For the sake of argument, we'll call the legislation the "No Banker Left Behind" act.
What the media and government are telling us is "this bill must be passed to avoid an economic catastrophe."
The calls for swift action are led by Treasury secretary Hank Paulson, who also happens to be the former CEO of Goldman Sachs.
Well, avoiding another depression sounds like a good deal for the taxpayer, right?
The governments plan is to allow the secretary of the treasury to buy these bad mortgages from banks, which would make the banks and markets more stable.
The government would then be on the hook for these mortgages, which means in the end that YOU the taxpayer will be on the hook for the mistakes of the bad lenders and defaulting borrowers.
You can find the full text of the proposed legislation here.
The media is calling this a 700 billion dollar bailout. I would say it's safe to assume the total cost will easily eclipse one trillion dollars.
So lets take some time to look at this legislation the government is rushing to pass.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.—The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Notice that "protecting the taxpayer" comes after providing stability for the bankers. At least they were honest with the order of the list. With this legislation Paulson will have the power to buy back whatever he wants from banks, and to nationalize or force banks to do whatever he sees fit to 'fix the problem'.
This is the de-facto nationalization of the banking and insurance industry.
The part about only buying mortgages from institutions headquartered in the US is worth noting. Would this prevent China (Who Paulson has close ties with) from selling a bad mortgage back to Goldman Sachs for 60 cents on the dollar, and then the US government buying it from Goldman at 70 and sticking the taxpayer with the bill?
In addition, Paulson later talked about expanding the program so US taxpayers bail out foreigners without the tinfoil laundering scheme I mentioned above.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Notice that this isn't the total amount they can ever have, it's just the amount that can be on the books at one time. So it sounds as if they were to buy a mortgage at $300,000 from Goldman Sachs, they could then turn around and sell it elsewhere for $200,000. The taxpayers basically foot the bill for the loss, and then there is more room to buy more assets.
The worst part is section 8:
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
There is no oversight.
Paulson would be untouchable by the law.
So what do the presidential candidates think about this legislation?
John McCain has not come out against this legislation. In fact, he supports the idea of bailing out the bankers. I suppose it shouldn't be a suprise when you look at the top 10 companies his donations have come from. (Credit: OpenSecrets.org)
Merrill Lynch $298,413
Citigroup Inc $269,251
Morgan Stanley $233,272
Goldman Sachs $208,395
JPMorgan Chase & Co $179,975
AT&T Inc $174,487
Blank Rome LLP $150,426
Credit Suisse Group $150,025
Greenberg Traurig LLP $146,787
UBS AG $140,165
Surely, Barack Obama must be against this! After all, he's the candidate of Change™!
Actually Obama has come out in favor of bailing out the banks. A look at his top 10 campaign contribution list might shed some light on his position.
Goldman Sachs $691,930
University of California $611,207
Citigroup Inc $448,599
JPMorgan Chase & Co $442,919
Harvard University $435,769
Google Inc $420,174
UBS AG $404,750
National Amusements Inc $389,140
Microsoft Corp $377,235
Lehman Brothers $370,524
SHIT! It can't really be that simple can it? Does the banking industry give enough in political donations, and simply have so many lobbyists that they can get candidates to agree to have taxpayers bail them out in an election year?
Probably.
In addition I'll note that John McCain has Phil Gramm on his campaign, who basically allowed banking lobbyists to write the Gramm Leach Bliley Act which was part of the cause of this crap.
And Obama, his VP vetting team was headed up by the former Chairman of Fannie Mae, Jim Johnson...who had to resign in disgrace after getting a sweetheart loans for himself and friends.
The banking industry fought tooth and nail to get that law passed in 1999 to allow them to leverage themselves (hold less money) more than was previously allowable by law.
Making money by giving out mortgages isn't hard. You require 20% down, and then you charge interest. The problem is the bankers wanted more. They wanted to be able to then package mortgages up and sell them to other people. They wanted to be able to invest and leverage themselves in 'exotic' ways to maximize profit.
So they hired some lobbyists, and with enough time, effort, and distraction they got what they wanted.
Now that they've leeched their millions off the backs of the uninformed people, they once again want more. The bloodsuckers have not yet had their fill.
They don't want to pay the piper. They don't want to pay for their mistakes. They don't want to face the ultimate regulators in capitalism: Bankruptcy and failure.
Additionally, there is no guarantee this will work.
Taxpayers taking on this kind of potential debt may temporarily settle the financial markets, and make the investment bankers happy....
Or it could dampen the desire of foreigners to invest in the dollar, as the US approaches insolvency and threatens to repudiate its debts.
Or we could just end up with a deflationary depression anyway. We've seen amazing wealth destruction in the past few months, and we've had the telltale signs of deflation...the monster that feeds upon wealth destruction to become stronger...and destroy more wealth.
I don't know what is worse, the situation America is in, the media's reporting of it, or the fact that nobody is really paying attention.
Doesn't anyone ever stop and ask themselves, why doesn't the democrat Obama, the champion of the "people" propose that we bailout the actual homeowners rather than the billionaire bankers?
Doesn't anyone ever stop and ask themselves, why doesn't the republican McCain, the champion of free market capitalism propose that we let these banks fail, and suffer the hard consequences of economic downturn rather than socialize our banking and insurance industries at the expense of the taxpayer?
Nobody ever wonders these things, because the media never bothers to ask. People don't have the time to dig for the truth, or even at least read the proposed legislation and come to their own conclusions.
Our fellow citizens, with their chronic inattentiveness have turned our democracy into an idiocracy.
It's a pure farce, I feel as if I'm watching a bad movie.
Both candidates are in bed with the banking industry that wrote the 1999 law that caused this mess. Now they're going to get the taxpayers to bail them out! And the media for the most part is silent, other than to tell us about how BAD things could turn out if action is not taken.
It's a legislative gang rape. The collective citizens are the rape victim, with the bankers and politicians perpetrating the rape. The media stands on the sidelines recording it for prosperity, while they remind us it's for our own good so we should enjoy it.
So once the democrats are appeased with something they can champion during the election, look for this legislation to pass. If it goes through congress, the only comfort I will have will be when I read the vote count which will likely be:
434 to 1.
22 comments:
You need to stick with the serious stuff. This was a great read.
Fuck big business investments in governmental affairs.
Whenever there is, shit like this happens. I fully agree on the Obama comment; I'm a People First™ person. I think politicians should be there to assist the masses first and foremost, but when you have the $ guiding your policies beyond the nation at large something is wrong.
Good stuff Vir. Your analysis of the two candidates and their reactions to this is the tell tale sign that neither of these guys are really all that different and that these political parties have both come too far towards the center, far away from the foundations of their respective parties.
-Slappy (blogger login isn't working)
Conspiracy theories often suck (and so their loudest critics - they say that schems never existed :D), but this realy looks suspicious - Did they make private banks go bancrupt in order to nationalize them?
No - government didn't intend to ruin the industry, but at the time they meddled in this area of the free market, it was great for getting votes!
Let's stop being politically correct here and call it what it is: Government coersion of banks to make loans to minorities and low income citizens. This is one example of politicians "giving back" to the community.
"We're going to force those evil lenders to make bad loans - loans they never would have made otherwise." Ooo those evil bankers, denying loans to minorities and other low-income citizens. Discrimination! RACISM I SAY!
If a bank wanted to expand and grow in the late 70's through the 80's, they better up the % of loans given to minorities - so said the politicians!
Welcome to Subprim Mortgages, community organizations such as ACORN (Obama). Life is great, everyone is getting loans!
Fast forward 20 years when, as the Reverend Jerimiah Wright would say, "their chickens have come home to roost".
Now it's a big blame game. And oh buy the way, government gets bigger and more powerful and taxpayers eat it.
www.fairtax.org - Let's end this shit.
Reason~
Don't forget that all this bad paper and bad companies are, on a long enough time scale, very valuable assets. Buying these companies stabilizes the market greatly, and it's not like the houses mortgaged vanished along with the poor broke bastards who got evicted after defaulting on their loans.
Governments actually make very decent profits by actions such as these, not to mention saving a long penny by preventing a depression. Who's to say that the eventual bill paid by the taxpayer would not be greater if it was in the form of an economic collapse?
Give big bro a break.
I'd like to add that the creation of a bank such as this isn't all that big of a deal. When Finland went through a horrible depression in the 1990's due to a banking crisis we spent over 8% of our GDP to fix it with similar measures to what's happening in the US now - your bill from all of this is now around 5% of your GDP.
You won't be spending your own money in any case, it'll be lent from either the asians or arabs who wish that their economies keep growing fueled by american consumption.
Your deficit is already huge but I don't see your credit rating going down in the (near) future so who cares.
Many people understand what this actually is, and I had a conversation with my dad about it the other day. This is technically socialism and is nowhere near what "Republican" John McCain should be supporting.
I would expect Obama to support it, being the socialist, national health care bastard that he is.
Again, people care but what are we to do about it? The only hope is to get a presidential candidate that will make the right decision, but 100% of the candidates are going with the socialist choice. The media is against the people, liberals are against the people, and conservatives politicians have to be against the people in order to not be called radicals.
Great read. (Coming from a first time reader of your political stuff here.) However, I'd like to question one of your interpretations. (Granted, my experience with American legalese is very limited, but bear with me!) Isn't the authority granted to the secretary, and the lack of limitations, referring to his authority "towards" the state so to speak? The legislation's use of the word "purchase" implies a consensual transaction. I therefore interpret the bolded parts in section 2 as basically meaning. "The secretary can do anything within the limits of this legislation (buy stuff for $ 700 billion) as long as the bank in question agrees with it." Otherwise it wouldn't be a purchase, would it? (As I said, could just be me being unable to correctly read American laws.)
The difference is of course that my interpretation is better for the banks (yay :P) and that it doesn't really open for a nationalization of banks that don't want it.
PS. The youtube link in the "1" is dead. Presume it's Dr. Paul?
Seriously, do you lot wish that the government does nothing to address the crisis? If so you really are a bunch of brainwashed idiots.
Unless there is a way for investors to get rid of the trash bonds your entire financial infrastructure will collapse taking down your whole economy with it. It's not about saving a few rich bankers, it's about making sure the whole damn planet isn't plunged into a depression nobody has ever seen.
Great read. It's always good to have knowledge passed on like this, and at the same time backing it up with facts.
The link at the bottom is broken, guess YouTube took it out.
Anyways, post this on Gameriot, since it's an Economic post, figuratively speaking. Besides getting exposure, it will help spread the word, and if anyone smarter than I can repudiate the facts, it would be great to continue the discourse.
Seriously, do you lot wish that the government does nothing to address the crisis? If so you really are a bunch of brainwashed idiots.
The government can't decide what's right for an economy. You can't assume that this will create more positives than negatives. You're the brainwashed one; watch some more CBS.
The government can't decide what's right for an economy. You can't assume that this will create more positives than negatives. You're the brainwashed one; watch some more CBS.
The government is the only entity that has the resources for this type of a thing. It is unquestionable that this act will help stabilise the crisis.
You oppose government action so dearly that you'd rather take a depression? Idiot.
The government is the only entity that has the resources for this type of a thing. It is unquestionable that this act will help stabilise the crisis
It's not unquestionable. I am questioning it. People should always question when the government is going to take 700 billion dollars and give it to billionaires and foreigners.
You oppose government action so dearly that you'd rather take a depression? Idiot.
Who's to say there won't be a depression or the collapse of the dollar anyway? We could easily buy out this bad debt, and still have the banks unwilling to lend to one another.
The American people SHOULD be up and arms about this. The fucking guy who wants all this power was the CEO of Goldman, which was the only investment bank left standing.
Plus look how much these companies contribute to the politicians.
It doesn't pass the sniff test.
I think a lot of Americans are thinking they're fucked either way, and if they go down why not take these bastards with them?
I'd like to at least see many provisions added if they're to pass this. There must be some kind of oversight, and people who are qualified should be able to keep their houses in addition to some other things.
I realize you think the government is perfect because it works so well for your small socialist country, but you've got to realize how poorly ours executes just about anything.
Also, I read about the school shooting in Finland. I'm sorry to see we've exported some of our idiocy to you.
-Vir
The government is the only entity that has the resources for this type of a thing. It is unquestionable that this act will help stabilise the crisis.
You oppose government action so dearly that you'd rather take a depression? Idiot.
I'm glad you called me an idiot when economics tells you that you cannot help companies. It's not up to the government to decide if companies will flourish or not because the outcome is always completely unpredictable.
The companies fucked up, and they need to pay the price. We'll be much worse off if we give this money away and if we allow the government more control than they deserve (which is zero, anyway).
It's not unquestionable. I am questioning it. People should always question when the government is going to take 700 billion dollars and give it to billionaires and foreigners.
No, it is rather unquestionable that buying out the loans will help stabilise the market as the original source of the distrust would be taken care of. It is very possible, probable even, that banks will still exercise a lot more caution while lending to each other, but it shouldn't be as bad as it is now. Besides, inflation is up so it would be healthy to have a little less money being tossed around.
I realize you think the government is perfect because it works so well for your small socialist country, but you've got to realize how poorly ours executes just about anything.
I do understand there's quite a bit of corruption in your government, but the people would benefit from this act regardless. I'm not sure about the details, it could turn out to be a rotten apple, but the basic concept is sound. 700bn is pretty minute when you consider it a productive investment, compared to a global depression.
Also, I read about the school shooting in Finland. I'm sorry to see we've exported some of our idiocy to you.
All it takes is a nutcase. There's talk of tightening gun laws further here, something along the lines of restricting hand guns to shooting ranges so you couldn't take them to home (or more importantly, school) with you. I think it could work, illegal gun trade isn't much of a problem here and the only way the shooters of Kauhajoki and Jokela could've got their guns was through gun clubs, like they did.
No, it is rather unquestionable that buying out the loans will help stabilise the market as the original source of the distrust would be taken care of. It is very possible, probable even, that banks will still exercise a lot more caution while lending to each other, but it shouldn't be as bad as it is now. Besides, inflation is up so it would be healthy to have a little less money being tossed around.
You've got to look passed the nose on your face - this will only lead to more irresponsible activity in the future with the knowledge that government will step in. It's that knowledge that got us here to begin with.
I do understand there's quite a bit of corruption in your government, but the people would benefit from this act regardless. I'm not sure about the details, it could turn out to be a rotten apple, but the basic concept is sound. 700bn is pretty minute when you consider it a productive investment, compared to a global depression.
The reason our economy grew so strong to begin with is because it WAS a free market. The more government meddles in it the worse it gets. It has to be allowed to operate freely. Companies have to be allowed to fail and collapse. We are spiraling down the road of socialism, and yes call me an idiot, but I would rather suffer a depression than leave a socialist country to my children.
That's the problem with you people, freedom is not free - it has a cost - are you willing to pay it? Most socialist liberals are not, clinging to the government tit, so to speak. Well all tits grow hard and leathery eventually.
This is all ASSUMING our economy can't right itself. It's all assumption and media hype. It could just as well rebound on it's own. You can not discount that.
All it takes is a nutcase. There's talk of tightening gun laws further here, something along the lines of restricting hand guns to shooting ranges so you couldn't take them to home (or more importantly, school) with you. I think it could work, illegal gun trade isn't much of a problem here and the only way the shooters of Kauhajoki and Jokela could've got their guns was through gun clubs, like they did.
Stop blaming the guns.
We are spiraling down the road of socialism, and yes call me an idiot, but I would rather suffer a depression than leave a socialist country to my children.
Finland is a better country to live in than the US is, and by your standards, we're a socialist country. So you my friend are are an idiot.
About the guns, we haven't messed up our shit like your lot has. In here, if you tighten gun laws, it actually becomes a whole lot harder to get one. If the two mass murderers were denied access to handguns, they couldn't have commited the shootings. They might've figured out a way to make a bomb or something like in 2002 when a student blew up 9 people and wounded 80 with an IED at a mall, but they wouldn't have shot anyone.
Finland is a better country to live in than the US is, and by your standards, we're a socialist country. So you my friend are are an idiot.
About the guns, we haven't messed up our shit like your lot has. In here, if you tighten gun laws, it actually becomes a whole lot harder to get one. If the two mass murderers were denied access to handguns, they couldn't have commited the shootings. They might've figured out a way to make a bomb or something like in 2002 when a student blew up 9 people and wounded 80 with an IED at a mall, but they wouldn't have shot anyone.
Yeah, I heard Finland also had a much stronger economy than the United States. It doesn't matter how satisfied you retards with with your socialism, it will never (statistically speaking, by the fucking way) be as well of as capitalism.
Man, you're intelligent. The government is just the answer to all your problems. No matter how strict your gun laws are, people will still manage to get guns. I would much rather have a chance of having someone near me that owns a gun who can stop a shooting than having a smaller (debatable) criminal owning a gun with no ordinary citizen with one.
I'm pretty sure the whole world would be safer if every single person carried a gun with them at all times than no one having a gun except the criminal who worked his ass off to get it.
About socialism, West Virginia is the most socialist state in the United States, and it managed to rank number one in neuroticism in a recent psychological study. Statistics and even psychology will tell you that socialism is complete rubbish compared to capitalism.
Finland has a population of 5,3 million while 305 million people live in the USA. According to a 2003 study Finland's relative poverty rate (post-transfer) is 3,1%, US's is 15,1% (Source: http://en.wikipedia.org/wiki/Poverty_in_the_United_States#Other_international_comparisons)
What you need to understand about guns is that there really is next to no gun related violence in Finland. It's about as likely to get killed by a meteorite as it is by a hand gun here. While there is an absolute shitton of guns available, about 1,6 million firearms in the country, almost all of them are hunting weapons and I can't recall a single incident in the past years involving one. We grew out of that Wild West phase.
I guess it's an american thing, to be completely incompetent at running nations. Just because you suck at it doesn't mean everyone else does. Bad socialism (USSR?) is really bad, but so is bad capitalism.
The only thing that will cause an American downfall is the institution of socialism. There is a good reason why the United States is the most powerful country, and Finland is not.
Basically, Finland sucks my dick.
http://andrewsullivan.theatlantic.com/the_daily_dish/2008/09/palin-on-russia.html
WHY ARE YOU A REPUBLICAN
When comparing the standard of living of citizens, the military strength or economic volume mean very very little. Who cares if you have the most expensive tanks or whatever if 15% of your population are under the poverty line?
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