by Randolph T. Holhut
American Reporter Correspondent
October 9, 2008
THE $700 BILLION MISTAKE
DUMMERSTON, Vt. -- So, how's that bailout thing working out?
After President Bush, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke pressured congressional leaders to approve a $700 billion bailout of the financial markets as soon as possible to prevent a global economic panic, lo and behold, we still ended up with a global panic. Perhaps it eased a bit with Monday's 936-point gain, but that remains to be seen.
The stock markets around the globe are tanking. The Fed, and the rest of the world's central banks, cut interest rates Wednesday in an unprecedented act of coordination. Worst of all, banks are still afraid to lend money.
It's not that $700 billion doesn't go as far as it used. It's that keeping credit flowing is a more difficult mission than the Bush Administration realizes. For starters, banks and investors are trying to pare back their debt by selling off assets.
But the problem is no one is sure what anything is really worth. All the financial innovations of recent years - structured investment vehicles, credit default swaps and the rest - used to be seen as a good thing, because they spread risk. But now that these investments are increasingly seen as worthless, and the risk has been spread out so widely that no one knows the real value of any financial asset.
And now, the Federal Reserve is joining the party. Nearly three-fifths of the Federal Reserve's $800 billion portfolio is now filled with mortgage securities and other rotten assets that it took off Wall Street's hands. And the Bush bailout is designed to relieve the major banks and investment houses of the rest of their financial junk, in the hope that this restores the economy.
The Fed needs money, hence the $700 billion infusion of cash. But we still have no explanations of how this bailout will work and no real demands on the bankers and brokers in exchange for the taxpayers' money.
Even in the slightly diluted form that was enacted by Congress, this cannot truly be called a rescue plan. It is a continuation of the smash-and-grab wilding that has characterized the tenure of the Bush Administration. Loot the treasury, reward your friends and stick future generations with the bill.
The bailout bill puts the burden for cleaning up the mess made by Wall Street squarely on the backs of the middle class. This is a vote that will go down with the October 2002 vote to authorize a U.S. invasion of Iraq as something that those who sided with the Administration will regret for the rest of their days.
As with the Iraq vote, too many senators and congressmen bowed to political pressure rather than using common sense. Despite the so-called "sweeteners" - raising FDIC coverage for savings accounts from $100,000 to $250,000, promises of increased congressional oversight and about $100 billion worth of tax breaks and subsidies - the bailout bill remains a giveaway of unprecedented proportions.
As Rep. Dennis Kucinich, D-Ohio, pointed out last week, "The central flaw of this bill is that there are no stronger protections for homeowners and no changes in the language to ensure that the secretary has the authority to compel mortgage servicers to modify the terms of mortgages. And there are no stronger regulatory changes to fix the circumstances that allowed this to happen."
Without any of these things, Congress will likely have to come up with more money in the coming months. That may be the time to do what should have been done in the first place - direct government financing of distressed mortgages and direct government equity in the troubled financial institutions that will need to be bought up.
"This bill represents an utter failure of the democratic process," Kucinich said. "It represents the triumph of special interest over the triumph of the public interest. It represents the inability of government to defend the public interest in the face of great pressure from financial interests. We could have recognized the power of government to prime the pump of the economy to get money flowing through out society by creating jobs, health care and major investments in green energy. What a lost opportunity!"
Randolph T. Holhut has been a journalist in New England for nearly 30 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at email@example.com.