Is the cure worse than the disease?by Dan Lieberman Secretary Paulson’s plan to prevent collapse of the financial system prompts immediate and unanswered questions: Will the Paulson plan fulfill its intentions or will it worsen what it wants to correct?The health of the financial system is a major problem, but is it the problem, and does it disguise the true problem? Let’s examine the first consideration.
Will the Paulson plan fulfill its intentions or will it worsen what it wants to correct?
A Treasury statement claims that “Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve chairman, other assets, as deemed necessary to effectively stabilize financial markets.'' By gaining authority to become a buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, the Treasury expects to reduce mortgage foreclosures and quickly create regulation for a new financial system.
Relieving “bad” banks of worthless securities in order to increase their reserves and their ability to lend and spread the ‘junk’ among many “good” banks that already have sufficient reserves and won’t feel any deterioration in their balance sheets is an expedient approach to the banking crisis. Nevertheless, there are many, many questions:
(1) Why doesn’t the Treasury provide an auction mechanism for direct sale of these assets rather than buying them and then trying to sell them to others?
(2) Since those selling the assets to the Treasury are normally those who purchase these assets, who is available to buy the assets?
(3) Isn’t the Treasury speculating with these assets; betting it can beat the odds and sell what nobody else can sell?
(4) Should the U.S. government be allowed to speculate with taxpayer money?
(5) Won’t the government be subsidizing and rewarding the “bad” banks while making the “good” banks less good?
(6) Since the sub-prime and other deceptive mortgages artificially raised housing prices, similar to having claques at an auction, aren’t housing prices artificially high? If so, how can Paulson’s scheme prevent foreclosures? The only buyers at the elevated prices were those who received the extraordinary mortgages. That crowd is no longer available to purchase homes. Considering present home ownership in the U.S., is there a sizeable portion of the American public that has sufficient down payments and income and will be willing to purchase homes at elevated prices? If so, why aren’t they buying the real estate now when interest rates are low?
Questions on the possible detrimental effects of the taxpayer commitment:
(1) Will this plan generate a huge increase in the government deficit, which will lower the value of the dollar and increase interest rates? Both seem likely.
(2) If the dollar decreases in value, won’t commodity and import prices rise? These negative effects will increase production and consumer costs.
(3) Has an analysis that includes the possible deterioration in the dollar and augmented commodity prices, especially in petroleum, been included in the presentation to Congress?
(4) Will higher interest rate rises offset benefits (if any) from the Treasury’s plan?
(5) Could a combination of a decreased dollar and increased interest rates set in motion a regenerative effect by which the economy deteriorates, unemployment accelerates, tax receipts are lowered, the dollar drops further, interest rates rise more, etc., etc.?
(6) Is this an all or nothing plan by which if the plan fails to accomplish its purpose, it will be counterproductive or catastrophic?
(7) If the plan fails, is there a backup plan in place that will take over?
(8) Are there other financial problems, e.g.; credit card debt, auto loans that are also troubling?
Let’s examine the second consideration.
Why was it necessary to pump up and manipulate the credit system in order to enable the U.S. consumer to make large scale purchases? Obviously, the American worker did not have the savings or wages to finance the purchases. Foreseeing a dead-end economy, the financial wizards in charge decided to use unsavory credit expansion to greatly enhance their profit margins rather than expand wages and face a possible reduction in profit margins. The relative stagnation of the U.S. manufacturing system and inability to compete in global markets, reflected by huge trade deficits, prompted the financing of consumer spending. The ‘housing bubble’ is a result of the actual problem, which has the U.S. free enterprise system on hold by its failure to compete with more controlled and regulated nations, such as those in China and Southeast Asia. Add to the problem, the financial burdens due to the Bush doctrine. While the U.S. plows its defense manufactures into the ground and freely distributes capital to “defend democracy,” other nations erect permanent institutions that assist them to move forward and invest their capital wisely. The U.S. structured globalism to benefit its economic system. The more regulated Statist nations have structured their economies to make globalism work for them.
In a previous article, The New Statism, The Rise of Corporate States, Alternative Insight, Oct. 2007, the writer outlined the notion that: "A new Statism, in various prescriptions, exercises control over the political, moral, economic and social fabric of several nations and has the potential to control the destiny of the world."
Another article, The Socialization of America, Alternative Insight, April 2005, stipulated: “The global economy has been pioneered by the United States but has not been a perfect fit for new pioneering nations. In order to provide prosperity for its people, the United States must implement policies that offset the detrimental effects of globalism.”