Mae and Freddie Mac strayed from their original mission, becoming too focused on profit and personal gain rather than their public purpose. Lax oversight was facilitated by powerful Wall Street lobbies and the lobbying of Fannie Mae and Freddie Mac.”

“Washington has charged everything to the nation’s credit card – engaging in tax cuts and spending increases without paying for them. Washington’s imprudent, unethical and even immoral behaviour is facilitated by a lack of transparency. For example, as of September 30, 2007 the federal government was in a $53,000bn dollar fiscal hole, equal to $455,000 per household and $175,000 per person. This burden is rising every year by $6,600-$9,900 per American. Medicare represents $34,000bn of this deficit and the related Medicare trust fund is set to run dry within 10 years. The Social Security programme is projected to have negative cash flow within about 10 years.”