|
Received this in an Email this morning wanted to share with you all.
*** Stop the Housing Bailout's main site has been temporarily moved here ***
Americans are sick and tired of politicians rushing to the aid of their
wealthy friends and backers, to the detriment of the mainstream
citizens who voted them into office. Nonetheless, this discord and
disappointment very rarely translates into action on the part of
constituents. Over the past week, however, torrents of constituents of
all political persuasions greeted their representatives with a tidal
wave of sentiment against a proposed bailout of Wall Street banks. And
in a shocking turn of events – the majority of politicians listened and
killed HR 3997 on the floor of the house.
Garbage In; Garbage Out
Make no mistake, this was not some knee jerk reaction by politicians
who were merely expressing the populace’s very real disdain for Wall
Street and their excessive pay. No, there were very real and very
significant flaws with the Emergency Economic Stabilization Act of 2008
(“HR 3997”) that prevented a consensus in the House.
Foremost, the proposal was garbage because it was based on garbage. The
three-page proposal sent to Congress by Secretary Paulson would be
funny if he had not been serious; it was doomed to failure from the
start. It gave the Secretary complete, unfettered control over the
United States economy – and with no oversight from any commission,
court, or the Congress.
Unfortunately, and as so often happens
in these situations, Congress took Paulson’s fatally flawed bill as a
“starting point” for its own legislation. This was a incredibly bad
idea. As the saying goes, “garbage in, garbage out.” And the Paulson
plan was the worst kind of garbage.
Five (Plus) Necessary Components of Any Bailout Bill
* Mandatory and enforceable equity stake, via warrants or other mechanism, in companies helped;
*
Mandatory and enforceable requirement that any securities purchased by
the Treasury are bought at “mark to market” rather than “mark to
maturity” prices;
* Lower initial layout by taxpayers, optimally
no taxpayer money at risk through an alternative program, e.g.: a
short-term (two years or less) government guarantee of all banking
deposits, covered bonds, senior debt, and dated subordinated debt;
*
Mandatory independent oversight of all actions by the Treasury
Secretary under the bill – optimally manned by a commission composed of
a majority of economists – not political appointees or Wall Street
lackeys (or both); and
* Mandatory and enforceable controls over executive pay and stock options for all employees of firms helped.
* Please also review Denninger's thoughtful plan to restore confidence to the markets!!!
Five Reasons the Bailout Had to Fail
I. No Effort – NONE – to Change the Risk Game
·
The past decade of industry self-regulation has proven that the model
is worse than ineffective in preventing excessively risky behavior – it
actually promotes such behavior
· Despite its huge payoff to
Wall Street, the bill has absolutely no provisions to curb the behavior
that brought us to this point
· It is a toothless tiger
II. Insufficient Limitations on Executive Branch Power
· The bill ceded unprecedented power from the Congress to the Executive Branch, with insufficient controls and limitations
·
The sole check on the Treasury Secretary was a commission composed
entirely of government and industry outsiders – no outside voices from
experts who did not have a conflict of interest with Wall Street
·
Congress would have no control over the securities purchased by the
Treasury Secretary, and the bill gives the Secretary discretion to buy
ANYTHING, ANYWHERE, ANYTIME
· Fed Chairmen Bernanke has already
signaled that he believes the government should pay “mark to maturity”
prices for these securities rather than “market prices” – in other
words, he wants to pay MORE for the securities than they are worth
III. A Ginormous “Moral Hazard”
·
The bailout would have transferred enormous wealth from taxpayers to
those who knowingly engaged in risky behavior. Thus, the bailout
encourages companies to take large, imprudent risks and count on
getting bailed out by government. This "moral hazard" generates
enormous distortions in an economy's allocation of its financial
resources
· The bill rewarded those in Wall Street who knowingly
took risks and failed – the very nature of the relationship between
“risk” and “reward” demands that risk takers incur any losses that
their risky behavior effects [make no mistake, Wall Street profited
handsomely for the past decade from its risks]
· As a result,
the bailout would encourage companies to take larger risks in the
future, because they know the government will bail them out
· Those who took no part in the past rewards would be required to foot the bill for the risktakers.
IV. Bad Economic Policy
·
Mark to maturity is just plain bad policy and is unabashed gift to the
Wall Street bankers (Bernanke should be ashamed of himself)
· HR
3997 – alone – would increase the national debt by almost 10%. Which
begs the question: how are we going to pay for this? The answer is
money borrowed from other countries, which means we will have debt
service on these loans. Worse, this perpetuates the cycle that started
this mess: people (countries) borrowing more money than they can
possibly repay
· The bailout bill had NO requirements that
protected taxpayers – any purported protections were illusory because
they were merely “optional.” Mandatory warrants or equity stakes in the
companies that are helped could have solved this problem.
· A
bailout of this proportion would severely, and perhaps irreparably,
damage the “free market superpower” image of the United States abroad,
thereby diminishing other countries’ willingness to follow our “model”
or lend us money
· Two-hundred of the top economists in the
country have attested, the bailout is flat out bad economic policy that
– like so many politically expedient bills – puts short term relief
above long term prosperity. As a result, the private capital markets
will be substantially weakened in the long run. (See this statement by
almost 200 top economists)
V. Foreclosures Are NOT The Problem
·
The bill’s attempt to help homeowners facing foreclosure is laudable,
but misdirected. The simple fact is that foreclosures are a necessary
component of this housing correction because HOUSING PRICES ARE TOO
HIGH RELATIVE TO INCOMES.
· The disconnect between house prices
and income was a direct result of lending standards that became so lax
that anyone with a heartbeat could get a loan. Congress – and
particularly Rep. Frank – pushed lax lending standards on the premise
that homeownership would help lift constituents out of poverty. But the
reality is that you help no one by loaning them money to buy homes that
they cannot possibly afford.
· Trying to help people stay in
homes that they cannot afford (and never could) will only prolong the
housing downturn. Forestalling foreclosures artificially maintains
housing prices that need to correct.
· The sooner that banks,
home-borrowers, and politicians realize that the housing prices of 2002
through the present were “bubble prices” the sooner the housing market
can correct and the pain will stop.
*** We still need action to make sure Congress hears these issues ***
Please go to the main STHB site and use the resources it provides to contact your representatives!!!
|