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The greatest theft in human history
by Chris Paige
Conventional wisdom holds that the bank bailouts were deplorable, but necessary. In reality, the bank bailouts were both deplorable and unnecessary. Saving the banks did not save the world. Saving the banks deepened and prolonged the recession, and saving the banks threatens to impoverish this nation. Let me explain.
According to Congressman Paul Kanjorski (D-11) and other bank-bailout apologists, the bailouts prevented a catastrophic run on the American financial system. Just think about that claim for a moment. Whatever we stood to lose as a result of Wall Street’s collapse, didn’t Wall Street stand to lose more? Wouldn’t they have at least tried to prevent their own collapse? Or are we really supposed to believe that whenever financial institutions get into trouble, bankruptcy is their only option? Unlike firms in other industries, financial institutions can’t cut expenses, renegotiate terms, stretch out payments, or reduce salaries? They can’t issue new shares or borrow at more onerous terms? In fact, we now know that Lehman Brothers turned down multiple offers that would have prevented its bankruptcy because Lehman expected the government to bail it out on more generous terms. In other words, Lehman’s collapse proves that Wall Street prefers government bailouts; it just doesn’t prove that it needs them.
Even if bankruptcy is a distressed financial institution’s only option, why should taxpayers suffer? Surely, all financial institutions have owners. Why shouldn’t those owners take the first hit? Likewise, all financial institutions have creditors. Why shouldn’t those creditors take the second hit? That is, how can anyone seriously contend that the U.S. financial system requires taxpayers to take the first hit?
As I have argued before, we could have prevented a run on the U.S. financial system at no cost to taxpayers by amending the bankruptcy code to make trading counter-parties “critical vendors,” which simply means that they would be paid before most other creditors. By moving counter-parties to the front of the line, we would have broken the chain in the chain reaction. Granted, this solution would have injured Wall Street’s shareholders and bondholders, but why should taxpayers suffer to protect Wall Street’s shareholders and bondholders?
Although it’s certainly true that allowing financial institutions to fail makes investing in financial institutions riskier, it’s not clear why we would want to make investing in financial institutions less risky than all other investments. That is, why do we want to subsidize financial institutions? Would we support a plan that taxes financial institutions at a lower rate than firms in other industries? Would we support a plan that sent large cash subsidies to financial institutions? Then why should we support bailouts—the effects of which are indistinguishable from tax breaks and cash subsidies? Unless and until someone can prove that Wall Street generates externalities (social benefits) that no other industry can produce, no one can defend bank bailouts as necessary.
Wall Street collapsed when the housing bubble popped—resources that had been flowing into Wall Street as a result of the housing bubble should have been redirected away from Wall Street towards our more productive sectors. To use an agricultural analogy, Wall Street’s fields needed time to recover, so they should have been left to lie fallow while we planted our seeds in healthier fields. By bailing out Wall Street, therefore, we reversed that healthy outflow of resources, forcing our scarce capital into our least productive firms in our least productive sectors. Just as scattering the best seeds in the worst fields tended by the worst farmers yields a smaller crop, forcing even more of our resources into Wall Street created even more economic misery. Arguing that one can save Main Street by saving Wall Street is patently absurd, notwithstanding the fact that so many experts who work on Wall Street or otherwise depend on its largesse maintain the opposite.
And the bailouts absolutely will impoverish our nation.
First and foremost, the bailouts undermined the rule of law by forcing investors to wonder whether a firm would be eligible for a bailout and what the terms of that bailout would be. Guess right, and you’re a Goldman Sachs shareholder who benefits from government largesse. Guess wrong, and you’re a Lehman Brothers shareholder who does not. Since it’s impossible to know which firms will be saved and which firms will not, investors must charge a risk premium to all American firms. That is, the bailouts made it more expensive for American firms to borrow and to attract capital, which means our economy will be smaller and less successful than it otherwise would have been. Second, the bailouts exacerbated our budget deficits. Without radical policy changes, our debt will eventually reach 100 percent of GDP, which—historically—has been the point at which nations rapidly decline. Third, the bailouts hijacked monetary policy. Before the bailouts, the Federal Reserve owned mostly Treasuries, but after the bailouts, the Fed held mostly junk it purchased at inflated prices from Wall Street. At this point, therefore, any attempt to raise interest rates would crater the value of those securities and force the government’s borrowing costs to explode. Since the Fed has a license to print money, it can’t go broke, but it can—and probably will—destroy the value of the dollar.
In short, the bailouts were Wall Street’s version of a coup. Although the Constitution grants the power to borrow against the full faith and credit of the U.S. exclusively to Congress, Wall Street has usurped that power by issuing debt with an “implicit” guarantee. Sadly, Congress appears ready to formally abdicate its power by adopting a “reform” package that would empower the executive branch to transform these implicit guarantees into explicit guarantees. Granted, Congress has not yet surrendered its taxing authority to Wall Street, but that might only prove that Wall Street would prefer that Congress bear the brunt of public outrage over taxes. Electing financially unsophisticated candidates like Congressman Kanjorski and Mayor Lou Barletta has a cost, and this election will decide just how much more that cost will be.
The writer is a Republican candidate in the 11th Congressional District.
February 15, 2010 at 8:45 am
Tags: Chris Paige
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Celtic Conservative
Feb 15th, 2010
Thomas Jefferson on Banks;
Banking establishments are more dangerous than standing armies.
Thomas Jefferson on a Central Bank;
The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.
Thomas Jefferson on Debt, and also, in my opinion, current liberalism.
If we run into such debts as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, and give the earnings of fifteen of these to the government for their debts and daily expenses; And the sixteen being insufficient to afford us bread, we must live, as they do now, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account; But be glad to obtain subsistence by hiring ourselves to rivet their chains around the necks of our fellow sufferers; And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for a second, that second for a third, and so on ’til the bulk of society is reduced to mere automatons of misery, to have no sensibilities left but for sinning and suffering…and the forehorse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.
dave lewis
Feb 15th, 2010
Then why did Bush bailout the banks.
gophawk
Feb 15th, 2010
Too many in both major parties are in the pocket of the financial oligarchs.
They are the same trusts that Teddy Roosevelt had to bust back in another era which had tremendous ‘financial innovation’ (read those words as ‘accounting fraud’).
What started under Clinton and Reagan was the elimination of all impediments to oligarchy in financial services and the oligarchs engaged in massive fraud.
What happened under Bush and Paulson was that the fraudsters lost their money because even they did not understand the consequences of their game. We the American taxpayers were called upon to make them whole and impoverish our nation and our middle class to support the wealthiest people – not only in our country — in the world. That was real panic back in 2008 because all those Wall Street guys were going broke. Nobody could pay them off on their irrational bets. No one except a sovereign nation. Enter the US taxpayer.
A year and a half after the transfer of wealth under Bush and Paulson, Obama and Geithner have still not prosecuted anyone for the fraud or done anything to get our money — and our nation’s future — back.
These financiers have systematically looted our manufacturing base, our pensions and our governments. They have hollowed out our middle class. And they are still going at it and there is not one ‘reform’ proposal in Congress that will break up these new financial trusts.
That is what we need to do. Our Founders did not pledge their lives to create a more perfect hedge fund. We are either a democracy – where people have an equal say – or we are an oligarchy where democracy does not matter at all.
David Diano
Feb 15th, 2010
Chris-
“And the bailouts absolutely will impoverish our nation.”
Umm… are you aware that the TARP money is being repaid, with interest?
Ed H.
Feb 15th, 2010
Well, Chris Paige certainly went back a year and a half ago and rewrote the history of the problem that our country and the world was facing when Bush signed TARP into effect. If a potential congressional candidate is as clueless as Mr. Paige is on the economy, can he expect to be elected to office?
And just to focus on his comments… where were the banks going to borrow money from when other banks were trying to keep their own heads above water? Who would have been insane enough to buy shares from a bank that was failing and didn’t have the capital to continue one for more than a couple of months or even weeks?
Wall Street stood to lose a lot, but their leadership has golden parachutes to buffer them from the drop. The vast majority of the American people don;t, and as we have seen with the huge job losses in the past 15 months even with the bailouts, the loss of a job with no other means of income for most people would have meant that social services would have been stretched far beyond the breaking point and that the cycle of joblessness would have coupled with a deflationary cycle.
I suggest that Mr. Paige fire his Economic advisor and get one that has an understanding of economics. Or, at least give up on the talking points the GOP hands out that, if followed, would result in more of their record of failure on economics.
GOPHAWK
Feb 15th, 2010
Ed, you are absolutely wrong about the parachutes for Wall Street. They were penniless. Huge leverage, no reserves. Their stock was worthless. They had engaged in massive fraud and we should have been hauling them into court just like we did with the S&L crooks and their Wall Street enablers like Milliken.
Did you know that at this time in the S&L cycle we had arrested more than one thousand people in connection with the fraud that they had committed and Congress was passing legislation to make it easier to recover their personal assets to repay the taxpayer? That was appropriate government action to protect the taxpayer. That is why we have a government to counterbalance the power of the thieves. And that is what should be happening now.