Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. Is another terrible folly about to be repeated, even with echoes of the costs and misadventures of the Iraq war booming loudly across the land?
Investors generally like a few details before laying out their money. A knowledge of the investment’s business plan, its costs, its expected return and its risk –above all, its risk– are key to the decisions investors make. It should be no different for citizens when they are asked to put $700 billion on the line for the private sector.
In this case, however, basic rules for the informed citizen/stakeholder are being thrown out the window. How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector. A rare and impressive collection of more than 200 economists, including Nobel laureates from both the left and the right, have raised serious questions about the plan and have urged Congress to reject it and to hold hearings into alternatives.
Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. And the sums stagger the mind. When you make a decision involving this amount of money, every detail matters. Probably even the spin of the earth should be calculated in the analysis for good measure. But what utterly takes the breath away is the lack of transparency and specifics offered as they relate to the single largest expenditure by any government in the history of the world. There is no clear statement even as to the kind of weak assets the government proposes to buy, much less how they would be valued. I suspect it will soon work its way down to student loans, car loans and credit card debt. Given the desperate picture portrayed by Fed chairman Ben S. Bernanke –who claimed in testimony before Congress on Tuesday, “I believe if the credit markets are not functioning that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way…”– and Treasury Secretary Henry M. Paulson Jr. –who resorted to begging House Speaker Nancy Pelosi, on a bended knee, for her support– don’t be surprised to see some banks even scurrying to trade in the trashy boardroom artwork selected by the chairman’s wife for some quick government cash.
Then there is that convenient cash and carry discount window the Fed is providing on a 24/7 basis. In the course of less than a year, deposit taking and investment banking institutions have so far borrowed a record $262.34 billion. The amount doubled in just the course of one week, the Fed said in its September 25th report. Total average daily borrowing also jumped to $187 billion from $50 billion in the previous week.
This unheard of level of borrowing from the Fed has received nothing near the reporting it deserves. To some observers it suggests that bank liquidity problems may be even more serious than are being disclosed. How much more will the taxpayer be on the hook for in addition to the $700 billion now being sought by the administration, which in turn is on top of the hundreds of billions that are on the line for all the other bailouts to date? If ever there was a time when the voices of the best economic minds in the world needed to be heard by lawmakers and citizens alike, it is now. Yet there has been no organized forum for either informed debate or Congressional testimony. Not only is $700 billion at stake, but much more will be at risk if the wrong decisions are made or the wrong problem is attacked. And what does the government do if it gets it wrong? Will the administration’s massive proposal stabilize a weakening housing market, which is the driving force in the erosion of corporate balance sheets and the unraveling of debt obligations, or will it merely be a prisoner in an even faster moving express ride downwards?
Institutions are failing, to be sure. Just this week Washington Mutual became the largest failure of its kind in history. But if the $700 billion dollar fund had been up and running, it is unclear whether it would have made any difference. And no one from the administration or Congress has weighed in on that issue. Even before this deal was proposed, Fed and U.S. government commitments and costs related to this crisis totaled more than a trillion dollars. Still, we are told a credit market calamity unlike anything since the Great Depression is possibly hours away unless taxpayers pony up hundreds of billions more.
So what exactly is the problem this bailout is supposed to be addressing and is it the right one? What if banks, having sold off their bad loans to the government, decide not to lend any money, except to other banks and their wealthiest clients? What will be the costs to the economy and to small business owners as well as ordinary Americans? Taxpayers should not be left scratching their heads for the answers. Some may recall that, as noted on these pages, just after the $21 billion takeover of AIG, the White House admitted that taxpayers may not see their money returned.
Here’s an idea: Why don’t Wall Street and the private sector take a more prominent role in cleaning up the problem that was of their creation? We are told that trillions of dollars is sitting on the sidelines and is ready for the right opportunity. But little effort is being made to corral these resources into an overall plan. It is just another inexplicable piece of a puzzle that has been turned into a masterpiece of confusion and uncertainty. Another nagging item: If the world is hanging on by the finger nails over the abyss of financial collapse which can only be averted by the steps the Congress is being asked to take, and so much anxiety centers on how the Asian markets will react on Sunday night (EDT) if the deal is not approved, why have governments around the world not proposed their own contributions to global economic salvation? Why do we not see their lawmakers meeting around the clock and over the weekend to do something to appease the markets?
Is America stumbling into a financial Iraq? The rush to attack a problem that did not exist on the basis of costs and consequences that were not anticipated have already taken their toll on America, its brave young troops, their families and the reputation of the country. The financial price tag for the Iraq misadventure is also counted in the hundreds of billions. Some estimate that it will soar into the trillions. Are we dealing here with the financial equivalent of threatened mushroom clouds and weapons of mass destruction? Another echo from that lamentable miscalculation is the idea that government cash may wind up making money for taxpayers. And the Iraq war was supposed to be self-funding from that country’s extensive oil reserves. Americans are still waiting for that windfall.
This much is clear from that costly experience: When principles that affect public confidence are sacrificed for the expectation of immediate gain, both stand at risk of being lost.
What is worrisome is that few leaders in business and government have demonstrated any grasp of the larger picture. Not only is there an apparent inability on the part of both Democrat and Republican legislators to connect the dots between the Fed’s record loans, the costs of the recent torrent of bailouts, the extent of the subprime mortgage mess, the swelling deficit and shrinking U.S. dollar and this latest government proposal, it is unclear that they even see the dots at all. The lack of leadership in providing the public with clear answers was especially apparent in Friday’s first debate among presidential hopefuls John McCain and Barack Obama.
The way Wall Street has been working is no way to run a business. The way the Bush bailout plan is being decided is no way to run a government. We are already seeing the consequences of the first fiasco. One shudders to think of what might await in the mismanagement of the second.