Friday, September 26, 2008

Is The $700 Billion Mortgage Bailout Scheme Merely An Attempt To Inflate Another Bubble For The Rich At The Expense Of Middle America?

I will admit that economics is not the forte of Voice Of Deseret. They didn't offer economics education when I attended school (a shortfall still not adequately addressed by many public school districts). Thus I did not become as interested in economics as I am in politics and culture.

But I know just enough about this proposed $700 billion mortgage bailout scheme to question whether or not it is merely another ripoff of Middle America. I have seen the successive bubbles deliberately inflated and sucked dry by the economic elite in this country. The S & L scandal in the 1980s was just the first (John McCain and the Keating Five). Then there was the "dot-com bubble". Then the housing bubble. All deflated - after the economic elite sucked the air out of each and every one of them. And, as Ron Paul points out HERE, Congress has been complicit in helping create all of these bubbles, particularly the housing bubble. Wikipedia offers a brief and comprehensible tutorial on bubbles HERE.

The text of one of the earlier versions of this bill can be viewed HERE (it can also be viewed on the TeamHammond blog). Originally three pages in length, it has now grown to 102 pages. Update September 28th: Newest version, available HERE, is 110 pages.

The Bush Administration's basic premise is that, if this bill isn't passed, credit lines will supposedly freeze solid, retailers will be unable to procur from wholesalers, which means jobs will disappear and store shelves will empty. Apocalyptics believe this will induce a serious recession or perhaps even another Great Depression.

A bill was close to being ready, but Republicans got cold feet. According to the San Francisco Chronicle, Republicans themselves are divided over how to best approach the problem. Some Senate Republicans called for action with Democrats, while others called the bailout hopelessly flawed. Conservative House Republicans floated their own ideas to provide insurance for mortgage securities rather than buying them outright. Democrats said they were stunned because the markets want a plan by Monday.

Details are still in short supply because the situation remains so fluid. Democrats insisted on substantial changes in the plan Paulson proposed last weekend, which they and many economists described as a $700 billion blank check.

Changes contemplated could include doling out the money in installments: $250 billion, then $100 billion and maybe later the other $350 billion. Government equity shares in companies seem likely in return for buying their bad debt, so taxpayers have some chance for gain and companies pay a cost. Limits on executive pay are certain, although how exactly to do that remains murky. Aid to homeowners facing foreclosure is likely, as is bipartisan oversight.

The U.K.-based MarketOracle website offers a pessimistic yet cogent analysis of the proposed $700 billion "bailout". Entitled "Mushroom Cloud over Wall Street as US Constitution Burns" and published on eptember 20th, it exposes not only the serious deficiencies of the proposed scheme, but decries Treasury Secretary Henry Paulson's John Gotti-like attempts to strongarm and stampede Congress into passing it post-haste, without even so much as the quintessential rubber stamp.

Paulson's plan to revive the banking system by buying up hundreds of billions of dollars of illiquid mortgage-backed securities (MBS) and other equally poisonous debt-instruments; ignores the fact these complex bonds have already been "marked to market" in the recent firesale by Merrill Lynch. Just weeks ago, Merrill sold $31 billion of these CDOs for roughly $.20 on the dollar and provided 75 percent of the financing, which means that the CDOs were really worth approximately $.06 on the dollar. If this is the settlement that Paulson has in mind, than the taxpayer will be well served. But this will not recapitalize the banks balance sheets or mop up the ocean of red ink which is flooding the financial system. No, Paulson intends to hand out lavish treats to his banker buddies, while interest rates soar, pension funds collapse, the housing market crashes, and the dollar does a last, looping swan-dive into a pool of molten lava. Thanks, Hank.

Economist and author Henry Liu summarized the current maneuvering like this: "The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep price of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy."

Indeed. The Fed and Treasury have decided to backstop the entire global financial system (foreign banks can access the Fed's facilities, too!) with paper money which is rapidly losing its value. Watch the greenback tumble tomorrow (Sep 21) in currency trading.

Congress is getting steamrolled and the American people are getting snookered. Consumer confidence--already at historic lows--is headed for the wood-chipper feet-first. Something has got to give.

One minute everything is hunky-dory; the subprime meltdown is "contained" and "the fundamentals of our economy are strong".(Paulson) And, less than a week later, congress is forced to surrender their constitutionally-mandated right to oversee spending in order to forestall economic Armageddon. Which is it? Or is the real objective just to keep the country on an emotional teeter-totter long enough for all state-power to be subsumed by the Wall Street Politburo?

No one knows what will happen next. We are in uncharted waters. And no one knows what the political landscape will look like after the dust settles from this outrageous power grab. According to Paulson, things are so dire, the entire nation will be reduced to smoldering rubble and twisted iron. But can we trust him this time after his long litany of lies?

And the last statement is precisely the problem. Once someone has cried wolf too many times, they run the risk of not being believed. And the American people are quite skeptical of Paulson; many polls indicate that at least two-thirds of respondents think Paulson is overhyping the threat to the economy.

Former Internet radio host Hal Turner offers a possible reason for Paulson's sudden sense of urgency. In this post, Turner states that the last hour of trading on Friday September 26th was what he calls a "quadruple witching hour." During that hour, contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire. Quadruple witching hours occur only four times a year, on the third Friday of March, June, September and December.

Turner further states that Bush, Paulson and Bernanke knew that if a solution was not found by close of business Friday, the markets would plummet starting in Asia on Sunday night (Sep 28 East coast time) because with all the options and futures having now expired, the market is free to "correct" itself. He believes that if no bill is passed by Sunday night that things will "go to hell" starting Monday.

Closer to home, Utah's Congressional delegation has reservations about the scheme as well. Lame duck Republican Rep. Chris Cannon is likely to vote against the bill, because he believes it will confer vast authority upon the Treasury with no limitations and no descriptions. Democratic Rep. Jim Matheson questions whether this proposal will stabilize markets and wants to hear from financial experts who think otherwise. While he doesn't want the markets to crash due to inaction, he also doesn't want to back such an expensive bill without some assurances that it will have the desired effect. Republican Rep. Rob Bishop worries about the costs to taxpayers and a permanent shift of power and financial responsibility to the federal government, but says Congress must do something.

In the other body, Republican Utah Sen. Orrin Hatch said he is also far from impressed with the current plan. He is not interested in putting present and future taxpayers' money at risk for the sake of bailing out those who have made greedy or foolish decisions. But the other Republican Utah Senator Bob Bennett, as a member of the Senate Banking Committee, is the one most involved in the debate. During a banking committee hearing on Tuesday September 23rd, he questioned Paulson on the details, pointing out the more the Treasury pays for the bad debt, the more it helps banks, but the more it costs taxpayers. His primary concern is that he doesn't know how it will work; there's no precedent.

Commentary: For far too long, Wall Street has dictated to Main Street. The gap between rich and poor in America has swelled to astronomical proportions. This crisis gives Main Street serious leverage over Wall Street for the first time in 40 years. Congress has the power to level the playing field between the two entities. Congress must yield to the public will and let the Administration know that it is willing to call their bluff - unless serious concessions are made. This is also an opening to place serious restrictions on the rampant offshoring that's been taking place. In short, this is a once-in-a-generation opportunity to bring corporate America back within American suzerainty, and we're foolish if we throw it away on more rhetorical flowers and candy from the plutocracy. We can finally put a leash on globalization.


steel68 said...

"I will admit that economics is not the forte of Voice of Deseret.They did not offer economics education when I attended school(a shortfall still not adequately addressed by many public school districts)."

When I left Weber State University in 1990,I had no clue what the Federal Reserve Bank was or even had the slightest base of economic knowledge from which to build.

Though I continue to voluntarily sit in on selected classes at the University of Utah(I am not a student),I have learned more from my own researching than I learned through the public schooling system and higher education combined.

Public schools funtion as an archipelago of disinformation centers bending and molding the helpless children almost at will.Only a few of us escape to exact our revenge!

If your aggressive with this,as I think you are Dawg,take the time to look at these if you haven't already:

steel68 said...