Why a "Bailout" is Our Best Alternative at This Time
While the American public has every right to feel betrayed and angry we must not let that anger steer us towards revenge against those that have betrayed us in the ivory towers of Wall Street and seemingly gotten rich while doing it. Those that have "earned" seven figure salaries and bonuses have in some cases betrayed their fiduciary responsibilities in ignorance, others have not. Some were very blatant about it.
"Forgive them Father for they know not what they do." Very few if any of the glorified salesmen of Wall Street and Main Street understood what was going on in the derivatives market and that it might lead to financial calamity for the U.S. economy. Many of them will lose their jobs and possibly have to take lower paying jobs and trade in the big yacht for a small one. There's nothing more we can do about that. I'm sure there will be some investigations of fraudulent activity, but, probably not much will come of that. One thing is clear, greed got the better of many of them.
Shareholders & bondholders in those companies that have failed or will fail will suffer financial loses. One of them is my eighty four year old mother. Please don't be angry at her for this mess. She, and I as her power of attorney, were ignorant as to what was going on when her broker recommended buying preferred stocks and bonds in Lehmann Brothers a couple of years ago. My eighty four year old mother will lose about 10% of her total investments because Lehmann filed for bankruptcy before it was taken over by Barclays of London last week.
De-Regulation is the root of this evil. Want to punish someone for this mess? Vote out those who insist that we must get the government off the backs of the financial sector. Want to blame someone? You can start with Ronald Reagan, (may he rest in peace) Bill Clinton, Phil Gramm, and George W. Bush. They led the charge to de-regulation and allowed new financial instruments and services to go completely unregulated. Then you can blame all those mortgage lenders who literally gave mortgages to people who couldn't afford them and didn't understand them only to sell them immediately to other firms so they wouldn't have to deal with the problems later. Oh yeah, there's also plenty of blame to place on the rating agencies who slapped an investment grade AAA rating on just about everything.
Level heads must prevail here. Doing nothing is not an option; banks would start falling like dominoes. The Great Depression II awaits us around the corner if we do nothing. The financial services industry needs liquidity now. Buying up "troubled" and non-performing assets does that. It also gives the government the power to renegotiate interest rates on these mortgages to keep people out of foreclosure. This is not a bailout in the true sense. The government will buy them at a very discounted price and many of them may actually provide a return on investment if this plan provides the needed boost to the financial sector and real estate values stabilize. De-regulation set the table, but it is the burst of the real estate bubble that triggered this calamity. The bailout plan is much like the Resolution Trust Corporation that was created to handle to S&L crisis of the 80's. That not only worked, it turned a small profit.
The credit markets froze up last Wednesday and the financial industry survives on the free flow of money on a daily basis. If it's not there they can't meet their obligations, their stock prices and credit ratings would plummet increasing their borrowing costs further and they would eventually fail.
We must stop the rash of foreclosures. Insurance, as some in Washington are proposing, would not do that. The premiums would drain still more cash from the banks, it would not provide the needed liquidity to the industry and could end up costing us more since the government would not acquire "troubled" mortgages until they became non-performing (in default) and properties would then have to be foreclosed upon. The "Insurance" plan that is proposed does not protect the American consumer. It protects the corporations. The "Bailout" plan does. It is likely, however, that some compromise plan that includes aspects of both approaches will be passed this week.
If we don't stop the foreclosures property values will continue to fall causing tax bases to shrink for municipalities, causing them to cut back on things such as the schools and police departments and that includes layoffs.
A plan passed by Washington must include a two part program that includes:
A) Treating the symptoms:
1) Buying the troubled assets at fair market value, not book value.
2) An avenue for the American taxpayer to benefit from the benefit that these companies may receive as a result of this "bailout".
3) Oversight of the process by Congress.
B) Treating the disease itself so it doesn't happen again:
1) A review of the securities rating agencies and the rating systems.
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