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Tuesday, October 14, 2008

Paulson: Lack of Financing "Totally Unacceptable"

So I just heard Treasury Secretary Henry Paulson defend the bank bailout (now a buy-in) by saying, “Government owning a stake in any private U.S. company is objectionable to most Americans — me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”

So we're doubling our deficit (tripling? quadrupling? Is anyone in Washington even counting any more?) to buy stock in banks so folks can continue to spend money they haven't earned yet.

I know, I know, the modern economy runs on credit. Darn few people (myself included) have the cash in their pockets to start a new business or buy a house or even a car.

But has Secretary Paulson just defined a new fundamental right? Is it really "totally unacceptable" that I can't get a loan?

We don't call it totally unacceptable that millions of Americans don't have access to health coverage. We don't call it totally unacceptable that millions of Americans have lost access to millions of good manufacturing jobs and slid precariously toward the bottom edge of the middle class. Or at least, we don't find them so unacceptable that we will pour $250 billion dollars all at once into rectifying those problems.

If you and I and the 10 a.m. brain trust from Gary's Bakery were sitting in Washington and we could steal $250 billion from our kids and grandkids to spend on today's problems, would we really burn it up buying stock in banks that got us into this mess in the first place? Would we then trust those banks to make the best use of that money?

Or would we spend it to help our neighbors directly? Would we pay Amert Construction to put a couple dozen more young fellas to work fixing roads and bridges? Would we come up with a program where we'd help our neighbors pay their mortgages in return for some work picking up trash or helping out at the elementary school? Would we pay off our neighbors' medical debts so they could avoid bankruptcy court and get back to spending their money at Sunshine and Pamida (or even saving up for their retirement)? Would we pay thousands of workers top dollar to install solar panels and wind turbines on city hall, the water treatment plant, and every other government building we can get our hands on?

That's what I might do... but I guess that's why I'm not in Washington. All those other things strike me as being a little more important to America than boundless credit. Silly me.


  1. Actually you have to back up a little from the banks to find the true cause of this mess. There was a little piece of legislation called the Community Reinvestment Act based on the fact that lack of finances was "totally unacceptable" as a reason to not qualify for a home loan. This act, along with pressure and intimidation tactics of organizations like Acorn, forced banks to make loans they knew were bad, no money down, low interest etc.

    I don't like the bailout either. I don't like the shenanigans and outright criminal acts. I don't like that there is no oversight on these institutions. I don't like that the Dems blocked McCain's call to look into this mess back in 2005. I don't like Pelosi's partisan, hatefilled speech blaming all on Bush (surprise?) before the first vote. I don't like Obama's still promising everything to everyone even though we are broke. There's a lot I don't like.

  2. Let's not inject any common sense ideas into this corporate welfare program. That would make too much sense and people may not understand the simplicity of it all.

  3. Let's not inject any common sense ideas into this corporate welfare program. That would make too much sense and people may not understand the simplicity of it all.

  4. When the bill for all this comes due with interest, watch out! We point our fingers of blame in various directions; our children and grandchildren will point theirs at us.

  5. [Tony submits the following insightful comment. Excellent! I edit for minor language.]

    Says Tony:

    "Anon 8:19:

    That is only part of the story. For a more detailed view, I would recommend:



    http://www.ny.frb.org/research/economists/ashcraft/subprime.pdf [PDF alert!]

    While the Community Reinvestment Act may have contributed there were three other features that were required for our current situation:

    1. Improper rating of the securitized debts.

    2. Predatory lending practices of the banks issuing the loans.

    3. Fund managers are not required to distinguish between corporate and securitized debt.

    The first is fairly obvious. As the housing bubble inflated, the "value" of securitized mortgages are computed daily as opposed to a multi-year or even multi-month average. This means that any artificial inflation in housing prices lead to dramatically over valued securitized debts with 15-30 year life times. The newly deregulated ratings agencies (thank you Bush) applied their magic formula a voila a variable value debt became consistent. Hedge funds then bought these way over priced debts.

    The second point, predatory lending practices of the banks, is a two step problem. First, banks resell mortgages to form securitized debts the day they are issued. The local banks simply tack on a finders fee. They have nothing to lose other than their reputations. So, banks came up with a number of complicated repayement plans that made it appear as though low credit borrows could pay for their loan. Note that this only came during the last few years many, many years after the community reinvestment act.

    The last point, fund managers are not required to distinguish between corporate and securitized debt, is again a lack of regulation problem. With corporate debt, detailed practices for evaluating and rating the debt are in place. Securitized mortgage debt though, is not (thank you bush). But, fund managers are not legally required to choose one or the other, just look at the debt rating. So, in the interest of finding the highest rate of return, many fund managers hopped on the securitized mortgage band wagon.

    All three of the above were necessary to get us to where we are today and span both the government and private sector. There is plenty of blame to go around for a [snafu] of this proportion."

    10/15/2008 12:26 AM


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