Dean Baker nails it on the Bailout

[Pale Blue Dot]

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC. He is a frequent guest on National Public Radio, Marketplace, CNN, CNBC and other news programs. He is the author of several books, including The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The United States Since 1980. He received his Ph.D in economics from the University of Michigan.

The NYT missed the obvious questions with the Bush bailout proposal. The most obvious question: is how will paying market price for near worthless assets prevent the collapse of zombie institutions like Bear Stearns, Lehman Brothers and AIG? These institutions needed money. They won't get it from selling mortgage backed securities, that are chock full of bad mortgages, at the market price. We already know this, because they already had the option to do so.

The Bush proposal to throw out hundreds of billions of taxpayer dollars to buy up this debt will do little if anything to prevent another round of collapsing banks. We will again see desperate weekends with Treasury and Fed honchos running around trying to save the next major basket case.

The other big question is: how will we get the banks to honestly describe the assets they throw into the auction? Will we rely on the rating agencies?

Maybe the Bush crew missed this one, but a big problem in the housing bubble financial flow was the fact the rating agencies accepted many false claims by the banks and therefore rated a lot of junk as investment grade debt. Has the Bush administration figured out how it will get around this problem with its reverse auction system?

Question II is directly related to question I, because a poorly designed auction system will be a fiasco, wasting taxpayers dollars and rewarding the most effective liars. If we have more time to design the auction system, then we can minimize this risk. There would be urgency if the auction system was the mechanism that would prevent the sort of freeze up of the financial system that we saw this week, however if the auction system will not accomplish this goal, then we can take the time necessary to get it right.

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=09&year=2008&base_name=questions_on_the_bush_bailout

Once again, the Bush administration is telling us that there is a crisis of such dire emergency that we must act on THEIR remedy without taking any time to question whether it is the right answer.

As they have done time and time again, they are pushing the exact WRONG answer. Will Democrats once again cower in fear and do the wrong thing?

[bbgrunt]

1. your question is answered by Chuck Schumer's "gulp"

[aquart]

9. I was really pissed at that "gulp."

[Eric J in MN]

2. I hate it when Congressional Democrats let Bush rush them into passing a bill.

With the Iraq War Resolution, there was a pseudo-emergency that they had to pass it right away because an international meeting was coming up.

But they should have waited then.

Similarly today, Congress should wait until after the next president is in office to decide what to do about mortagages.

[CountAllVotes]

5. this is an emergency for the rich

only 25% of Americans have money invested in these failed/failing companies.

Why should the majority of American citizens have to pay for the greed of this 25% that are "invested"?

I don't like this deal one damn bit and I'll make no effort to hide my opinion about it.

It won't fix anything. It will open the door for more corruption I believe as this signals that if you lie and steal, your ass will be covered.

Damn these thieves ... damn them all!

:dem:

[grasswire]

3. I don't like those secret emergency meetings...

....where Republicans meet with lawmakers and scare the bejeesus out of them so they will give away something we value.

Remember that secret room and meeting that reportedly caused a bunch of congresscritters to vote for the impeachment of Bill Clinton?

Remember those secret reports that sent our blood and treasure to Iraq?

Now this.

There's no place in a democratic society for secret meetings of this import.

Tell the people the truth, all of it, now.

[CountAllVotes]

4. as I type another one is going on right now ...

Morgan Stanley board to meet over weekend: report
Saturday September 20, 11:49 am ET

CHICAGO (Reuters) - Morgan Stanley's (NYSE:MS - News) board was expected to meet over the weekend to discuss a merger with Wachovia Corp (NYSE:WB - News), the Wall Street Journal reported on Saturday.

A deal could include sovereign wealth fund China Investment Corp taking a significant stake in the combined company, the newspaper said, citing people familiar with the matter.

CIC's interest may be contingent on Wachovia being able to offload some of its mortgage assets, the Journal said. The CIC discussion has been preliminary and has not been raised with Wachovia's board, the paper said.

CIC dampened speculation on Friday that it could be ready to increase its stake in Morgan Stanley as a senior CIC official was quoted by the Xinhua news agency as saying Morgan Stanley and Goldman Sachs (NYSE:GS - News) were capable of tackling their problems on their own.

http://biz.yahoo.com/rb/080920/morganstanley_wachovia.html?.v=2

:kick: & recommend!!

[grasswire]

6. a shell game is going on

We may never know the extent of it.

[clear eye]

7. Kuttner's "American Prospect" & Baker's CEPR are the only sources of credible economic analyses left

since EPI filled up w/DLCers. Ditto, Center for American Progress. Here are a couple of links to two other discussions of this situation from Kuttner and Baker: "Seven Deadly Sins of Deregulation"--<http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms> and "Subprime Rescue Plans"<http://www.cepr.net/documents/publications/bailout_2008_03.pdf>

These are both accessible to laypeople and not terribly long.

[glitch]

10. I like Greider and Stiglitz too. nt

[BraneMatter]

8. What I don't understand...

is how five million single-family mortgages can cause this much havoc and bring down the world economy.

Someone is not telling the whole story here... surprise, surprise.

I guess it's kinda like the surprise you get when you open your credit card statement!

It's all so diabolical that, well, it makes you wonder, could it be... SATAN???

Man, this is all really getting to me. As I was typing, Senator Biden was speaking to a crowd on CNN, and out of the corner of my eye, I could have SWORN the CNN subtext said, "Bailout Bowl '08" instead of "Ballot Bowl '08"!!!

[pa28]

11. Yes, thank you.

So many good points here. How are these derivatives valued? I think the trillion dollar figure is based on the fictional values assigned by the banks. The actual cost of taking on these instruments will no doubt be far more expensive. Not only that the door is open for more of this worthless paper to come in now.


I really believe we got hustled into a huge mistake here. I know it would have been painful for everybody to leave the situation alone and no doubt would have resulted in a massive market drop, financial panic and hardship for everybody but I think it also would have laid the foundation for a turnaround. The banks have been bailed out, wealth has been preserved, but who will bail the government out now?

Could this just be a multi-trillion dollar band-aid? I think it could be.

[BearSquirrel2]

12. If it's a "debt crunch" ...

If it's a "debt crunch" that is feared, I say we should just extend loans to banks who didn't engage in all this predatory lending and help them grow while the big boys wither and die from their own stupidity.