President Bush’s address tonight raises the stakes for the Mother of All Bailouts bill being crafted by Congress. The President, Paulson and Bernanke have talked all week about the seriousness of the situation, but by voicing their belief that not enacting a bill would be disastrous, they have set the stage for a panic if nothing is done:
The government’s top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:
More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.
If we don’t pass this, the Bush team tells us that banks will fail, the stock market will fall, your home value will plummet, businesses will close their doors, locusts will swarm and frogs will fall from the sky. Well, if everyone wasn’t in a panic before, they sure as hell are now. What are the odds that something gets passed? Well, with all that on the line, I’d say pretty damn good. Lord only knows what will be in it, but something will pass and Bush will sign it.
Bush at least gets some of the cause right:
Well, most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions — along with low interest rates — made it easier for Americans to get credit. These developments allowed more families to borrow money for cars and homes and college tuition — some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.
Well, sort of. Money flowed here because we ran huge trade deficits. If you send a lot of dollars overseas, they find their way back. They’ve got to use those dollars for something. And it was indeed easier to get credit; so easy anyone could do it at the low, low rates set by the Fed. And those jobs created were probably in things like home construction or real estate development or collateralized debt obligation manufacturing.
Bush did find the mark in singling out Fannie Mae and Freddie Mac as culprits:
Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.
The real problem is revealed:
Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system. In the short term, this will free up banks to resume the flow of credit to American families and businesses. And this will help our economy grow.
Maybe American families and companies shouldn’t be so dependent on another dose of credit. That’s the basic illogic in this bailout – we are trying to correct a problem of too much debt by encouraging banks to lend more money. So the answer to too much debt is more debt? The real problem of the US economy is that too many people think that credit is the thing that makes the economy go. Think about this for a minute. We have banks that don’t have enough capital to lend and the government’s answer is to give them some more. Doesn’t that seem stupid? Hey guys, I know you loaned that last bunch of dollars to folks who spent it on bricks and shingles that no one wants, but that’s okay, here’s some more. Please do better this time. That’s the plan? I’m sensing some gaps in the logic here; Spock would not like this plan.
Bush pushes off any reform onto the next occupant of the Oval Office:
Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we’ve seen how one company can grow so large that its failure jeopardizes the entire financial system.
We can only hope that the next President doesn’t over-do it, but that seems unlikely for a first-year, first-term President. Whoever it is will want to show that they are getting to work cleaning up America. And it doesn’t matter which one gets the job, either will ignore the real problem. We only need one real reform and that is at the Federal Reserve. The Commission for Manipulating Interest Rates needs to be disbanded and replaced with a large pile of gold.
The ironic thing is that I think this plan will probably work to accomplish what Bush, Paulson, Bernanke and apparently most other politicians want. If the Treasury pays enough for the mortgages, the banks will be recapitalized, at least partially and they will lend again. That’s what they do. And they’ve proven that when you give them free money, they will lend it to just about anybody. How much more debt our economy can handle and still function is unknown, but it appears we are about to find out.