Sunday, September 21, 2008


Lots of news over the weekend about the $700,000,000,000 bailout package proposed by the Bush administration. I'm probably one of the least qualified people to understand what we ought to do about the current financial meltdown. And frankly, the idea of inoculating risky behavior and bad business decisions from the corrective powers of the market just stinks. (As an aside, it's remarkable how the GOP, who routinely praises the self-regulating powers of the market, now makes FDR look like a penny-pinching scrooge).

But look - we've collectively bought in to the market psychology over the last couple of decades. We have tax breaks for 401(k)s, while pensions go by the wayside. I've got a 401(k) myself. A lot of people own mutual funds and money market funds. The government has scared people about Social Security and encouraged folks to invest more money into the market. (As we probably should, since SS alone is not designed to provide a comfortable standard of living in retirement.) So market investing is not in of itself a bad thing. Nor is getting people into houses, which for many, is the only way to accumulate wealth. We've relied on it, and in many cases, need it for the hope of a good retirement.

Thus, if the government stands pat and does nothing, it does seem possible that some, if not many, of the parents of stock funds and money market funds could find themselves insolvent, leaving a LOT of Americans in a tight pickle. Heck, even major banks have written down many bad mortgages. Even though your 401(k) statement or your money market statement shows a balance of $100,000, if there's no money to redeem the shares then the fund is worthless. It seems like we've got to help these institutions, despite the moral hazards of doing so.

What's that, you say? I support the bailout plan?? What did you sprinkle on your Cheerios this morning??

Not so fast. There's a few things that really scare me about the current plan proposed by the White House:

1) The fund will have no oversight. Not by Congress, courts, anyone. Period.
2) The purpose of the fund appears to be to buy out the bad mortgage debt from the distressed owners. There's no requirement that the Fed take an ownership stake in the company. Also, the Fed looks like it is going to set prices for the assets - who knows what these things are worth? Maybe if the Fed buys this debt at a steep discount, it's a good buy and there might be upside. But there's nothing requiring that. It doesn't seem like we (taxpayers) get a quid pro quo for it, or require a payback of the money. Just buy the bad assets and hope for the best. I know I'm not an expert in high finance, but this doesn't really strike me as a good idea.
3) The fund will be open to non U.S. Banks. (Note Phil Gramm, McCain's economic advisor, is currently a vice chairman of UBS, which has written down tens of millions in bad loans). Gramm has also lobbied for UBS. Maybe good idea, maybe bad idea, but just looks bad.
4) The fund will be run by the Bush Administration, a paragon of competence and success if I've ever seen one.

Like I said, I can't claim that I know anything about what to do. But you don't need to know how to cook to smell a rotten egg. I'd feel a teeny bit better if in fact the Treasury had some accountability to Congress. At least if things went south some upset Congresspeople who were worried about re-election might decide to do something (e.g. redirect the money or take it away from the Fed).

So I suggest if you want to do anything then call your Congressperson and demand direct accountability for the funding. That's pretty much the only thing I'd know how to do anyway.

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