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Socialism for the Rich, Naked Capitalism for Everyone Else
Joseph PalermoFor twenty-eight years, since the beginning of Ronald Reagan's first term, we have been subjected to a steady stream of Republican propaganda claiming that if we just got government out of the way and "off our backs," deregulate the economy, and let the market work its magic, prosperity would "trickle down" to the average American citizen. In the mid-1980s, corporate lobbyists descended on Washington, threw huge amounts of campaign cash around, and told us that deregulating the Savings and Loan industry would be a great idea. John McCain and his good friend Charles Keating from Arizona were big advocates of this scheme that turned out to be a disaster that cost taxpayers $500 billion. Phil Gramm, when he was Senator from Texas (and John McCain's choice for president in 1996), worked up another "deregulation" bill that President Bill Clinton signed into law in 1999 that repealed the Glass-Steagall Act of 1933, thereby destroying a key firewall between commercial and investment banks.
We witness the same over-confident, smug market fundamentalists and laissez-faire devotees, businessmen and women who hate "government" when it provides aid to families with dependent children, or food stamps, or health coverage for poor people -- businessmen and women who denounce as creeping "Socialism" any attempt by the government to redistribute some of the nation's wealth to the working middle class or to the poor -- now come to Washington, hat in hand, begging the federal government to fix their self-created problems brought on by their own unbridled greed and recklessness and demanding massive infusions of tax-payer dollars in the form of bail out after bail out.
It's Socialism for the rich and laissez-faire capitalism for everybody else.
What Bear Stearns, Lehman Brothers, Merrill Lynch, and now American International Group Corporation have in common is that they all hired Washington lobbyists and lavished campaign donations on politicians to push through with no public support the radical deregulation of the financial sector. Then they proceeded to create entire new categories of "financial products," derivatives and the like, that amounted to nothing but a giant Ponzi scheme. And when it all collapsed due to their Wild West, shoot 'em up, freebooting, 19th Century-style rapacious business practices, they turn to the government for a hand out to keep the whole goddamned system from descending into another Great Depression.
For historians like myself, and for people like Kevin Phillips, William Greider, and other observers, this collapse of our financial sector was like watching a slow motion train wreck. The laissez-faire proponents for the past thirty years have perpetrated the biggest lie ever told to the American people. And George W. Bush, as with everything else, took this lie to its extreme. He gave the financial industry everything it wanted, and he appointed their lackeys and puppets to run the regulatory agencies that were set up in the wake of the Great Depression to avert exactly the kind of catastrophe that we're witnessing on Wall Street today.
George W. Bush spent the first months of his second term on a 60-city tour where he answered prefabricated questions in phony "town hall" meetings claiming that privatizing Social Security -- taking $1 trillion out of the trust fund and throwing it to his backers on Wall Street -- would be a great idea. And even though the Republicans ran the House of Representatives with Denny Hastert and Tom DeLay, and the Senate with Bill Frist, and the presidency, the American people did not fall for this legalized form of grand larceny. And it's a good thing they didn't. Had Bush been able to get his way and throw a third of the Social Security trust fund at these same damaged, greedy firms we would be witnessing with the current financial meltdown the demise of Social Security.
The libertarians like Ron Paul, Bob Barr and others tell us that the government should not bail out these Wall Street hucksters and gangsters and should let them go down and pay the price for their own mismanagement and bad investments. I agree philosophically with this point of view. But I don't think it's realistic unless one is willing to see the nation enter an economic collapse that would probably look a lot like what Japan and Argentina endured in the late 1990s only worse. The fact is these giant firms, with their billionaire owners and their army of pin-striped men driving Jaguars and flying in private jets to their summer homes to visit their mistresses, have a stranglehold on the nation. They are too big to fail because it would bring on another Great Depression.
Everybody knows that what is needed is exactly the opposite from what we've had for the past three decades. Instead of a government that is asleep at the switch and filled with cronies and hacks from the industries that are supposed to be subject to oversight, we need an activist state that rebuilds the firewalls between the commercial and investment banks; we need a "re-regulation" of the economy, especially key sectors that the entire nation depends on -- finance, energy, health care, food, etc. In short, what we need is a "New" New Deal in this country. We need an IRS and a Justice Department that can strike fear in the hearts of these captains of industry.
Ronald Reagan is often looked upon as the Republicans' Franklin Roosevelt. But Reagan sold the nation a bag of goods. We can finally see clearly the failed results of this three-decade experiment in laissez faire capitalism. It has nearly destroyed the middle class in this country, greatly widened the gap between the super rich and everybody else, destabilized vital sectors of our society, and made the United States a laughing stock abroad.
As a historian I always wondered what evidence of the free market utopia people like David Brooks (with his "ownership society") and the army of ideologues and market fundamentalists marching in lockstep out of the Cato Institute and the Heritage Foundation and the American Enterprise Institute and Gover Norquist's Americans for Tax Reform, and all the other shills and hucksters who sold this tripe to a naive public like a greasy used car salesman selling a lemon -- I always wondered where is their laissez-faire utopia? Are they referring to what America looked like in 1880? A time with nearly zero federal government regulations? With no child labor laws, no limits on the hours worked, no weekend or paid overtime, no minimum wages, no workers' safety regulations, no Security and Exchange Commission, no Federal Deposit Insurance Corporation, no worker pensions or Social Security, no right to form independent labor unions, and no vote for women. Is this their laissez faire utopia that deregulation was supposed to produce?
Today, we have the worst of both worlds. Government bailouts for the rich -- naked capitalism for everybody else. This whole mess could have been avoided if the generation that followed the New Deal had the common sense and decency to understand that you cannot turn over capitalism to the capitalists. Greedy individuals will always figure out clever new ways to make their own piles of money at the expense of their fellow citizens and at the expense of their nation's wellbeing. Whether it's the Savings and Loan scandal of the 1980s or the Dot.Com bubble of the 1990s or the Enron collapse or the mortgage meltdown -- it's always the same old story. They pass on the wreckage to the taxpayer as they always do. It's time to put to rest once and for all the Big Lie that deregulation and privatization of government institutions will bring the nation anything other than calamity after calamity.
| Confessions of a Global Conference-Trotter | |
By David C. Wyld |
Many organizations are taking a critical look at the high price of sending employees to conferences. As travel prices skyrocket, David C. Wyld considers a nearly free alternative — virtual conferences. He argues that online virtual environments like Second Life may offer a cost-effective alternative for conference attendees around the globe.
Truth be told
Yeah, your colleagues and your family may be envious of your trip to Washington or London or Sydney, but the truth of the matter is that while there may be a precious hour
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No matter how fancy the setting, no matter how many fake palm trees and live caged parrots, no matter how lavish the continental breakfast and cocktail hour spreads are, one conference hotel starts to look as bland as the others, blending together in our minds to say, “I heard an interesting speaker on that subject, I just can’t remember where or when.”
We also realize the opportunity costs involved, both in productivity and on our families, for the time spent away.
The real worth
All too often, there’s precious little value that comes from all of the money spent on the formal part of conferences.
What real value there is for participants comes from the “informal” portion of such meetings, when attendees actually talk to one another during the break and “happy hour” times, as opposed to listening to a formal presentation or panel discussion.
A worthwhile cost?
And in today’s wireless world, rather than being tuned-in to what is happening right in front of them at the
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Personally, as a speaker, it becomes more and more challenging to engage the attention of people in the back of the ballroom when competing with YouTube and your email.
Today, in the wake of the global energy crunch and economic slowdown in the West, companies, governments and non-profits are looking at the rising costs of conference attendance and saying, “No mas.”
First thing to go
In a downturn, travel and training budgets are typically among the first items to be slashed.
However, industry analysts expect the impact on conventions and other meetings to be especially acute this time in the face of rising travel costs.
A solution within reach
In fact, according to projections from the National
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And, with the falling dollar, travel costs are rising even more rapidly for U.S. organizations and their employees.
What is the solution? It may be right in front of you — the screen where you are reading this article.
Virtual world
Increasingly, conferences and meetings are being held in the virtual world of Second Life.
This is opening up a world of possibilities for rejuvenating the convention and meetings industry and reinventing the very idea of participating in a conference.
Invisible populations
Second Life has been perhaps the most visible and most talked about of a growing number of virtual worlds, spanning the gamut from so-called “men in tights” games, geared to adults, including medieval-styled fantasy
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In these games, you assume an on-screen character – your avatar – and you can interact in real-time with individuals around the world.
Second Life, which has an excess of 13 million residents, is drawing particular attention for all types of organizations — corporations, non-profits, colleges and universities, and government agencies, who are fast setting up virtual presences in this game-that-is-not-a-game — an unscripted virtual world.
A conference in your living room
For conferencing, the advantages are obvious. One can participate in a conference from your desktop or laptop — wherever you may be (provided you have a high-speed Internet connection and an up-to-date computer).
Travel costs: none! Opportunity costs: minimized — just participate in “real-time” events or view archived events on your schedule.
Worlds colliding
However, when participating in “live” events in the virtual
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And, as with a real meeting, one can continue the dialogue with conference participants after the speakers finish presenting their talks, their slides, and their audio-visuals.
In fact, just like traditional conferences, such “in-world” events often include social hours and meeting spaces. Increasingly, “real-world” conferences are adding virtual world “divisions” and simulcasts of real-world events in Second Life.
Going somewhere?
What does the future hold? The very notion of “traveling” to attend a conference may soon become passé, as the economics of presence and the economics of today’s rapidly increasing travel costs will combine to force more conferences and their attendees into the virtual realm.
The thought of “attending” and “participating” in virtual events is also in line with the present push for greening business practices, as virtual conferencing not only saves money, but vastly shrinks the carbon footprint of such events.
New traditions
In doing so, conference organizers will be able to greatly expand
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Certainly, this is an area where virtual world solutions will garner a great deal of attention over the next few years, as we will quite quickly see the “ramping-up” of conferences held either entirely in Second Life or other virtual world environments (most likely private worlds accessible after gaining an access code via registration).
Of course, this could have a tremendous negative impact on the “traditional” meetings business — as well as on destination cities and their host infrastructure (airports, hotels, restaurants, etc.).
Why not try?
However, if your organization or agency puts on meetings and conferences, a simple question to ask is, “Why are we not doing at least part of this virtually?”
Today, there’s simply no reason not to at least offer mixed-world (part real world, part virtual world) conferences. And, for companies and organizations looking to reduce their expenditures and their carbon footprints, this may truly be a “win-win” situation.
PAULSON GOES ALL IN
Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman's demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go "all in" and bail out every institution with financial exposure to U.S. mortgages. Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.
Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson's bazooka turned out to be a nuclear tipped ballistic missile.
By committing trillions of tax payer dollars (not the "hundreds of billions" that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.
In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings is wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.
Paulson's distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.
When the U.S. government owns all mortgages, the real estate market will be completely subject to political, rather than financial, concerns. Will foreclosures be outlawed? Will loan term easements and principal reductions become standard campaign issues?
While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put "significant amounts of taxpayer dollars on the line," they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.
The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it? Washington thinks so.
Further, since I assume the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.
Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.
Comrade Bernanke Does it Again
by Peter Schiff
By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company's shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America's once vaunted free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.
The "line in the sand" that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic.
While Fannie and Freddie were arguably quasi-government agencies that deserved special protection, no such status exists with AIG. Where does the Fed get the authority to use the money it prints to take over private companies? Congress never gave such authority and, even if it had, it would be unconstitutional, as Congress itself has no such authority to delegate. What about the shareholders? Why didn't they get to vote on this acquisition? Whatever happened to private property rights?
Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost? Why stop at troubled companies? If the Fed can buy into a sick company, why not a healthy one? Now that we have allowed the Fed to take over any asset it wants, private property rights are meaningless. When oil prices get really high, why bother with a windfall profits tax when the Fed can simply nationalize Exxon-Mobil with a few cranks on its printing press. Who needs Bolsheviks when you have the Fed?
AIG is not a bank; it is not even an investment bank. The "lender of last resort" power was supposed to apply only to banks, to prevent runs. It was not meant to apply to any company that had been declared "too big to fail".
I suppose the Fed is trying to get around some of the more obvious illegalities by having the new AIG shares issued on behalf of the Treasury. What happened to the concept of an independent Fed? Here you have the Fed seizing a private company and ceding control to the U.S. Treasury. Rather then acting independently, the Fed and the Government are merely partners in crime.
On the economic side, the Fed expects us to believe this is a smart investment. Does anyone really think that officials at the Fed and Treasury are suddenly private equity experts? These are the guys who missed both the tech and housing bubbles, and who assured us that subprime problems were contained. I would not trust them to run a lemonade stand, let alone one of the largest insurance companies in the world.
The idea that this bailout was necessary given that the alternative would be worse should by now be fully discredited. All of today's financial problems are the direct consequence of Fed policy that was designed to weaken the recession that followed the bursting of the tech bubble and the shock of September 11th. Of course, the tech bubble itself resulted from the Fed's actions to sooth the pain following the collapse of LTCM, the Russian debt default, the Asian crisis, and Y2K.
I suppose the precedent for all of these actions was established back in 1979 when the government guaranteed Chrysler's debt. It sure would have been a lot better and a whole lot cheaper if we had simply let Chrysler fail. The road to financial hell, or in this case socialism, is certainly paved with "good" intentions. Today's historic surge in the price of gold shows that at least a few investors are refusing to march in the parade.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff's book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.
More importantly, don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download our free research report on the powerful case for investing in foreign equities available at www.researchreportone.com, and subscribe to our free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
Commentary by Caroline Baum
Sept. 19 -- Employees of Lehman Brothers Holdings Inc., packing up their desks after the company's Sept. 15 bankruptcy filing, must have been confused by the government's decision to bail out insurance giant American International Group, Inc. less than 48 hours later.
The government cut Lehman loose six months after determining that Bear Stearns Cos. was too big to fail. The Federal Reserve anted up $29 billion in March to make the company's less wholesome assets more palatable to acquiring bank JPMorgan Chase & Co.
Lehman's former employees would probably find Treasury Secretary Hank Paulson's comments on the same day the company filed for bankruptcy disingenuous, to say the least.
``What is going on right now in New York has got nothing to do with any bridge loan from the government,'' Paulson said at a Sept. 15 White House briefing, referring to talks between the government and AIG. ``What's going on in New York is a private sector effort, again, focused on dealing with an important issue that's, I think, important for the financial system to work on right now.''
Oops. Is it possible that Paulson and his crack staff of Goldman Sachs alums were unaware of AIG's precarious position when he made those statements? Granted, the outlook for the company deteriorated when the rating companies downgraded AIG's senior debt, requiring the company to post billions more in collateral -- money it didn't have.
Paulson's blanket statements on the government's intentions were quickly overtaken by events.
Misleading Statements
My inbox is already filled with e-mails from disgruntled investors who think the government led them astray with its reassurances that Fannie Mae and Freddie Mac were well capitalized. The government seized control of the two government- sponsored agencies that dominate mortgage finance on Sept. 7.
``The preferred stock that we purchased was issued by Freddie Mac at the request of the Treasury,'' and the GSE regulator ``maintained at that time, and subsequently, that the companies were adequately capitalized,'' one investment adviser wrote.
My correspondent and his clients ``experienced dramatic losses'' when the government seized the two companies, put them into conservatorship and sent the existing shareholders (common and preferred) to the back of the line.
At the same press briefing, Paulson said he ``never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.''
Nuances of Rescues
Lehman's former employees might not appreciate the nuances that went into the decision. They were told that Bear Stearns imploded quickly while Lehman sprang a slow leak that Chief Executive Officer Dick Fuld was even slower to plug. AIG was assigned to the urgent-and-needy category.
Perhaps Secretary Paulson could elaborate on the criteria used to determine who gets a seat in the lifeboat and who goes down with the ship. Instead, he reassured us that ``the American people can remain confident in the soundness and resilience of our financial system. Our banking system is a safe and sound one.''
The American people must be wondering what all that confidence is buying them.
79.9 Percent Solution
For $29 billion, they got a boatload of Bear Stearns's dodgy mortgage collateral.
For $200 billion and unlimited borrowing authority, they got 79.9 percent of Fannie Mae and Freddie Mac, which may or may not turn out to be a good deal. The basic model of borrowing at a subsidized rate to buy higher yielding mortgages is a winner. Unfortunately, the losers -- the underwater mortgages -- will eat into that profit.
For $85 billion, they got 79.9 percent of AIG. (See uncertain outcome for Fannie and Freddie above.)
The American people must wonder why central banks around the world are pumping hundreds of billions of dollars into short-term money markets to keep credit flowing and interest-rates down if the financial system is so sound. The Fed increased its swap lines to central banks in Europe, Japan and Canada to $247 billion. The Treasury is selling bills (raising cash) so the Fed will be able to lend to the wards of the state without depressing the federal funds rate.
At times like these, when no one has a good idea how to stop the bleeding, the Treasury secretary is supposed to instill confidence, not play a confidence game. Never say never at times like these.
Good with Numbers
Barclays Plc agreed to buy Lehman's capital markets businesses, which means many of the employees boxing up their personal effects can unpack.
With any luck, some of Wall Street's newly unemployed bankers and brokers will be able to retool themselves for other professions. Legal services, for example, should be a growth industry in light of expected lawsuits for predatory lending and other real and perceived crimes and misdemeanors.
For anyone who is good with numbers and has first-hand experience working with a chief financial officer of a Wall Street firm, the possibilities are endless.
U.S. Drafts Sweeping Plan to Fight Crisis
As Turmoil Worsens in Credit Markets
Paulson Briefs Congress on Idea to Buy Bad Assets From Banks, Insure Money-Market Funds; Stocks Rebound Sharply
DEBORAH SOLOMON
WASHINGTON -- The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.
At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said.
![[Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and Senate Banking Committee Chairman Sen. Chris Dodd join other leaders from the House and Senate for a meeting at the U.S. Capitol September 18, 2008 in Washington, DC.]](http://s.wsj.net/public/resources/images/OB-CJ292_sectre_D_20080918201225.jpg)
Getty ImagesBernanke, Paulson, Cox and Senate Banking Committee chair Dodd join other leaders from the House and Senate for a meeting at the U.S. Capitol.
Another proposal would be the creation of federal insurance for investors in money-market mutual funds, coverage akin to the insurance that currently safeguards bank deposits. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.
In addition, the Securities and Exchange Commission proposed a temporary ban on short-selling on 799 financial stocks. The ban, which is effective immediately, is set to last for 10 days, but could be extended for up to 30 days. (See related article.)
The administration had been taking a patchwork approach to the financial crisis, putting out fires as they ignited. The new moves represent an effort to take a more systematic approach, after a spiral of bad debts, credit downgrades and tumbling stocks brought down venerable names from investment bank Lehman Brothers Holdings Inc. to insurance giant American International Group Inc. Banks have grown unwilling to lend to one another, a sign of extreme stress, because financial markets work only when institutions have faith in each other's ability to meet their obligations.
Word of the plan came the same day as the Federal Reserve and other major central banks offered hundreds of billions of dollars in loans to commercial banks to alleviate a deepening freeze in the world's credit markets. That step appeared to have moderate impact on lending among banks. Meanwhile, a wave of redemptions continued hitting money-market funds, causing a second large fund to shut to investors.
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In Russia, officials suspended stock-market trading for the second-straight day as the Russian government promised to inject $20 billion to halt a collapse in share prices. In China, government officials directed purchases of bank shares and encouraged companies to buy their own shares in efforts to prop up a falling market.
Still, word of a possible U.S. plan to address the crisis sent the stock market soaring, in one of its sharpest reversals in recent memory. The Dow Jones Industrial Average ended up 3.9%, the index's biggest percentage gain in nearly six years, on record New York Stock Exchange volume. The blue-chip index finished more than 560 points above its intraday low and reclaimed about 90% of its Wednesday losses. Nasdaq composite trading also saw trading volume set a new single-day high at 3.89 billion shares.
All 30 Dow component stocks closed higher, but financial companies were the biggest winners, racking up double-digit percentage gains after weeks of selling off.
The flurry of moves under discussion may bring the markets some breathing room, but it isn't clear whether they will amount to a long-term solution to the complex financial problems sweeping the market.
"The market wants to see a more systemic solution that doesn't leave us wondering day after day about the next institution that's the weakest link in the chain," said former Fed Board member Laurence Meyer, vice chairman of Macroeconomic Advisers, an economic research firm.
![[Bailout Brigade]](http://s.wsj.net/public/resources/images/P1-AM980A_INTER_NS_20080918195223.gif)
Treasury Department officials have studied a structure to buy up distressed assets for weeks, but have been reluctant to ask Congress for such authority unless they were certain it could get approved. The intensified market turmoil may have changed that political calculus, even with less than two months left until the November elections.
A big question still to be answered is how the government will value the assets it takes onto its books. One possible avenue could be some sort of auction facility, so that the government would not have to be involved in negotiating asset values with companies. Financial companies would likely take big losses.
President George W. Bush met with Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and Federal Reserve Chairman Ben Bernanke for 45 minutes Thursday to discuss "the serious conditions in our financial markets," said White House spokesman Tony Fratto.
Messrs. Paulson, Cox and Bernanke later addressed Congressional leaders Thursday evening on their proposals. At the meeting, Mr. Bernanke began by laying out the severity of the crisis. Mr. Paulson "made the sale," said a top congressional aide.
House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat, said his panel could hold a vote on the package as soon as Wednesday.
"They said they would like legislation to do it, and there was virtually unanimous agreement that there would be legislation to do it," said Mr. Frank.
In a news conference after the meeting, Mr. Paulson described his effort as "an approach to deal with the systemic risk and the stresses in our capital markets." The "comprehensive" solution would deal with the souring real-estate and other illiquid assets at the heart of the financial crisis, he said.
Exactly how such an entity might be structured isn't yet clear. The possible plan isn't expected to mirror the Resolution Trust Corp., which was used from 1989 to 1995 during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and eventually sell them back into the market.
![[President George W. Bush arrives to make a statement regarding the economy in the Oval Office Colonnade at the White House Thursday.]](http://s.wsj.net/public/resources/images/P1-AM981_Interv_D_20080918200638.jpg)
European Pressphoto AgencyPresident George W. Bush arrives to make a statement regarding the economy in the Oval Office Colonnade at the White House Thursday.
The program may look more like the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to inject liquidity into the market by giving loans to banks and other businesses.
According to a top congressional aide, the Treasury department wants authority to either control the program or have it be a separate division of the government.
A series of veteran policy makers, including former Treasury Secretary Lawrence Summers and former Fed Chief Paul Volcker, has pushed in recent weeks for such a government agency that would attempt a comprehensive solution to the markets crisis.
The idea would be to steady the market so that investors regain confidence in financial institutions and resume conducting business normally with them.
"By stepping in here and getting the markets to function again, the government could deliver the Sunday punch to this financial turmoil," said former Comptroller of the Currency Eugene Ludwig, who is now chief executive of Promontory Financial Group, and a big proponent for the idea. "By taking the first step and making a market the new government entity could take fear out of marketplace," he added.
Thursday, Republican nominee Sen. John McCain sought a broad expansion of government regulation over financial institutions, including the formation of a body to both assume distressed mortgages and help failing investment banks.
Saying the government cannot "wait until the system fails," Sen. McCain called for the creation of an entity that would essentially help companies sell off bad loans and other impaired assets. It is unclear how the body, dubbed the Mortgage and Financial Institutions trust, would operate, including whether or not institutions would seek help or whether the government would intervene on its own behalf.
His rival, Democratic Sen. Barack Obama of Illinois was less specific about what steps he would take, offering broader outlines of policy proposals that included a "Homeowner and Financial Support Act." The measure, which would inject capital and liquidity in the financial system, is designed to provide a more coordinated response than "the daily improvisations that have characterized policy-making over the last year."
How to Cure This Sick System
Steve Forbes
Not even during the Great Depression did we witness what is now unfolding--a sizable number of big financial institutions going under. What enabled their taking on so much debt and so many questionable assets was, primarily, the easy-money policy of the Federal Reserve. Chairmen Alan Greenspan and Ben Bernanke created massive amounts of excess liquidity. If the dollar had been kept stable relative to gold, as it was between the end of WWII and the late 1960s, the scale of the bingeing in recent years would have been impossible.
The first prescription for a cure is to formally strengthen the dollar and announce it publicly. A year ago August the price of gold was more than $650 per ounce. In late 2003 it had breached $400. The Fed should declare that its goal for gold is around $500 to $550. That would stabilize the buck--and stability is essential if animal spirits and risk taking are to revive.
Also of immediate urgency is for regulators to suspend any mark-to-market rules for long-term assets. Short-term assets should not be given arbitrary values unless there are actual losses. The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline.
Think of the mark-to-market madness this way: You buy a house for $350,000 and take out a $250,000 30-year fixed-rate mortgage. Your income is more than adequate to make the monthly payments. But under mark-to-market rules the bank could call up and say that if your house had to be sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth only $200,000 and to please fork over the $50,000 immediately or else lose the house.
Absurd? Obviously. But that's what, in effect, is happening today. Thus institutions with long-term assets are having to drastically reprice them downward. And so the crisis feeds on itself.
The SEC should immediately reverse its foolish decision to get rid of the so-called uptick rule in short-selling. That would provide a small road bump to the short-selling that's helping to destroy financial institutions.
At the same time the SEC should promulgate an emergency rule (which we thought was already the rule): No naked short-selling. That is, you have to own or borrow shares in a company before you can short it. The rules should make clear that short-sellers must have ample documentation proving they truly possess the shares at the time of the short sale. Otherwise, each violation will result in heavy fines. That wouldn't be a road bump but a wall of Everest-like proportions. Regulators should also be told to instruct banks to keep their solvent customers solvent. The last thing the economy needs right now is for the banking system to seize up.
The federal government should also consider setting up a new Resolution Trust Corp., which was devised during the savings and loan crisis nearly 20 years ago as a dumping ground for bad S&L assets. Today's bad assets could then be liquidated in an orderly way. And, finally, the financial industry should be encouraged to create new exchanges for exotic instruments. This would result in the standardization of these things, which would mean more transparency.
These steps would quickly revive financial markets. Already mortgage rates are coming down. It won't be long before American homeowners start an avalanche of refinancings, which would be an enormous boon to confidence and the economy.
What Makes Our Ever Changing 400 List Possible
Prophet of Innovation--by Thomas K. McCraw (Harvard University Press, $35). An excellent, thorough and smoothly written biography of Joseph Schumpeter, the greatest economist of the 20th century. Too bad most politicos--and economists--don't fully grasp his insights.
Born in 1883 in a province of the old Austro-Hungarian Empire that is now part of the Czech Republic, Schumpeter recognized at a young age that the critical factor in economic progress was the entrepreneur, the innovator. To him it was the risk taker who brought about new products and services and more efficient ways of making and doing things. A free-market, capitalist economy, he emphasized, meant constant change, often disruptive and disorienting to traditional ways of doing things. Competition wasn't just the jousting of existing firms that had similar products but also encompassed the threat that came from a truly new product, new technology or new type of organization.
Schumpeter made the distinction between an inventor and an innovator: The innovator takes an idea or product and figures out how to produce it efficiently and profitably. His term describing one process, "creative destruction," has become a catchphrase of our own era.
Schumpeter's perceptions here were profound, although most of his time's economists--and politicians--downplayed or ignored them. Today, though, things seem different. Even Demo-crats occasionally pay lip service to the risk takers' and entrepreneurs' importance to economic growth. Yet Democratic policies, such as raising the cost of capital and reducing its availability, would devastate them. Similarly, while economists doff their caps to Schumpeter, their professional research downplays innovation because it is impossible to quantify and not conducive to mathematical models. So the appreciation of this genius is still superficial.
One drawback is that Schumpeter was not a "feel-good" economist like Keynes, whose apostles believed that properly manipulating government fiscal and monetary tools would generate perpetual prosperity, with nary a bust or a bout of irrational exuberance. Innovation, however, is not a smooth process but comes in fits and starts. That's why, Schumpeter pointed out, a healthy economy is subject to cycles of boom and bust.
In the early 1980s, for example, personal computers became the hot new product. Then came the inevitable shakeout. Many companies, such as Atari, Commodore and Osborne, bit the dust. But PCs became more powerful. Innovators learned to network PCs, enabling them to easily replace expensive mainframe computers with the significantly cheaper and more versatile PCs.
In the early 20th century the automobile went through similar booms and busts: Before World War I there were more than 300 auto manufacturers in the U.S. Another vivid testimony to innovation's disruption and destruction is today's fast-shrinking newspaper industry, a victim of the Internet.
Schumpeter recognized that a dynamic economy creates wide inequality. A successful entrepreneur, his investors and even some of his employees (think Microsoft (nasdaq: MSFT - news - people )) will get rich. However, this is not the kind of static inequality one sees in semifeudalistic, oligarchic economies that exist in South America and elsewhere, where the same handful of people are wealthy and everyone else struggles. A truly capitalist economy will see the players change repeatedly. Facts back up Schumpeter's insight. IRS data show that 75% of the very top income earners in the mid-1990s are no longer in that category. Growing up in a turbulent part of Europe made Schumpeter realize that life did not follow a smooth-running, gentle path. In contrast, Britons such as John Maynard Keynes tended to see the economy in more static terms. Even American economists tended toward a rather static view of the world. Harvard's late, once renowned John Kenneth Galbraith wrote a book in the 1960s whose thesis was that major corporations such as Ford Motor Co. (nyse: F - news - people ) were the epitome of economic development and lived by their own laws rather than those of the marketplace. Today once formidable giants, such as Ford and General Motors (nyse: GM - news - people ), are struggling just to stay alive financially. Schumpeter was a genius at dissecting the ideologies and prejudices of other economists. Karl Marx, for example, also observed the dynamic nature of entrepreneurial capitalism. But he mistakenly concluded that this kind of change would inevitably, inexorably impoverish the workers. Instead--as Schumpeter laid out time and time again--an entrepreneurial economy means more people earning more and enjoying a higher standard of living. Adam Smith celebrated the importance of free trade, low taxes, property rights, the enforcement of contracts in enabling people to get richer. But he had very little appreciation of the crucial role individual entrepreneurs and innovators play in the process. Schumpeter acknowledged that governments would have to play a role--one hopes a constructive one--in creating conditions in which creative destruction could play out. In the U.S., for instance, farm subsidies helped ameliorate the political backlash when technology and manufacturing sharply reduced employment in the agricultural sector. A century ago one in 4 Americans made his or her living in agriculture; today it's fewer than one in 75. What made Schumpeter especially insightful was that he was truly a multidisciplinary individual. He was well versed in politics, sociology and history. By the time he finished his secondary education he had mastered six languages. He would look upon the bulk of today's economists, with their obsession with numbers and regression analysis, as hideously narrow-minded and suffering from academic constipation. As he grew older, Schumpeter became pessimistic about democratic capitalism. He observed that the sons and daughters of successful entrepreneurs often became leftists or outright socialists. His own varied life undoubtedly added to his gloomy outlook. He had moved numerous times and seen convulsions aplenty. World War I broke up the Austro-Hungarian Empire, creating, among other things, the state of Austria--what wags dubbed "a bureaucracy without an empire." After the war Schumpeter served briefly as its finance minister. It was a disastrous experience. Knowing the right things to do does not automatically make them politically possible. He lasted less than a year in the job. Only when inflationary conditions worsened did subsequent ministers adopt some of his policies. The rise of Nazism in Germany--Schumpeter taught there until the early 1930s, at which time he accepted an offer from Harvard--was a personally vivid example of how a great nation can self-destruct and threaten civilization itself. Schumpeter would certainly take a dim view of what many politicians in America are offering up these days. But the actual history of Britain and the U.S., after his death in 1950, might have lightened the darkness of his long-term outlook. As long as a society remains free, entrepreneurs can prevent ossification. The U.S.' great comeback under President Ronald Reagan is one vivid example, as is Britain's under Prime Minister Margaret Thatcher. Once taxes were cut and structural reforms made, Britain morphed from the sick man of Europe into Europe's most dynamic large economy. Schumpeter would also have been astonished by the fall of the Soviet Union.
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