Unstructured Finance

The Big Picture asks the Big Questions of Paulson, Bernanke

September 23, 2008

Paulson and Bernanke arrive to testify at a hearing of the Senate Banking Committee hearing in WashingtonFinancial blogger Barry Ritzholtz of The Big Picture has some questions for Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke ahead of their appearance on Capitol Hill on Tuesday, starting with a biggie:

You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Recall the overuse of the word “Contained.” Indeed, you two have been wrong about nearly everything financially related since this crisis began years ago. Question: Why should we trust your judgment on the largest bailout in American history?

There are 13 more in that vein, plus a “bonus comedy question” — or at least what would have been comedic if the leading lights of American capitalism were not carrying out an unprecedented governmental intervention in the free market:

Are you now, or have you ever been, a Socialist? Do you know, or associate, with other Socialists?

What questions would you like to ask Paulson and Bernanke? Put your best nominees in the comments section.

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BAILOUT AND THE NEW “LOST GENERATION” By Michael Rivero

“As American products continued to decline in quality and foreign manufactured products displaced them in the stores, American corporations, rather than address the problem with manufacturing, hit on the idea of closing the US factories and sub-contracting the manufacture of products to the very countries whose manufacturing was already surpassing that of the United States. It was a quick fix, with even quicker profits for those first few companies to taker advantage of offshoring.

Then, as more companies started offshoring their manufacturing (aided by generous tax credits from the US Government) a funny thing started to happen. Retail sales began to decline in the US. We started seeing one disastrous Christmas shopping season after another (culminating in the current year where the holiday goodies started showing up in stores in August). US companies had forgotten a simple truth than Henry Ford had recognized more than a century ago; your workers are also your customers. Ford made a point of paying his workers a high enough wage that they could afford to buy the cars they were building. Those working class drivers became Ford’s best advertising, and Ford and the community around him prospered.

But today’s managers, unconcerned with community, workers, or even really the quality of products in their rush to produce the highest “score” on the stock ticker, went on sending manufacturing jobs to other countries. Retail sales continued to decline. Corporate culture still couldn’t or wouldn’t see that the problem was of their own making. Your workers are your customers. You cannot lay off workers without laying off your customers. It’s the same group. Regardless of the layers on layers on layers, every investment sooner or later got down to the workers either being able or not able to earn enough money to buy things. By the 1980s, it was obvious that while the top 1/5 of the nation’s population were doing well, the standard of living was in decline for the lower 80%. But rather than address the issue of our lost manufacturing, government and corporations papered it over the the “service economy”, the ludicrous idea that we could return the nation’s workers to prosperity by doing each other’s laundry for a fee. Of course, the service economy created new tax opportunities for the government., which made it look like things were improving, but the reality is that without new money coming into the system from product sales, all the service economy did was accelerate the flow of money from private to government hands.

Then the real-estate bubble frothed up, the adjustable rate mortgages started to jack up the rates, and decades of self-serving greed began to pull the economy down. And the real b**** of it was that it was still reversible at that late date, but it is a funny thing about rich people; they are okay with sacrifice for the common good as long as someone else does the sacrificing. Remember, for most of them, those dollar signs are the only thing they have to feel good about themselves.

Rather than take the long hard path back to knowing how to manufacture products (most top American manufacturing experts had already been lured to other countries), Wall Street decided to make money itself the product. They took money (or debt), repackaged it, spun it around, piled it into interesting artistic shapes, tied a ribbon around it, and re-sold it. The theory was that if you had enough money and shook it back and forth hard enough, it would grow all by itself. And in the arcane world of corporate bookkeeping, it looked like it was working.

Except that what was really going on was that corporations were actually accumulating debts and selling them as investment opportunities, simply assuming that someone else would eventually have to square the accounts. But again, American manufacturing was clearly on the wane. We were not exporting enough products (no, not even bombs and bullets) to pay for all the excess debt piling up around Wall Streets favored get rich quick schemes.

Yes, a lot of Wall Street executives got very rich, and this attracted a lot of sharp operators to play the game, but they played it with the companies where We The People worked to pay our bills, and as those companies continued to downsize and lose jobs to boost immediate “profits”, Wall Street came up with every more complex financial “products”, all of which concealed a dark secret; Wall Street’s money was all borrowed, and as grandiose as the wealth of certain individuals such as AIG’s Maurice Greenberg may look to ambitious traders, it pales before the reality that Wall Street’s total debt exposure is almost $600 Trillion (with a ‘T’), almost one thousand times the promised (but probably underestimated) cost of the latest taxpayer funded bailout. The harsh reality is that Wall Street owes (and is unable to pay) more money than the entire nation is worth.

So now comes the fascist economy where profits are private but losses are socialized and anybody who objects gets a boot in the face.

But setting aside the costs of the bailout and the reality that the American taxpayer has run out of money and CAN’T find the cash to save Wall Street, there is an aspect of this sub-prime mess and bailout nobody is looking at.

Our nation’s workers are its wealth. As mentioned above, the workers are the fundamental force of our economy, something Wall Street forgot. But those workers have to be motivated to be productive, and right now, it’s hard to get enthusiastic about another 14 hour day when everything you ever thought you worked for vanishes in the blink of an eye as your company gets raided, your pension plan vanishes, your job evaporates and the guys who did it skip out with a $40 million severance package.

At the end of World War One was a period called the “Lost Generation”. Popular culture recalls them as the “beatniks” and tries to deride them as worthless bums, but the reality is that the Lost Generation was a symptom of a terrible malaise that infected the entire population. Even though we had won the war against Germany, personal experience had shown that it did not matter how hard you worked to acquire material wealth; it could be gone in a moment by the orders of some government somewhere. It was a nihilistic time where people survived but did not try to excel.

So here we are in the United States at the dawn of the 21st Century. Millions of Americans have seen a lifetime of work invested in their homes evaporate before their eyes while Wall Street’s royalty wallows in riches. Careers to which workers have devoted a lifetime are vanishing and the promised “retraining” amounts to asking if the customer wants fries with that order.

Americans are worse than broke, they are discouraged. The bailout sent a clear message that no matter how hard you work, the government can plunge you into deeper debt with the stroke of the pen or the vote of a congress inextricably linked with Wall Street itself. Black Tuesday may have plunged the United States into the Great Depression but it was a sense of hopelessness; the feeling that nothing one could personally do would improve things that kept us in that depression until WW2. The American Dream is a nightmare. Worse, for most Americans it turned out to be a cruel lie. A mortgage is just another form of rent; your home can still be taken from you with the flick of a banker’s wrist or eminent domain.

So the cost of the bailout is more than money. The cost of the bailout is the spirit of the American workers. How can we expect them to be enthusiastic builders of cars, TV sets, washing machines, of pyramids, of wars, if they have seen first hand how the proceeds from their work can be taken from them with barely a moment’s notice? At a time when our nation most needs the spirit of the American worker, the government has dealt that spirit a crippling blow. At a time when we all need to work together, the government has in effect told the workers that they are unimportant in the greater scheme of things. And in that fatal mistake, in that dismissal of what even McCain states is the core fundamental of the economy, in that careless and reckless moment of pride that goeth before the fall, lies the doom of the US itself.”

The full article is at:
http://whatreallyhappened.com/WRHARTICLE S/fflaw.php

Posted by Ruth | Report as abusive
 

OK, I’ve watched all these guys, from both sides of the aisle, and from the administration, on all the talking heads shows, and all of the press events. They’re scared to death. I can only think of one thing that would have put such a fear in them. China called. They said, “The money we have put into your economy, even into your Treasury bills, seems to be in jeopardy, as a result of your practices. Straighten the situation out, guarantee our investments, or we will quit rolling our Treasury Notes over, and you will have to find another source of funding for your government.” I suspect this was followed by a call from others (the Saudi’s?) with similar messages.

So,”government isn’t the solution, government is the problem?” and “deficits don’t matter?”

Right.

Posted by Steve Day | Report as abusive
 

Bailout Ideas

In watching the testimony today it would seem that a plan that entails full transparency and disclosure on every trade is needed. Initially this information would be provided publicly for each trade, within minutes of the transaction. This information would include among other facts ( keeping in mind that is a layman’s list, not a mortgage bankers):
1) the seller;
2) the total amount of the package;
3) details of the risk profile:
a) number of mortgages;
b) range of size of the individual mortgages;
c) number of mortgages in default;
d) number of mortgages late for 30 days, 60 days, 90 days, etc;
e) loan / equity ratio of the total portfolio, etc , including date of valuation and average house value as percent of December 31, 2005;

While this is being done to get beyond the initial crisis; concurrent steps should be taken to move credit default swaps to a regulated exchange and possibly even package mortgage product and move it to a regulated exchange ( contracts could be developed for mortgages of various risk profiles). Furthermore, the bigger goal is to get government assets out of the program as soon as possible.

 

I would like to ask Paulson and Bernanke where their investmests (money) are and when they put them there.

Posted by Joey | Report as abusive
 

My question would be: if this is the best solution to save the world’s economy, why doesn’t the US government openly nationalize the affected institutions?

For $700 Billion, the taxpayers should OWN a controlling interest in ALL corporations partaking in this bizarre absurdity of legislation. If that is unacceptable to corporations, then do not gamble my money on the very people who have allowed this to occur.

George Bush will simply attach a signing statement castrating any conditions Democrats put in this bill anyway. Only an idiot would TRUST these Republican neo-cons to follow the law when they have proven over and over that they consider themselves above the law.

Let the rich now suffer with all of us.

Posted by Jack Oak | Report as abusive
 

In order to accomplish the purpose of government as prescribed by the preamble of the U.S. Constitution, the Federal Reserve must be governed by a congress with apportioned representation in proportion to population growth.

The socialism vrs capitalism paradigm must give way to a republican form of government, which has nothing to do with the republican party, just as democracy has nothing to do with the democratic party.

Republicanism will, after the shxx hits the fan, and the general public wakes up to a cloudy future, fix all that is wrong in America’s government of, for and by the people.

The first step in re-establishing justice is to define the limits of government legislation, i.e. food, shelter, transportation, and communication. Next repeal the law that limits over 300 million people to 435 representatives.

The first two steps will allow the size of the electorial college to expand with the number of representaives. By limiting government to issues of general applicability, the focus of government will turn to the federal reserve, which will be demolished.

Banking will reverse to its orgainic intent, and by adhearing to the rule of law, article 6 of the US Constitution will empower a well proportioned congress to remove all concepts, and physical constructs to the contrary of justice, as intended in the engagements the U.S. entered into before the constitution was ratified.

The hope for the future is a constitutional reniasance. The U.S. is, after all, a constitutional republic.

Posted by Su Stainablepeace | Report as abusive
 

After Patriot Act now Bailout Act.
Americans, say NO!

 

Money never disappear, they just change hands. If those stupid banks led by idiots lost billions of dollars, somebody somewhere got all this money. I have a question: who are those people, where they are, why FBI is not hunting them down? They managed to cheat the whole nation into horrible disarray. If this is not a white color crime, then Enron scandal is kindergarten jock.

Posted by Isay | Report as abusive
 

After much reading, consternation and frustration, I find it ironic how the perpetrator of the horrendous scheme, former Senator Phil Gramm, author of the Commodities Futures Modernization Act among others, was employed as a lobbyist for a Swiss Bank…where do you think all of the payolla went???

Let it go into the $h!tt3r, I know how to survive and am willing to bet some mansions will get “reappropriated” into smaller holdings…

Posted by The Beej | Report as abusive
 

“A DEMONSTRATION OF THE ADVANTAGES AND NECESSITY OF FREE COMPETITION, IN THE BUSINESS OF BANKING

INTRODUCTION

With respect to the business of banking there are two inquiries of principal interest and importance.

First, What system of banking is most advantageous to the public?

Second, How can banks be rendered most profitable to the stock-holders?

The second of these questions has been thoroughly studied, and is perfectly well understood by the greater part of bank directors (*1). The prevailing theory of banking has respect to this question alone. That theory is founded upon the experience and practice of the Bank of England, and is the sole guide of banking operations throughout the United States.

The first question, certainly the more important of the two, – has hitherto been hardly deemed worthy of notice. Bank directors have been satisfied with taking care of themselves. The public interest has been little thought of………………………

It is said that a National Bank is necessary,

First, To regulate the local banks and keep them in order.
Second, To facilitate domestic exchanges.
Third, To furnish an uniform currency.

1. The first of these reasons ……..A free competition in banking will accomplish the end proposed, with much less trouble, and much greater certainty.

You set up a National Bank to watch the other banks; but who is to watch the watcher?

Where there is but one watchman in a city, albeit the same be a most “grave and ancient watchman”, yet does it generally happen, that he betaketh himself soon after twilight to the watch-house, and there most quietly and securely sleepeth out his watch, till his coat be stolen, or the city is set on fire with the candle from his own lantern. When it is well burning, and the engines are already at work, he opens his eyes at last, and bawls fire! as lustily as though he had been the first to make the discovery.

Is it not far better to dismiss your watchman, and to arrange things that it shall be for the interest of the rogues to watch and betray each other’s roguery?”

Quoted from the second part of A History of Banking by the late Richard Hildreth, published 1837, reprinted NY 1971 in the Reprints of Economic Classics series, purchased this morning at the LSE branch of Waterstones, behind the Royal Courts of Justice for £6.99 cash.

(Note *1 this observation may no longer hold true.)

Posted by HGJ | Report as abusive
 

The proposed solution is as cumbersome and crooked as the problem itself. 700 billions of dollars divided between all USA citizens over eighteen years old will perfectly resolve all financial problems of this country. Each and every citizen over eighteen years old will receive over $2,000,000, enough to pay all debt on mortgagees, student loans, credit cards, etc. Taxes paid on that money will dramatically reduce the deficit and the leftovers will be spend, improving the economy. The only people punished will be Wall Street gamblers, when you loose your money in a casino you are not demanding them back, but that exactly what 700 billions of dollars are requested for by treasury secretary – to give back to the gamblers from the Wall Street Casino.

Posted by Isay | Report as abusive
 

Let’s talk real world, shall we? The Federal Reserve system (FRS) is made up of PRIVATE, INTERNATIONAL banks, not government owned banks. Most are international in scope.
Bottom line is this: Loehman Bros. is among the mega-powerful, mega-elite banks that control the FRS, and in effect, control the world economy through the money supply and interest rates. Period. If they are going belly-up, or at least in a pickle, this is huge. Read a great article on this point, and also the upcoming Social Security train wreck. Check out a new website called Whiteandright.com. Very interesting stuff. We are on the verge of disaster.

 

I agree with the man who has written on whiteandright.com. This dip in the market is defintely atypical. When the Loehman Bros. go down, being an original Fed reserve Bank giant, the implications are mind blowing. Definitely check out that website.

Mike McLean

 

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