Posts Tagged ‘TARP’

Nouriel Roubini was one of the few people who very accurately predicted our current economic meltdown.  Recently he wrote that the cause of the meltdown was “the bursting of a huge leveraged-up credit bubble”.  He goes on to say in this recent article that he believes the economy will get worse before it gets better. The question we should be asking ourselves is why? We know that the nation’s banks made terrible decisions about granting credit, not only for houses, but also for credit cards, auto loans, furniture loans – you name it. If you could walk and breathe you could get credit to buy almost anything. In retrospect the result of all of this is obvious: a lot of people who couldn’t possibly pay back their loans didn’t pay back their loans.  For a long time the banks new that they shouldn’t give loans to non-creditworthy people, so why did they change their minds? The banks had found a way out of their potential liability – they sold the loans. A whole industry of derivatives and credit default swaps emerged.  Loan obligations were sliced and diced and sold and resold and insured and eventually very few people in the banking industry actually had the ability to understand the true value of the new derivatives they had created.

There was one other really bad problem with these loans – they had exhorbitant interest rates.  Even people with good credit would have had a hard time making the required payments. As Roubini said, it was a bubble, and it has burst with devastating results.  The Secretary of the Treasury raced to solve the problem of our collapsing banking system (they had loaned out their money and it wasn’t being paid back) by creating the TARP fund, a $700 billion government fund that was a way to funnel money to banks. About half of that money has been doled out, but the economy is still on the ropes.  Why? Because the banks have their money back, and they have no desire to loan money in this economy! Who would? So we sort of have an economy of self-fulfilling prophecies where the banks are afraid to loan money to businesses because they don’t thinks the businesses will be able to pay them back and businesses are  failing because they can’t borrow any money and the banks are saying, “See, we knew they would fail!”

Our banking system has gone through many incarnations since the U.S. began. The current system of a U.S. Treasury and a Federal Reserve that works with private banks is a cobbled together operation that has certain weaknesses, like a propensity to creating credit bubbles and to creating what we have now: a credit vacuum.  It is time we took another look at the structure of our banking system, particularly with regard to creating a new type of bank, a Federal Direct Loan bank that would issue loans directly to consumers at low interest rates. This bank would compete with the private banks and keep them honest.  It would also be a lender even in the most difficult times, ensuring that individuals and businesses could obtain credit and therefore ensuring that the economy would continue to function even when the wealthy private bankers have decided that they don’t want to play.

Something tells me that this would not be a popular idea on Wall Street, but I’m guessing it might fare better on Main Street.

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A couple of months ago Secretary of the Treasury Paulson told us the sky was falling and convinced Congress to approve the $700 billion TARP (Troubled Assets Relief Program).  The TARP would buy up all the toxic mortgages that the banks had created out of their failed attempt to satisfy their insatiable greed.  You will recall that these mortgages were given to people who often didn’t have a job and had no ability at all to repay the loans.  These loans were provided by the banks at exorbitant interest rates because the geniuses at the banks (they must be geniuses – they make $30 million or more a year in salaries and bonuses) believed that they could either flip the mortgages to some unsuspecting investors and make a huge profit, or they could hang onto the mortgages and squeeze the lifeblood out of the poor homeowners and still get astonishingly fabulous profits.  It turns out that the bankers were wrong on both counts and the banks wound up holding stunningly massive amounts of absolutely worthless mortgages (also known as Troubled Assets).

Today, Mr. Paulson advised us that regarding the TARP, he is no longer for it. He was for it, but now he’s against it. The TARP, also known as the bank bailout in Democratic circles, would not be used to buy mortgages after all – sorry Congress.  Hey, don’t get mad – it’s only $700,000,000,000.00.  Despite Congresses instructions, the money is now nothing more than a gift to the banks who can now do whatever they want with the money.  Right now they are sitting on it.  Sec. Paulson hopes, but he isn’t sure, that they will lend the money via credit cards or other loan instruments.  (I guess, if all goes well, these new loans will be at the usual extremely high, usurious, gotcha interest rates that will punish the borrowers as much as possible without actually killing them – because of course dead people can’t repay a loan.)

Our President and his administration like to think of themselves as pure Capitalists.  They put their faith in a banking system that is self-regulating, an economy of no rules, an economy that takes no prisoners and where only the strong survive.  Their faith in this is close to a religious faith and they will brook no questions about it. For them this, and only this, is the true spirit of America, and anything less is the road to Communism, let alone Socialism and all the other un-Americanisms.  It is Republicanism at its finest – rule of the wealthy, by the wealthy, and for the wealthy.

So, this is where we have landed. The President and the Secretary of the Treasury, our great defenders of Capitalism (Kapitalism?) are acting like closet Marxists.  They are using the people’s money to bail out the banking businesses, like Paulson’s old employer, Goldman Sachs, while they imply that this will help the ordinary people.  Does anyone really believe that?  It’s pretty clear that helping us, the ordinary people, is, and always has been, the very last thing on their minds. In the end we can’t call this Capitalism, we need to call it what it is; it is Socialism for the banks and Socialism for the owners of the banks.  It is unapologetic Socialism for the wealthy – at the direct expense of the U.S. taxpayer.  The question I have is this: how can our country and the world survive two more months of this selfish incompetence?

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It’s pretty clear that our old U.S. economy is on the ropes.  For the past ten years or even more we’ve been playing a multinational economic game where we bought things cheap from other countries and, in essence, paid for these things with credit – either with credit cards or home equity loans or automobile loans or some other type of loan.  We’ve been living on borrowed money and borrowed time.  With the election of a new President we all have high hopes of getting our economy back on track, but just how do we do that?  How do you actually go about creating a new economy when you’ve pretty much fried your old one?

I think it might be useful to use the analogy of starting a fire in a fireplace.  First you need some kindling wood. For the economy, the kindling wood is our small businesses.  We need to get the small businesses burning first. How do we do that? We need an igniter, which in our analogy is a government stimulus package.  It’s like a match.  It burns bright for a little while, but it is enough to get the kindling wood going.  In the same way as a match, if the government should give every taxpayer $1,000 that they have to spend right away (see my earlier blog about how to do this with a debit card that expires two months after issue).  This will immediately inject a lot of money into the economy and small businesses will be able to start re-hiring people again.

The problem with kindling wood is that it doesn’t really provide a lot of heat, and the fire doesn’t last too long.  You need the big logs for that.  In our case the logs are the major industries of the U.S…. Uh oh!  I think I see the problem – our major industries are all going belly up.  The auto makers will probably be next. The problem with them, as I wrote in an earlier blog, is that they are not competitive. There is no point in using the TARP bailout money to keep them on life support if they don’t realize that they have to change their ways – and I don’t mean just building electric cars – they need to make a better product than the Japanese, the Koreans, the Germans, and the Chinese (watch out for them, they’re coming up fast).  If the US car manufacturers aren’t committed to competing head to head and making really superior products (like offering a 200,000 mile bumper to bumper warranty) then they should just close up and save us our tax dollars.

The other logs we have relied on in the past are in similar trouble.  We are down to only one commercial airplane manufacturer (Boeing), we don’t build ships anymore, our steel industry is a ghost of its former self, our railroads’ glory days are long in the past, we hardly make any furniture in the U.S. anymore. The list just goes on.  The absence of any real logs for our economic fire has been masked over the past thirty years by the actions of our government which caused people to put their own money, i.e. 401k and 529 funds into the stock market or to bet on the housing Ponzi scheme, enticed by the massive windfall available from not paying taxes on the first $500,000 in profits when you flip a house every two years. These are incendiary schemes, not economic logs. They are the equivalent of throwing gasoline on a fire.  It flames up dramatically for a short time, but it soon rapidly dies down. Then you have to throw more gas on the fire. We’ve been doing that for almost thirty years now.  It’s time to put a log or two on our economic fire.

The best chance for a long burning log is probably the transformation of the country so that almost all of our energy requirements are met by electricity.  This would require the development of massive new sources of electricity such as wind, solar, nuclear fission, and nuclear fusion.  This new energy industry would create self-sustaining jobs (and energy) for a long time.  Another log for the fire should be the development of a nationwide, high speed (and I mean HIGH speed) railroad system.  As I said, the car companies could play in this new economy too, but they would really have to get in the game and be serious about competing on a global scale.  In each case the government would probably have to provide the initial funding to kick start the business. Eventually these businesses would be profitable companies, selling products to the world, and we would have a nice cozy economic fire.

The thing we need to do now is start the process of developing the major logs for our fire even as we reignite the flames of the smaller businesses with a stimulus package.

Most of all we need to stop throwing gasoline on our dying economic fire – it just doesn’t work.

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