Tuesday, October 7, 2008

360 In-depth: Reasons Not to Bail Out Wall Street, Part 3

A summary of what you need to know about the bailout from previously posted parts 1 & 2

First some very hard facts: The Federal Reserve is divided into 12 regions. All but one is financially sound: The New York Federal Reserve Banks because of unsound financial decisions based not only on corporate and political welfare, but also greed and speculative loans. These loans, as demanded by Democrats Pelosi, Waxman, Reed, Frank, et al., forced Freddy Mac and Fanny Mae to practically give away home loans to low income families who would never be able to afford them - subprimes. The U.S. Attorney at that time, Janet Reno even threatened banks if they didn't comply. No wonder hundreds have defaulted! The only one untouched is Sallie Mae.

Demos orchestrated this free money give away for the same reason as they always do: TO BUY BLACK AND MINORITY VOTES. Dispite the Bush administration's warning that Freddy and Fannie need revamping, Demos continued to follow through with offering these subprime loans complaining that blacks and minorities were being redlined - calling Bush a racist. The only racists I see are the Demos who try to buy votes in exchange for using tax payer money to keep them in office. The Republicans like cheap labor, a shame to be sure, but the idea that Demos like cheap votes just got very expensive - about $700 billion to be exact.

The bailout will save the banks of New York Federal Reserve members and reward them for poor judgment and bad behavior. In the meantime and as a result, the dollar has lost half its value.

America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because we no longer have a free and responsible press.

The 20th century proves that the market is likely to know better than a central planning bureau. It was Soviet Communism that collapsed, not American capitalism. However, the market has to be protected from greed. It was greed, not the market that was unleashed by deregulation during the Clinton and George W Bush regimes.

The Paulson bailout saves his firm, Goldman Sachs. The Paulson bailout transfers the troubled financial instruments that the financial sector created from the books of the financial sector to the books of the taxpayers at the US Treasury.

This is all the bailout does. It rescues the guilty.

The Paulson bailout does not address the problem, which is the defaulting home mortgages.

The defaults will continue, because the economy is sinking into recession. Homeowners are losing their jobs, and homeowners are being hit with rising mortgage payments resulting from adjustable rate mortgages and escalator interest rate clauses in their mortgages that make homeowners unable to service their debt.

Shifting the troubled assets from the financial sectors' books to the taxpayers' books absolves the people who caused the problem from responsibility. As the economy declines and mortgage default rates rise, the US Treasury and the American taxpayers could end up with a $700 billion loss.

Since Paulson's bailout of his firm and his financial friends does nothing to lessen the default rate on mortgages, how will the bailout play out?

If the $700 billion bailout is based on an estimate of the current amount of bad mortgages, as the recession deepens and Americans lose their jobs, the default rate will rise. The $700 billion might not suffice. The Treasury will have to go hat in hand to its foreign creditors for more loans.

As the US Treasury has not got $7, much less $700 billion, it must borrow the bailout money from foreign creditors, already overloaded with US paper. At what point do America's foreign bankers decide that the additions to US debt exceed what can be repaid?

This question was ignored by the bailout. There were no hearings. No one consulted China, America's principal banker, or the Japanese, or the OPEC sovereign wealth funds, or Europe.

Does the world have a blank check for OUR mistakes?

This is the same world that is faced with American demands that countries support with money and lives America's quest for world hegemony. Europeans are dying in Afghanistan for American hegemony. Do Europeans want their banks, which hold US dollars as their reserves, to fail so that Paulson can bail out his company and his friends?

The US dollar is the world's reserve currency. It comprises the reserves of foreign central banks. U.S. economic policies are destroying the basis of the US dollar as reserve currency. The day the dollar loses its reserve currency role, the US government cannot pay its bills in its own currency. The result will be a dramatic reduction in US living standards.

Currently Treasuries are boosted by the habitual "flight to quality," but as Treasury debt deepens, will investors still see quality? At what point do America's foreign creditors cease to lend? That is the point at which American power ends. It might be close at hand.

The treasury secretary would become
a more powerful - and unaccountable - figure
even than our powerful &
unaccountable president.
And, as such, he would be operating in
direct conflict with the Constitution.

The Paulson bailout is predicated on cleaning up financial institutions' balance sheets and restoring the flow of credit. The assumption is that once lending resumes, the economy will pick up.

This assumption is problematic. The expansion of consumer debt, which kept the economy going in the 21st century, has reached its limit. There are no more credit cards to max out, and no more home equity to refinance and spend. The Paulson bailout might restore trust among financial institutions and enable them to lend to one another, but it doesn't provide a jolt to consumer demand.

Moreover, there may be more shoes to drop. Credit card debt could be the next to threaten balance sheets of financial institutions. Apparently, credit card debt has been securitized and sold as well, and not all of the debt is good. In addition, the leasing programs of the car manufacturers have turned sour. As a result of high gasoline prices and absence of growth in take-home pay, the residual values of big trucks and SUVs are less than the leasing programs estimated them to be, thus creating more financial problems. Car manufacturers are canceling their leasing programs, and this will further cut into sales.

According to statistician John Williams, who measures inflation, unemployment, and GDP according to the methodology used prior to the Clinton regime's corruption of these measures, the US unemployment rate is currently at 14.7% and the inflation rate is 13.2 percent. Consequently, real US GDP growth in the 21st century has been negative.

This is not a picture of an economy that a bailout of financial institution balance sheets will revive. As the Paulson bailout does not address the mortgage problem per se, defaults and foreclosures are likely to rise, thus undermining the Treasury's estimate that 90 percent of the mortgages backing the troubled instruments are good.

Moreover, one consequence of the ongoing financial crisis is financial concentration. It is not inconceivable that the US will end up with four giant banks: J.P. Morgan Chase, Citicorp, Bank of America, and Wachovia Wells Fargo. If defaulting credit card debt then assaults these banks' balance sheets, who is there to take them over? Would the Treasury be able to borrow the money for another Paulson bailout?

An alternative to refinancing troubled mortgages would be to attempt to separate the bad mortgages from the good ones and revalue the mortgage-backed securities accordingly. If there are no further defaults, this approach would not require massive write-offs that threaten the solvency of financial institutions. However, if defaults continue, write-downs would be an ongoing enterprise.

Clearly, all Secretary Paulson thought about was getting troubled assets off the books of financial institutions.

And finally, consider this:

Under Paulson's bailout plan, Congress and the courts have been barred from reviewing or challenging his moves to stabilize financial markets - effectively making him the nation's economic czar.

That's not just a dangerous power grab for economic and politic reasons. It's unconstitutional.

Paulson's power grab was specifically spelled out by the treasury secretary in Section 8 of his proposal, which read: "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."

The treasury secretary would become a more powerful - and unaccountable - figure even than our powerful and unaccountable president. And, as such, he would be operating in direct conflict with the Constitution.

The nation's essential document makes it clear that every member of the executive branch is subject to legislative and judicial review.

Congress cannot delegate its oversight authority to a cabinet member, even in a time of turmoil. The opening section of the Constitution gives all -- emphasis on all -- legislative authority to the House and Senate. Under the well-established constitutional doctrine of nondelegation, Congress cannot cede that power in the manner that Paulson's draft plan proposed -- or, for that matter, in any manner whatsoever.

The same reckless leadership (I'm including Demos and Republicans) that gave us expensive wars based on false information, handouts to minorities, ridiculous entitlements, makes a joke out of affirmative action has now concocted an expensive bailout that does not address the problem, which will fester and become worse.


Sources: Wall Street Journal, Barrons, Leer Financial

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