The government has now approved a record $700 billion plan to try to stabilize US–and world–financial markets. The plan is not a total bailout as the media describes it; it is more of a government purchase of the stock of failing companies. The government is expecting a return on it’s investment, and, who knows, perhaps Uncle Sam will actually make money on this “deal.”
Of course, the government is doing the negotiating, so instead of using leverage to buy anything worthwhile, such as the senior preferred stock that Warren Buffet gets when he takes over a company (senior preferred stock gets paid first when dividends are awarded) the feds are getting non-voting stock. There is also no mandate that the stock be bought back, which means that a portion of the $700 billion will go to lobbyists maneuvering to have the stock perpetually “floating” so that it’s never actually repaid.
The extent of the global crisis, and the effect American markets have on the world, can be seen by the half-point interest rate cut instituted today by the Federal Reserve and five other central banks, the Bank of England, the European Central Bank, and the central banks of Canada, Switzerland, and Sweden, in a coordinated move to stimulate economic market.
The U.S. plan can now be compared to today’s announcement that the U.K. will offer the country’s major banks a rescue plan in exchange for preferential shares that will be benefit the taxpayer. The terms of the plan are still unclear: Fox News reports that the U.K. plan totals $87 billion, while BBC News reports that the plan could total 880 billion in U.S. dollars. Despite that the plan was announced today, the BBC News article contains highlights of the plan and a chart for how the plan could work. The article provides a clearer picture of the U.K. bill than most U.S. citizens have seen for the bill that took Congress two weeks to pass. The British policy demonstrates a clearer philosophy and more orchestrated plan than the bill that is now U.S. law.
I’m not an economist, but a plan that rewards bad behavior doesn’t sound like good government. The CEOs made risky investments. Some of those risky investments were government mandated, as the Clinton administration, and later Obama and the people’s friend Barney Frank, mandated that companies provide “affordable housing” by giving a percentage of their loans to people with credit scores, credit history, and paychecks that said they were unlikely to be able to make good payments. Since the government is a culprit, the government does need to be part of the solution, and the government does have to interfere with the economy to fix a mess it helped to create.
But the government didn’t mandate all of the risky investments. The Board of Directors’ made many supposedly “risky” decisions. But the decisions weren’t really risky. During the economic boom, they profited as the investments panned out. Now that the economy has slowed, the investments aren’t panning out. That doesn’t mean the investment was risky: under this plan, the CEOs get bailed out and still keep their profits. If they’re fired they get parachutes and are still rich. If they are kept on, their salary is limited to $500,000 per year. The average American sure would think they were in a risky situation with those prospects.
Why should the government save the failing companies? The argument is that the economy will fail if the market loses essential services, and that those services are fundamentally important to the economy. These companies aren’t the only one’s capable of rendering the services, however. By rescuing the companies, the government is preserving both the good, necessary services and the bad ones that got us into this mess: and even if the company has to sell off assets and subsidiaries to pay back stock, the bad practices continue.
Instead, the government could allow the companies to fail. When they fail, the essential services can be identified. The government can then give assistance to a new company, which agrees to adopt to liabilities and obligations of the defunct company that are deemed to be essential to the economy in exchange for the government purchasing stock to get the company started. Since the government has no business owning company stock, the stock could be tendered to the taxpayer as a tax rebate.
The taxpayer could then buy more stock, sell the stock for cash, or discover that they finally have an opportunity to enter the stock market. The government has spent comparatively little money to the current $700 billion plan, the CEOs have learned that risky investments do still exist, the essential economic practices continue, the taxpayer has a rebate to put into the economy, a new company is born, and the government is back out of the way.
I’m no economist, but it sounds like good policy if the economists could work out the details with Washington. Until economists have more input on the plans, and philosophy comes back to our government, we’ll continue towards becoming the S.U.S.A.: the Socialist United States of America
Aberdeen Resident says
You are kidding right?
“as the Clinton administration, and later Obama and the people’s friend Barney Frank, mandated that companies provide “affordable housing” by giving a percentage of their loans to people with credit scores, credit history, and paychecks that said they were unlikely to be able to make good payments.”
What kind of crack are you smoking.
You mean the “Clinton administration” that managed to balance the budget and the “Obama”, who is but one vote amongst hundreds of senators, are personally responsible for the mess we are in now?????
And the current administration had nothing to do with it?
Brian Young says
President Carter instituted a limited “affordable housing” program to give loans to some lower income Americans. President Clinton signed a law that greatly expanded the program. The program required lenders to give a percentage of their loans without considering credit scores or income. This is federal law.
This is a fact that you should research prior to augmenting your counter argument with personal attacks… even meant as a joke, it doesn’t help your position.
There are many people who are responsible. Clinton and the Democrats’ “affordable housing” are some of the responsible parties. It doesn’t mean that Clinton didn’t do some things that were good; to say that it does is illogical.
The current administration didn’t do what it should have to stop it. The administration, and John McCain, did support a bill to regulate Fannie and Freddie that would have decreased the “affordable housing” to manageable levels, but Obama opposed it and Barney Frank specifically stated that it would negatively impact “affordable housing.” Of course it would, it was getting rid of the problem.
Obama is one of the people who are personally responsible. Why did I identify him out of those 100? Because he’s the one running for president who supported affordable housing!
This administration has had many flaws, and not pushing harder on this legislation is high on the list. Identifying some of the sources of the problem doesn’t say that anyone else is innocent. It is, however, an attempt to identify how to rectify the situation and how to keep us from repeating our mistakes.
Bel Air Resident says
Yes, that Clinton administration. Hillary isn’t going to be president now, remember? There was one Clinton administration.
The Clinton administration that balanced the budget, sent troops to Kosovo, didn’t spend $100 trillion on a mission to mars, didn’t stop Saddam from violating agreements… what does anything else the Clinton administration did that didn’t impact the current meltdown have to do with it?
The Clinton administration did many things, and one of them helped get us in this mess!
Aberdeen Resident says
Actually this whole mess started with the repeal of the Glass-Steagal act. While this legislation was signed into law during the Clinton Administration, it was done so with the knowledge that it was Veto-proof by the Republican stronghold in Congress at the time.
You can thank Phil Gramm (R-TX) and James Leach (R-IA) for this mess.
This is what happens when you deregulate the banking industry.
You are correct – I’m sure Democrats, Clinton, Obama, etc. had something to do with this mess. However, there is no doubt that so di Republicans, McCain, etc. After all, when the affordable housing stuff came about Repubs controlled the House AND the Senate.
So, we can agree that both parties have some sort of hand in this mess. However, what strikes me, is that your analysis is totally one-sided in pointing the finger at Democrats, but not Republicans, when both are at some fault. When I see something like this in a piece of writing, I immediately stop reading becasue I know it’s just going to be an editorial puff piece and not a balanced analysis.
BTW, I am an Independent.
Brian Young says
My analysis contains one paragraph that mentions one of the causes that got us here. The article was long enough as it was, and the point was to demonstrate that the government is one of the culprits. The example I used was an easy example to do so.
If we can all agree that the government was partially responsible, and that both parties messed up, the point still stands.
How can the mess be fixed? How do we get the economy moving again? Would the plan I suggested have been any better than the one that is now law?
Um, this country is nowhere near socialism and while I don’t love the bailout, taking a step like this to stabilize the financial markets of the U.S. and the world is not socialism. Socialism involves “government ownership of the means of production or distribution of goods.” There are no goods involved, just money. This is capitalism at it’s worst.
These banks investing in unstable mortgages should have known that their profits weren’t long term or sustainable; however, all they cared about was their quarterly profit and giving out more loans increased their profit. While the government didn’t do anything to stop it (both Republicans and Democrats), it’s the short-sightedness of the financial sector that caused this. Any halfway insightful person could have looked at these mortgages being given and known they would not be paid, even if they didn’t realize it would happen to the extent it did. I think folks are also placing too much blame on the people getting these mortgages; I know of several people who are in bad mortgages and it wasn’t because they’re greedy or stupid – they just trusted the wrong people and didn’t do the research. One friend who bought a house with a normal 30-year fixed mortgage almost got an adjustable rate one because both the realtor and the bank said it was no big deal, she could just refinance later on.
Both sides are to blame but Clinton raped the benefits from Reagan Economics which takes approx eight years to see the full effects of any economic plan. So Reagan made Clinton look good. Now Bush is seeing the effects from Clinton, along with the expence of a war he got handed to him, 9/11 clean up, and more national disasters than I have ever seen in my life time due to mother nature. Also after Carter and Clinton, both democrats, cut our defense programs, he needed to start new security programs and repair the old. Four years ago, when the economy was still strong, people wanted more, so they voted in the Democrats to congress and the senate. Since then, nothing has gotten done! They will block everything just because! I guess that was the change the people wanted. Lets do nothing!!!
Ninja Panda says
The End of American Capitalism?