I’ve been listening to Dodd’s Senate Banking Committee meeting with witnesses Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Christopher Cox and Director of the Federal Housing Finance Agency James Lockhart. The gist of the story is that Paulson wants Congress to give him $700B without providing even an initial plan, no organizational structure, no personnel (industry experts who got us into this mess in the first place), no definite structure for real accountability to the taxpayers, and no guarantee that the bad debt they are proposing we buy will ever return so much as even money, and no historical reference for which such a plan like this ever worked. In the past, when the U.S. government “bailed out” the Savings & Loans during 1987, they simply guaranteed the debt, they did not purchase it. But in this plan, we are actually buying bad mortgage-backed securities, hoping that the market will improve and the taxpayers will eventually be able to sell these securities off if and when the market improves and at least break even.
There were dire predictions from Paulson about what would happen if Congress didn’t act quickly. Freezing credit markets means no business-to-business loans, no loans to farmers, no loans to consumers for mortgages or other items, inflation, etc. “The sky is falling!” as Chicken Little would say. Well, all I can say is there are dire consequences if Congress acts imprudently and rashly, too. Obama’s statement about Iraq could be applied here as well: we must be as careful and thoughtful about getting out of this mess as we were careless getting in.
“I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets,” he [Cox} said. The debt insurance is known as credit default swaps. (http://news.yahoo.com/s/ap/20080923/ap_on_bi_ge/financial_meltdown)
As part of their very vague, generalized proposal, which can be boiled down to “Give us unlimited authority and all the money now, and we’ll figure it out as we go along, they propose a reverse auction method, meaning that instead of the buyers competing with each other to purchase the product (an auction), the situation is reversed, where there are no real buyers, only the taxpayers, and the banks are bidding to sell their bad debt x amount of the dollar to us. We are, for all practical purposes, buying their bad debt so that they can look more profitable. And there are, so far as I can tell, no provisions which prevent these banks from rewarding their personnel with bonuses, etc., or golden parachutes for the executives (there has been some discussion about this from the Senators, but not from Paulson).
Effectively, Paulson would be God of the Financial Universe, with no serious oversight from Congress, no real requirement for approval from Congress as to the structure, the regulatory rules, etc. In other words, no accountability to the American taxpayers. Paulson’s reasoning is that it takes too long for all that.
I find this rush to produce legislation with no serious controls over this new “agency” we are creating to be very troubling, to say the least. The last time there was such a panic, “rush, Rush, RUSH” with legislation was the Defense Appropriations of 2007, wherein there was a clause transferring the power to declare a national emergency and impose martial law from the Congress to the president, UNILATERALLY, with not even notifying Congress of the decision until it was made, forget advice and consent. That little gem still stands and has been joined by the FISA Amendment of 2008, which effectively relieves us American citizens of the burden of having the protection of the Fourth Amendment (warrantless search and seizure). So, when I see the rush-Rush-RUSH to Congressional action with this administration, I am, to say the least, mightily concerned, and my reflexive response is to say “NO WAY!”
“I understand speed is important, but I’m far more interested in whether or not we get this right,” said Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee. “There is no second act to this. There is no alternative idea out there with resources available if this does not work,” he added. (http://www.msnbc.msn.com/id/26850571#storyContinued)
I agree with Dodd.
While this was going on, “Vice President Dick Cheney and Jim Nussle, the administration’s budget director, met privately with restive House Republicans, some of whom emerged from the session understated.”
“Just because God created the world in seven days doesn’t mean we have to pass this bill in seven days,” said Rep. Joe Barton, R-Texas. (http://news.yahoo.com/s/ap/20080923/ap_on_bi_ge/financial_meltdown)
Rep. Barton speaks wisely in my view. And my own senator, Richard Shelby, who I normally have little agreement with, made what I consider a “spot-on” insight:
“Sen. Richard C. Shelby of Alabama, the panel’s senior Republican, was even more blunt. “I have long opposed government bailouts for individuals and corporate America alike,” he said. Seated a few feet away from Paulson and Bernanke, he added, “We have been given no credible assurances that this plan will work. We could very well send $700 billion, or a trillion, and not resolve the crisis.” (http://news.yahoo.com/s/ap/20080923/ap_on_bi_ge/financial_meltdown)
Senator Chuck Schumer (D-NY), in an exchange with Paulson, asked Paulson why they couldn’t accept a lower number that would get them through the first three months, which is when Paulson is due to report to Congress on how it worked. Schumer observed that, if the plan doesn’t work, they will be able to assess the damage in January and figure out what to do next at that time rather than handing Paulson the full$700B right now. Paulson admitted that the funds would be traunched (One of many influxes of cash that is part of a single round of investment.), but he wanted the full authority for all the money right now because it would restore market confidence.
I think that is absolute crap. Schumer’s proposal to give $150B for the next three months would be sufficient to get Paulson through this initial phase of the response to this debacle. And Schumer added that if there were a further and unforeseen market problem, the Congress could be called back in an emergency session to deal with the problem.
Paulson gave no concise, clear answers. He appeared to be totally unprepared to provide any vision of what he intended to do. This sparks absolutely no confidence in me that he is the man for the job. He may have a net worth of $500M, but being rich doesn’t mean you are smart at everything. He also could not provide any concrete suggestions of who he intended to call in to act as advisors or regulators for this project.
The bottom line is that he wants all the money, he wants it now, he doesn’t want to have any requirement or second-guessing from Congress, he wants no accountability for himself or this team if they screw it up, he has no guarantee that the taxpayers won’t get caught holding bad debt that can’t be recovered.
Further, he has no set of new regulations to propose by which to prevent further disasters like this. He intends to decide that later.
Everything about his attitude, his vagueness and lack of any substantial ideas in the committee hearing, the rush to judgment in moving legislation with a huge price tag and no real substantial controls – all of this smacks of a really, really bad idea. Not prudent, as Bush 41 would say.
It seems that Republicans are even more opposed to this than Democrats. I think Schumer has got it right. If it is, indeed, necessary at all to intervene in this market and purchase this bad debt to start a market recovery and avoid real disaster (and that is only a theory, not an absolute fact), then let’s try it for three months and see what happens. And let’s take our time in devising a plan that is carefully thought out with all the regulatory and oversight controls and mechanisms that we truly need to stop this problem cold and not see it continue.
Those who do not learn from history are doomed to repeat it. –
George Santayana quotes (Spanish born American Philosopher, Poet and Humanist who made important contributions to aesthetics, speculative philosophy and literary criticism. 1863-1952)