Tag: Paulson

The Bush administration on so many fronts has been a step slow.

And in each case, the mix of indecision and outright incompetence has had dire results — Katrina, Afghanistan, infrastructure.

But, perhaps, nothing shows the failures of the administration so clearly as its its resposne to the housing crisis, which it has allowed to get out of control and emasculate the economy. It’s not as if the growiung number of foreclosures, especially in the sub-prime market, was a secret. There were congressional hearings last year and the issue came up during the primary season.

And yet, the administration managed to ignore it until forced to step in and save the lending institutions that acted irresponsibly — selling risky mortgages to homeowners that the banks should have known would default and then breaking the mortgages up and mixing them with other loans so they could be sold on the financial markets.

The plans, so far, have fallen far short of effectiveness, leaving housing prices to continue their downward spiral and taking with them the equity that homeowners were convinced would rise forever. That lost equity means an end to the house-as-credit-card mentality encouraged by the banks, an approach that put a lot of cash in consumers’ hands but masked some real economic problems that were brewing.

Yesterday, the administration unveiled yet another plan to address the crisis — what he called a “redefinition” of the poorly conceived $700 billion federal bailout.

In recasting the program, the Treasury no longer plans to buy troubled assets from financial firms, the idea initially presented to the country, but instead will offer aid to banks and other firms that issue student, auto and credit card loans in part by jump-starting the market that provides financing for these companies.

“This market . . . has for all practical purposes ground to a halt,” Paulson said at a news briefing. “Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”

The new old plan, however, will not assist the people hurting the most — homeowners. Protecting them directly — by extending unemployment benefits, imposing a foreclosure moratorium or other measures — will have to wait.

Paulson’s revisions followed Treasury’s announcement on Tuesday that it would streamline the mortgage process.

This program attempts to address that by using a simplified process for determining whether someone is eligible for a new loan. Instead of the standard cumbersome loan modification process, which can include reviewing a borrower’s credit report and tax returns, the new plan focuses on the borrower’s income and how much he or she can afford to pay. It also creates a formula for determining what a homeowner can afford, eliminating some guesswork.

Government officials said they expect the effort, dubbed the Streamlined Modification Program, to be able to help “hundreds of thousands” of homeowners.

But critics — including Federal Deposit Insurance Commission Chairwoman Sheila C. Bair — say the program doesn’t go far enough.

The plan announced Tuesday by federal officials and mortgage giants Fannie Mae and Freddie Mac sounds sweeping in its approach: Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable.

But there’s a catch. The plan focuses on loans Fannie and Freddie own or guarantee. They are the dominant players in the U.S. mortgage market but represent only 20 percent of delinquent loans.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., said the plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages.”

With the government spending billions to aid distressed banks, “we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans,” Bair said in a statement.

The New York Times was pretty blunt in its assessment, calling it “another too-little, too-late solution” and part of “the administration’s pathetic responses” to the crisis. The problem, according to the Times, is that the administration has been unwilling to intervene to prevent foreclosures while at teh same time “”intervening forcefully — using taxpayer dollars — on behalf of an ever-expanding cast of bailout recipients” in the financial sector.

That is a huge policy error. The whole point of the bailouts is to stabilize the financial system. But the system will not stabilize until house prices stabilize, and house prices will not stabilize until the government finds a way to stanch foreclosures on a large scale.

The Times offers an alternative: Use the bankruptcy courts.

As a candidate, President-elect Barack Obama favored amending the law so bankrupt homeowners could have their mortgages revised in court, an avenue currently denied them. The next Congress must move forward on the bankruptcy amendment first thing in January.

Hundreds of thousands of homeowners would qualify for bankruptcy, and hundreds of thousands more would be helped if lenders and investors opted to restructure bad loans rather than having to go to court. Better still, bankruptcy restructurings would cost the taxpayers nothing and concentrate the pain on those responsible: borrowers who took on more debt than they could handle, and lenders who made bad loans.

Bankruptcy offers other uses that would be more beneficial to the economy and the taxpayer, as former Clinton Labor Secretary Robert Reich points out:

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it – called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers’ heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn’t pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street’s major banks and insurance giant AIG are so important to the national and global economy that they can’t be allowed to fail, that doesn’t mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they’re taking now that taxpayers are bailing them out. But they’re the ones who took the risk. We didn’t.

A bailout in some form might be appropriate for the auto industry, “because two and a half million households depend directly or indirectly on them for their paychecks.” the best approach, however, is not a no-strings bailout but to put conditions on aid, Reich says.

In exchange for government aid, the Big Three’s creditors, shareholders, and executives should be required to accept losses as large as they’d endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.

Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.

So, enough with the free money to the monied classes. Enough with helping out the people who already have the cash, the people who made bad bets and awful business decisions. Let’s direct our efforts to helping the rest of us.

There was a time when Americans made things. People from Central Jersey still can remember the massive slogan on the Trenton bridge crossing the Delaware River on Business Route 1:

Trenton Makes The World Takes.

Installed during the 1930s, the sign could be said to have been the motto of every small to midsize city in the country for much of the last century — not only New Jersey cities like New Brunswick and Phillipsburg, but urban manufacturing centers like Youngstown, Ohio, and Gary, Ind.

That was during another time. Over the last three decades, as the writer Kevin Phillips pointed out to Bill Moyers on Friday, on Bill Moyers’ Journal, the nation’s manufacturing base, which had driven the economy, has atrophied. In its place, he says, you have a financial sector that has “hijacked the economy.” The rapid growth in the financial sector, combined with its political power and ties to the political establishment of both parties meant that it has come to control the political agenda.

This has been going on since the beginning of the 1980s. Finance has been preferred as the sector that got government support. Manufacturing slides, nobody helps. Finance has a problem, Federal Reserve to the rescue. Treasury to the rescue. Subsidies this, that, and other.

So bit by bit, they got bigger.

And as the industry has gotten bigger, its hold on political power has grown — with friends in high places like Federal Reserve Chairman Alan Greenspan and the various treasury secretaries who have served since the 1980s, including Bob Rubin under President Bill Clinton.

And as it has gotten bigger with its tentacles reaching deeper into the national economy, the sector’s health has become conflated with the health of the overall economy — which is where Treasury Secretary Henry Paulson’s bailout plan comes in.

Paulson, speaking at a Senate hearing on Tuesday, said that the proposal he announced last week was designed to “stabilize our financial system” to “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy.”

He described his plan as a

a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.

The market turmoil we are experiencing today poses great risk to U.S. taxpayers. When the financial system doesn’t work as it should, Americans’ personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.

The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system. I am convinced that this bold approach will cost American families far less than the alternative a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.

For Paulson, speed is of the essence. He said Congress needed

to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don’t have broad support. This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy.

But is it? Senators on the Senate Banking Committee were not so sanguine about the possibility of handing over nearly a trillion dollars to the financiers who drove the bus off the cliff, especially when many of the CEOs of the failing banks and investment firms were walking away with juicy compensation packages as the people they lent money to were being asked to leave their homes.

Sen. Jim Bunning, a Kentucky Republican, called the plan “financial socialism” because it would “take Wall Street’s pain and spread it to the taxpayers.”

And Sen. Chris Dodd, D-Conn.,

called the crisis “entirely foreseeable and preventable, not an act of God,” and said that it angered him to think about “the authors of this calamity” walking away with the usual golden parachutes while taxpayers pick up the bill.

“There is no second act on this,” Mr. Dodd said, acknowledging that speed was important. But it is more important, he said, “to get it right.”

Matt Rothschild, editor of The Progressive (disclosure: I write for Matt through the Progressive Media Project), called the bailouts “socialism for Wall Street.” The bailouts of AIG, Bear Stearns, Fannie Mae and Freddie Mac will not “help the people who are hurting in this country, especially the people who are being foreclosed upon.”

For less money, Washington could have backed their mortgages and let them stay in their homes. It could have marked the mortgages down by 25% or so, since the homes were overvalued. But this would have made it easier for people to make their payments, and the government also could have frozen the increase in the subprime rates that were killing the homeowners.

Since the housing sector was at the epicenter of the financial crisis, the government’s backing of individual mortgages could have lent some stability to the industry, and put an orderly floor on the deflation. This could have stanched some of the bleeding at the investment firms that had recklessly bet on the housing market, as well.

But rather than put the individuals first, the government has put Wall Street first.

And that’s socialism for the greediest, not the neediest.

Gretchen Morgenson, a business writer for The New York Times, was just as critical during an interview on Friday’s Bill Moyers’ Journal:

The ugly thing about this is this is privatizing gains and socializing losses. So when things are going well, the managements make out, the shareholders make out, the counterparties are fine. All the private sector people do well. But when something goes wrong, when decisions are made that turn out to be bad decisions, the U.S. taxpayer has to take on the problem.

And there’s something very wrong about that. Because all of those people that made all that money are running off here into the distance with the money, carrying it in
their bags. And the United States taxpayer is on the hook.

This is reason enough to slow down. Bob Herbert, writing in The New York Times, acknowledges that “the system came perilously close to collapse last week and needs to be stabilized as quickly as possible.”

But we don’t know yet that King Henry’s fiat, his $700 billion solution, is the best solution. Like the complex mortgage-based instruments at the heart of this debacle, nobody has a real grasp yet of the vast implications of Mr. Paulson’s remedy.

Experts need some reasonable amount of time — I’m talking about days, not weeks — to home in on the weak points, the loopholes, the potential unintended consequences of a bailout of this magnitude.

The patchwork modifications being offered by Democrats in Congress are insufficient. Reasonable estimates need to be made of the toll to be taken on taxpayers. Reasonable alternatives need to be heard.

And they need to be heard precisely “because the people who have been running the economy for so long — who have ruined it — cannot be expected to make things right again in 48 or 96 hours.”

Mr. Paulson himself was telling us during the summer that the economy was sound, that its long-term fundamentals were “strong,” that growth would rebound by the end of the year, when most of the slump in housing prices would be over.

He has been wrong every step of the way, right up until early last week, about the severity of the economic crisis. As for President Bush, the less said the better.

The free-market madmen who treated the American economy like a giant casino have had their day. It’s time to drag them away from the tables and into the sunlight of reality.

And they should be made to pay. In the end, any bailout package has to be structured to protect taxpayers and homeowners and not reward companies and CEOs who made bad bets — as Dean Baker wrote earlier today.

The bailout has to be painful, it is not supposed to be a reward for ridiculously overpaid executives who pushed their companies to the edge of bankruptcy. If the government’s purchases of bad debt were tied to serious restrictions on executive compensation and the forced sale of equity to the government, then only banks that really needed the money would line up for the bailout. Under these terms, we could include whatever assets the Wall Street boys and girls want to sell.

I want to go back the Trenton Makes bridge and our history as a manufacturing nation for a second. The textiles, iron works, furniture, automobiles and other goods produced by American workers in the past were a tangible product of the money invested by the financial industry. What has happened to our economy is that we have replaced our productive investments with what many commentators have called an elaborate pyramid scheme in which money is moved from account to account, increasing in value without creating anything productive.

Once the foundation of the pyramid is exposed as a fake, the entire thing comes crumbling down. My fear is that’s what’s happening, that there is little we do will prevent the collapse and the best we can hope for is to craft measures to make it as painless as possible.