The I more think about it, the more I believe we were had
when the federal government proposed that $700 billion bailout to
primarily deal with the liquidity crisis.
At the time, nobody seemed to know what to do. When
Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben
Bernanke jointly proposed the bailout in an attempt to avoid a repeat of
the Great Depression, nearly everyone threw up their hands and concluded
there was no alternative.
At first, some members of Congress both Republicans and
Democrats balked at the huge bailout package. They said at the very
least there should be some minimal safeguards since the legislation was
drawn to give the Secretary of the Treasury what appeared to be total
power to determine how the bailout would be structured.
These concerns were addressed to some extent in the revised
bailout bill which, among other things, staggered the bailout payments
and provided for some Congressional lending oversight for half of the
$700 billion rescue package. Congress apparently assured that having
waited and then passing the legislation on the second time it was
presented to the House, it was in fact improved and would prevent our
being ripped off by Wall Street for a second time.
We were told over and over by the experts in the news media
and government that the real problem was in fact liquidity banks were
just not willing to lend, even to creditworthy applicants. I decided to
write a letter to both Treasury Secretary Paulson and Federal Reserve
Chairman Bernanke stating my concerns about the use of the federal
guarantees and loans.
The letters follow:
October 9, 2008
Henry M. Paulson, Jr.
Ben S. Bernanke
Department of the Treasury
Federal Reserve System
20th & 1500 Pennsylvania Avenue, N.W.
Constitution Avenue, N.W.
Washington, D.C. 20220
Washington, D.C. 20551
As you have pointed out, the meltdown occurring in the
United States is taking place in large part because of a lack of
available liquidity, meaning that lenders commercial banks in the lead
are not lending to applicants seeking to borrow in order to purchase
housing, cars and other big ticket items that the economy relies on to
flourish, as well as denying loans to small businesses and local
governments seeking to borrow to pay their bills with municipal bond
markets largely closed to them.
One of the purposes of the $700 billion recently made
available as a result of legislation enacted by the Congress is to give
additional liquidity to commercial banking institutions so that they can
once again perform their leading raison d'etre lending money. The
major reason for lack of liquidity availability of loans is fear, as
you have stated, fear that the money will not be repaid either by
individuals, governments or institutions, e.g., other banks.
Again, as you have stated, another reason offered by the
banks for not lending monies is that much of their assets are now
labeled "toxic." It is these assets which, as a result of your efforts,
the newly-enacted legislation addresses, freeing the banks of them by
having the federal government buy them at a price below their original
value, substituting cash to the banks.
If I have accurately stated the facts, why not by order of
the United States Treasury and Federal Reserve direct the commercial
banks to immediately commence loaning money to "creditworthy" applicants
and at a scale comparable to loans individual banks entered into last
year? If the banks refuse to abide by such order, they would not be
eligible among other punitive measures to sell their "toxic" securities
to the Treasury. If the banks require a definition of "creditworthy,"
your offices will supply it for the various situations that apply.
If the proposal makes sense, it can immediately be
implemented and provide the credit needed. If it does not, I would
appreciate knowing the reasons why.
All the best. Sincerely, Edward I. Koch
Chairman Bernanke's response dated October 16th is as
Dear Mr. Koch:
I am responding to your letter of October 9, 2008, in which
you recommended that the Treasury or bank regulators direct commercial
banks to lend to creditworthy borrowers. You further suggested that
banks that did not comply with such a directive would be ineligible to
participate in the Treasury's Troubled Asset Relief Program (TARP).
We at the Federal Reserve firmly agree that an unfreezing
of financial markets and a resumption of lending activity is essential.
Credit is the lifeblood of an economy, and continued economic growth
will require that substantial credit flows be restarted.
But requiring directly that banks extend specified amounts
of credit to creditworthy borrowers would entail many complications.
For example, bank regulators would need to create an objective
definition for determining which borrowers were creditworthy.
because the volume of banks' credit activities can fluctuate over time
for a variety of reasons, including those over which they have no
control (such as the rate of economic growth in their geographical
regions), determining appropriate targets for individual banks' lending
activities would be complex and potentially arbitrary. In addition,
because of the very large number of banking institutions in the country
more than 8,000 administering such a program would be extremely
However, we believe that the plans recently announced by
the U.S. Treasury, the FDIC, and the Federal Reserve to bolster the
capital of banking institutions and to guarantee certain liabilities of
banking firms will be effective in strengthening the banking system and
in fostering the extension of credit to sound borrowers. The purchases
of mortgage-related assets under the Treasury's Troubled Asset Relief
Program will also contribute to a recovery of the credit intermediation
process by reducing the amount of opaque and difficult-to-value assets
from the balance sheets of financial institutions. Moreover, the
Federal Reserve continues to provide large amounts of liquidity to the
financial system through its standard lending program as well as through
a wide range of new liquidity facilities, and these activities should
further support credit intermediation.
To be sure, even with these substantial actions by the
government, the recovery of our financial markets will take time.
Strains on financial markets and institutions are likely to remain
considerable and will act as a drag on economic growth for the
foreseeable future. However, I believe that the government has now put
in place an important array of tools that will enable us to address over
time some of the most significant difficulties in our financial system.
As a result, with continued focus and effort to resolve these issues, we
can look forward to a gradual restoration of lending activities and
sustainable economic growth. I hope these comments are helpful. Please
let me know if I can be of further assistance.
Chairman Bernanke responded, but Secretary Paulson has not.
On November 7, The New York times in its masterful style published an
article authored by Steven Erlanger and Katrin Bennhold putting into
context the problems we and other countries are facing. The article
states, "But there is a fundamental problem that is not easily solved by
the usual economic policy tools: how to persuade rattled banks to start
lending again an essential first step to restoring economic health.
It was shocking to learn, "Treasury Secretary Henry M.
Paulson, Jr. had to gather the chief executives of the nine biggest
American banks and cajole them into accepting about $25 billion each in
new capital. But having pleaded with the banks to take the money, and
putting no government officials on bank boards, the government had
little power to tell them how to spend it. Treasury officials also
refused to tell banks to reduce their dividends or to increase their
lending by any specific amounts.
I find it incredible that this is happening and no one is
calling foul. Where are all the hotshots who supported Paulson in his
psyching us all out by conveying that if we did not follow his plan, we
would find ourselves in another Great Depression? Why aren't they at
the very least denouncing what is now happening? We are keeping alive,
in addition to banks, other institutions that have done a terrible job
and were greedy. Those companies should be permitted to declare
bankruptcy so that someone in the private sector can buy them at a
discount, if they are worth purchasing.
Everyone is lining up to get their federal handout. AIG has
come back for more and is to receive a total of $150 billion. The three
American car companies, General Motors, Chrysler and Ford, have received
$25 billion and want another $25 billion of taxpayers' money. Why not
let them be bought by others in bankruptcy? There are those who say we
are bailing out companies in order to prevent massive layoffs. In my
view, those layoffs will come sooner or later anyhow because those
companies are run by incompetents and no longer able to compete, while
foreign companies like Toyota, manufacturing their cars in the U.S., are
selling them and not seeking to be bailed out. They make cars Americans
want to buy.
In the meanwhile, the vast majority of Americans have lost
upwards of 50 percent of their savings including in the stock market and
their 401ks. Particularly heartbreaking are the financial futures of
those already in retirement who are dependent on their now lost or
greatly reduced savings, as well as the millions more who hoped to
Plans should be made to organize to bring to Washington
hundreds of thousands if not millions of Americans? We should carry
pitchforks to scare the hell out of government, particularly the
newly-elected members of Congress as well as all of those reelected
recently, for failing us so miserably.