It seems we haven't learned anything from the ongoing real estate and financial investment debacle facing the United States.
Congress is about to approve a record $700 billion bailout request from President George W. Bush less than one week after U.S. Treasury Secretary Henry Paulson proposed the plan.
It reminds me of the subprime loans that got us into this mess in the first place. Bankers who heedlessly tossed aside numerous safeguards to award huge loans to borrowers without verifying income, assets or even demanding a reasonable down payment approved many of these junk mortgages. Regulators too, slept at their desks while the bankers and realtors ran amok.
The same madness is happening again at the national level. This time, Congress, which should act as regulator, is being railroaded into hurriedly passing the bill approving the bailout.
There might still be time to back out, but it looks like Congress will approve the request because the President, the Treasury Secretary, the Federal Reserve Bank, equity investors and the distressed investment companies say the U.S. economy will grind to a halt if the plan is not approved.
I beg to differ. The market and the economy will definitely suffer without this bailout plan, but the pains won't in any way match what will invariably happen in future if we refuse to allow the market to proceed with the purging that is already in motion.
Let's debunk some of the myths that underlay this scheme:
The U.S. economy will collapse and fall into a deeper recession. Even Fed Chairman Ben Bernanke admits to not being 100-percent certain the plan will work. The economy is already in a recession and pouring $700 billion into it won't change the equation. The economy is experiencing a major hiccup, but it will recover once the excesses of the past are flushed out.
Lenders will stop lending. That's a huge exaggeration. If you are in the lending business, you don't turn around to start selling bread and milk. Lenders temporarily stopped lending to any Jack and Jill because they needed first to clean up the mess they created. They needed to examine their books, review which loans were bad and which ones should be or could be salvaged. That's why they temporarily stopped lending--when you are in a hole, stop digging. We should let the process run its course. Let the lenders review their operations, adopt better practicies, set new loan terms for borrowers, monitor them and let regulators do their work.
The U.S. capitalist system is broken. This is another whopper. In fact, the system is working exactly the way it's supposed to. If you overreach, you have to pay for it. The market was in clean-up mode and we've delayed that process. It's painful, but it has to happen. We can defer it for another generation to handle but someone will ultimately have to pay the huge bill we are running up today.
We'll get the $700 billion or a huge portion of it back with profit. Not so. Whatever gave anyone the idea government officials can succeed where the private sector failed? Additionally, many of these loans were guaranteed by overvalued properties. The U.S. government would have to hold the properties for the next decade or more before they appreciate to the lofty levels at which the loans were granted.
Lines of credit won't be renewed. Perhaps some of them shouldn't. A bank that has committed to giving a company $5 billion in line of credit, for instance, should now more closely scrutinize the health of the lender and the terms of the loans. This means the loan may not be renewed on the old terms, or not at all, because they were improperly and irresponsibly awarded in the first place. This is good for the system.
The solution to this mess should be one that's best for America, not Henry Paulson's friends on Wall Street.
The failed mortgages are only part of the story. Unfortunately, the mortgages resulted in investment derivatives in which many banks and investment firms poured money. The damage could very well be far worse than many think.
Philosophically, I am opposed to a bailout and the accompanying government meddling. As a practical matter, I think the risks go well beyond our own economy, although we will get hit quite hard.
If the banking industry can't make ends meet, then let them fold. Maybe someone new can do the job correctly. The main problem right now is simply there is no accountability anywhere in this country. They want to stop CEO's from making huge amounts of money if they get bailout money--good. Now add those who profitted from this-the stockholders cannot make huge amounts of money. Make this backdated for the last five years. That will stop the problems from happening again.
Bolaji, thanks for writing this important article. There's a lot that you have exactly right.
With respect, you're factually mistaken on whether the government will be able to recoup the $700 billion, never mind with a profit.
The details are subtle but incredibly important (and important for people to understand): the government will NOT simply accept the assets at the price currently in the books of the distressed lenders. One of the questions holding up the debate is: how deep should the write-down be?
It is unlikely that the taxpayers will recoup the entire amount; the RTC of the late nineties ended up spending about $90 billion for failed savings and loan banks; this bill will be larger.
But probably not $700 billion.
I've written more about this on my blog: peterlevin.wordpress.com
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