Not so long ago, Secretary of the Treasury, Henry Paulson,
joined by Chairman of the Federal Reserve Ben Bernanke, proposed a
strategy to Congress for dealing with the financial crisis.
As I recall, Paulson and Bernanke said the biggest and most
immediate problem was liquidity: unless the federal government took
action, lending by banks to other banks and to consumers and businesses,
which has stopped, would not begin again. In fact, the banks took the
money and did not lend it to consumers and businesses, but are
purchasing other banks. What an outrage. The largest heist in
America's history, only it's legal.
Our economy does not grow, indeed quickly diminishes, when
businesses, large and small, are unable to obtain short and long term
loans to deal with payrolls, purchases and expansion measures.
Congress was not convinced but Paulson assured the House and
Senate that if the bailout bill did not pass, Congress would be
responsible for driving the U.S. economy into another Great Depression
like the one that almost destroyed America in the 1930s.
In 1933, President Franklin Delano Roosevelt, who inherited
a devastated economy from Herbert Hoover, took heroic measures to get
America going again. At age 83 I remember that era well. Nevertheless,
even with FDR's New Deal reforms, the U.S. did not come out of the
Depression until 1941, when World War II and the war-driven economy put
the entire country back to work.
At the height of the Great Depression, unemployment reached
25 percent. Today, according to The New York Times on November 17th,
"The unemployment rate was likely to peak at 7.5 percent by the third
quarter of 2009...The unemployment rate rose to a 14-year peak of 6.5
percent in October."
Even with the threat of another Great Depression hanging
over their heads, the House of Representatives refused to vote for a
bill that gave the Secretary of the Treasury unlimited power to spend as
he saw fit $700 billion dollars. This money was intended to secure
liquidity in the country's financial institutions by buying their
so-called "toxic assets."
The bill gave the Secretary stunning powers, which could not
be appealed to any court. He was to be immune from any oversight
whatsoever. A sufficient number of House members, to their great
credit, refused to go along and the legislation was defeated by a vote
of 228 to 205. Paulson and Bernanke, joined by all of the major
economic leaders of our country, went to work and got the Senate to pass
a slightly improved bill, providing among other things, that while the
Secretary would continue to administer the fund with enormous unilateral
power, he could only disperse half of the fund, $350 billion, after
which he would have to seek to get the Congress to release the balance.
This would give Congress the opportunity to add additional conditions,
if they were needed. To date, Paulson has committed all but $60 billion
of the $350 billion fund under his control.
This extraordinary legislation passed the House by a vote of
263 to 171, having passed the Senate earlier by a vote of 74 to 25, and
was immediately signed into law by President Bush on October 3rd. Six
weeks later, Paulson announced he had made a mistake in his approach to
correcting the liquidity problem and wants now to modify his future
strategy. He will no longer buy "toxic assets," but take an equity
position in financial firms.
It is not clear to me if he is seeking Congressional
approval for that, but probably so, because Congress must agree to allow
him to expend the balance of $350 billion. In the meanwhile, liquidity
has not been achieved. What the Treasury Secretary has done is expand
the categories of applicants seeking to obtain money from the $700
billion spigot. He has approved loans to banks, also to General Motors,
Chrysler and Ford for $25 billion with an endorsement of their request
for another $25 billion to the automakers coming from TARP, and he has
dispensed or agreed to dispense, a total of $150 billion to the gigantic
insurance company, A.I.G.
The name of the program, TARP (Troubled Asset Relief
Program), is an apt one, since tarp is a nautical term for cover, and we
now have, in addition to all our other problems, a cover-up engaged in
by Secretary Paulson who refuses to provide details of the loans he made
in response to FOIL requests of the media.
Recently, someone wrote to me, commenting on my suggestions
on dealing with liquidity and the sub-prime mortgage crises. First, I
suggested that banks receiving bailout funds agree to commence lending
to creditworthy applicants or not be eligible to receive the funding.
Second, bankruptcy judges, who are court officers, should be given the
power to evaluate the mortgages before them and make independent
decisions on modification, as they do other contracts before them. I
believe that banks, knowing that an independent authority can make such
decisions, will prefer to negotiate directly with the mortgagor, rather
than have a decision imposed upon them by a judge.
The writer stated, "I'm not anything like an expert on
banking and mortgages, but your message on a pure common sense basis
sounds both right and reasonable." I wrote back, "The experts have
failed us...so don't be too humble."
Adding to the public's outrage was the position taken by
President Bush at his appearance at the U.S. Sub-Treasury Building on
November 13th. With the stock market in freefall and the unemployment
rolls rising daily, he defended his administration's failure to regulate
the stock market and the mortgage market. He said, "The crisis was not
a failure of the free-market system, and the answer is not to try to
reinvent that system...Free-market capitalism is far more than an
economic theory. It is the engine of social mobility, the highway to
the American dream....We must recognize that government intervention is
not a cure-all. History has shown that the greater threat to economic
prosperity is not too little government involvement in the market, but
Bottom line: there is a shocking lack of leadership in
Washington and throughout our financial system. Is it unfair to say
that the lunatics have been and still are running the asylum?