Bush and Paulson's financial bailout must be stopped

Last March I posted a proposal on this website calling for urgent action to be taken in order to prevent the subprime crisis from developing into a general financial crisis. (See the proposal here.) Needless to say, my warning wasn't heeded, and now we have a situation where we are being told that without a $700 billion giveaway to Wall Street the financial system will collapse. We are being told it has to be done immediately and that Treasury Secretary Paulson must have complete discretion to decide how much to pay his old Wall Street buddies for their toxic mortgage assets. If we don't stop this we are sure to plunge ourselves into another depression, only this time the bankers won't be jumping out of windows but rather jumping for joy.

The plan worked out by Paulson's Treasury Department and the Federal Reserve centers around a "reverse auction" of the toxic mortgage assets (and perhaps other bad assets), whereby financial institutions would name their own price for the assets they want to dump, and Paulson will purchase as many of the assets as he can with the $700 billion. On the surface the auction would have a competitive nature, but there is no mechanism to keep prices near their market value and every incentive for the sellers to overprice them. The amount of money at Paulson's disposal is enough to purchase all the toxic mortgage assets from the eligible banks at or near book value, thus shifting most or all of the losses from the private banks to the tax payer. Moreover, Paulson's plan makes no attempt to punish those responsible. This plus the other bailouts announced over the summer will cost each family of four about $13,000, while the corporate criminals responsible will be able to go on rewarding themselves with multi-million dollar pay packages.

This kind of bailout will overwhelm the government's finances and force it to cut needed spending. National health insurance will become impossible for at least another generation. We'll have to forget about investing in new clean energies. Because the bailout proposed by Paulson does not protect people from foreclosures, we will continue to see a rise in people without homes and homes without people. Prices will rise, consumer spending will fall, companies that actually make things will go bankrupt for lack of customers and their employees will lose their jobs. There will be a great depression. Paulson and Bush and Bernanke want to stampede us, saying that there is no time and we have to do something. But make no mistake, it would be better to do nothing than to completely sell ourselves out to Wall Street masters.

This is not to say that there is nothing we can do. To address the immediate problems of the financial system, we need to conduct prompt and thorough audits of our banks and insurance companies in order to ascertain the value of their assets. Those institutions that have debts in excess of their capitalization should be seized by the government and either liquidated or put into receivership. Undercapitalized institutions would have to take steps to bolster their capitalization or risk a partial government takeover. Other institutions should be allowed to sell their toxic subprime assets to the government AT MARKET PRICES, which would be a small fraction of the book values. The securitized subprime assets would be unbundled and the government would renegotiate the terms of the loans so that homeowners will be able to make payments. The banks and insurance companies who sell their loans to the government must agree to several conditions, including a cap on executive salaries of no more than the salaries of the President of the United States, the Vice President, or other corresponding government executives. Also, all banks and insurance companies must be required to set up and contribute to a fund to reimburse the taxpayers. Executives at companies that required tax payer assistance should be sued and the pay they received during the years their companies were engaging in the practices that produced the current crisis should be forfeited into the taxpayer reimbursement fund. Also, contributions to the fund will have to take priority over paying dividends to shareholders. Hedge funds should be investigated for wrong doing and provided with no assistance should they fail.

What is happening is an economic 9/11 and it is being exploited as shamelessly by our politicians the first 9/11. If we let them get away with it again, our future will be very bleak indeed.