Fed Chairman, Ben Bernake says that we will buy up these bad debts at a price that is closer to what they would be “in a more normal market” or through a process of “price discovery”. What does that mean, simply we’re going to give them more then their real value. Then hopefully other fools will rush in and pour more money into these institutions to recapitalize them. Then we will wait for who knows how long, for those debts to reach a value somewhat close to the price they bought them for. When? Maybe never.
The powers that be in the fed and SEC, stopped short selling which they blamed for “crashing companies”, in all reality it was an attempt to stop the public from learning how worthless these financial instruments really are before a bailout value could be established based on their true value. Short sellers bid on what they think a stock will fall to, in other words its current present worth, something the bailout boys don’t want you to know.
Bernake also made the statement to congress that the “economy was severely undercapitalized”. The economy is undercapitalized? That means the whole economy has borrowed too much money, issued Treasury Bonds with out sufficient capital behind them, to print more money and put it into circulation to prevent an economic slowdown. In other words, what took place was an expansion of the economy that outpaced actual growth in wealth creation through an inflationary money supply. Choices made out of political opportunism and blatant greed.
The PlansNow, Secretary Treasurer Paulson who used to work for Goldman Sachs is proposing we bail his former company and other friends out with more debt, and that they be the “experts” appointed to handle this mess they have created. Understand what Paulson is demanding, we borrow more. Print an extra $700,000, give it to him and let him do what he wants. Take note 200 well known university economists say the Paulson plan won’t work.
Consumers have started spontaneous protests all over the country against bailing out the big boys and with half of congress facing re-election they are listening. The Conservative Republicans are not, as some have reported, asking to let the companies fail and the market correct itself. Instead they are asking for the government to set up an insurance plan financed by the companies and backed by the government that would insure the bad debts. Something like selling flood and wind insurance to a Galveston homeowner when Ike was 50 miles offshore.
Of course anyone who doubts the brazenness of the house Republicans only need look at the add-ons they want. They want even less regulation, reduce the capital gains rate to 15%, half of the worker rate, and to lower taxes on money they have made on their offshore operations, and of course they are still lobbying like mad to keep the tremendous tax break for the rich implemented by Bush.
Showing their concern for those common citizens suffering from this mess of deregulation, Senate Republicans blocked a plan on Friday by the Democrats to pump $56 billion into the economy through public works projects, more help for the unemployed and money for states who are underfunded for Medicare. No worry however even if had passed, Bush had promised to veto it. They did support however the $630 billion spending bill to continue government operations past Wednesday, funding for the Pentagon, veterans medical care, homeland security and of course a $25 billion bailout for those geniuses in the auto industry.
The bankers, speculators and stock traders who certainly don’t want to be outdone for brazenness, want the government to give Paulson complete control of the money no strings attached. Trust us they say. Paulson as recently as 2004 was advocating for these looser restrictions that created the problem.
Paulson has already helped big investment houses Goldman Sachs and J.P. Morgan buy companies while we take their bad debt. The reason they bought the bankrupt Washington Mutual was because they figured the government, you and I, would take WaMu’s bad debt off their hands.
The Democrats want some guarantees: 1) equity in the companies they give money to, exactly what any other creditor would ask for, 2) limits on management compensation, 3) authority for bankruptcy judges to demand refinancing or restructuring of mortgages where homes are worth less then their mortgage, 4) new regulatory controls, 5) bipartisan oversight of the Treasury Secretary’s management of the bailout, 6) and some realistic price on what they take on.
While a deal will be made and probably include most of the Democratic proposals and something for the House Conservative Republicans to save face, the problem is much bigger and this most likely won’t solve the problem but only offer a short temporary boost in the market before continuing a downward spiral.
The underestimation of the amount of bad debt in the mortgage market, but also all of the other overvalued “exotic financial instruments” is much more than $700 billion and will begin as commercial loans start to fail, most of that held by smaller regional banks. Inflation will not be far behind.
Bush’s false prosperity will leave a wake of devastation for decades. He’s hoping one more quick bailout by daddy’s friends will get this mess through to the day he steps out of office. The only good news is that writers and historians will have a field day.
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