The Great Bailout

Secretary Paulson’s plan to prevent collapse of the financial system prompts immediate and unanswered questions:

Will the Paulson plan fulfill its intentions or will it worsen what it wants to correct?

The health of the financial system is a major problem, but is it the problem, and does it disguise the true problem?

Let’s examine the first consideration. Will the Paulson plan fulfill its intentions or will it worsen what it wants to correct?

A Treasury statement claims that “Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage-related assets and, after consultation with the Federal Reserve chairman, other assets, as deemed necessary to effectively stabilize financial markets.” By gaining authority to become a buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, the Treasury expects to reduce mortgage foreclosures and quickly create regulation for a new financial system.

Relieving “bad” banks of worthless securities in order to increase their reserves and their ability to lend and spreading the ‘junk’ among many “good” banks that already have sufficient reserves and won’t feel any deterioration in their balance sheets is an expedient approach to the banking crisis. Nevertheless, there are many, many questions:

(1) Why doesn’t the Treasury provide an auction mechanism for direct sale of these assets rather than buying them and then trying to sell them to others?

(2) Since those selling the assets to the Treasury are normally those who purchase these assets, who is available to buy the assets?

(3) Isn’t the Treasury speculating with these assets, betting it can beat the odds and sell what nobody else can sell?

(4) Should the U.S. government be allowed to speculate with taxpayer money?

(5) Won’t the government be subsidizing and rewarding the “bad” banks while making the “good” banks less good?

(6) Since the sub-prime and other deceptive mortgages artificially raised housing prices, similar to having claques at an auction, aren’t housing prices artificially high? If so, how can Paulson’s scheme prevent foreclosures? The only buyers at the elevated prices were those who received the extraordinary mortgages. That crowd is no longer available to purchase homes. Considering present home ownership in the U.S., is there a sizeable portion of the American public that has sufficient down payments and income and will be willing to purchase homes at elevated prices? If so, why aren’t they buying the real estate now when interest rates are low?

Questions on the possible detrimental effects of the taxpayer commitment:

(1) Will this plan generate a huge increase in the government deficit, which will lower the value of the dollar and increase interest rates? Both seem likely.

(2) If the dollar decreases in value, won’t commodity and import prices rise? These negative effects will increase production and consumer costs.

(3) Has an analysis that includes the possible deterioration in the dollar and augmented commodity prices, especially in petroleum, been included in the presentation to Congress?

(4) Will higher interest rate rises offset benefits (if any) from the Treasury’s plan?

(5) Could a combination of a decreased dollar and increased interest rates set in motion a regenerative effect by which the economy deteriorates, unemployment accelerates, tax receipts are lowered, the dollar drops further, interest rates rise more, etc., etc.?

(6) Is this an all or nothing plan by which if the plan fails to accomplish its purpose, it will be counterproductive or catastrophic?

(7) If the plan fails, is there a backup plan in place that will take over?

(8) Are there other financial problems — e.g., credit card debt, auto loans — that are also troubling?

Let’s examine the second consideration. The health of the financial system is a major problem, but is it the problem, or does it disguise the true problem?

Why was it necessary to pump up and manipulate the credit system in order to enable the U.S. consumer to make large scale purchases? Obviously, the American worker did not have the savings or wages to finance the purchases. Foreseeing a dead-end economy, the financial wizards in charge decided to use unsavory credit expansion to greatly enhance their profit margins rather than expand wages and face a possible reduction in profit margins. The relative stagnation of the U.S. manufacturing system and inability to compete in global markets, reflected by huge trade deficits, prompted the financing of consumer spending. The ‘housing bubble’ is a result of the actual problem, which has the U.S. free enterprise system on hold by its failure to compete with more controlled and regulated nations, such as those in China and Southeast Asia. Add to the problem, the financial burdens due to the Bush doctrine. While the U.S. plows its defense manufactures into the ground and freely distributes capital to “defend democracy,” other nations erect permanent institutions that assist them to move forward and invest their capital wisely. The U.S. structured globalism to benefit its economic system. The more regulated Statist nations have structured their economies to make globalism work for them.

In a previous article,1 the writer outlined the notion: “A new Statism, in various prescriptions, exercises control over the political, moral, economic and social fabric of several nations and has the potential to control the destiny of the world.”

Another article,2 stipulated: “The global economy has been pioneered by the United States but has not been a perfect fit for new pioneering nations. In order to provide prosperity for its people, the United States must implement policies that offset the detrimental effects of globalism.”

Many developing nations incorporate Statist characteristics in their political system. Poland, South Africa, Indonesia, Singapore and India have State Organized Enterprises (SOE) and, to some degree, have incorporated essential features of the new Statism. Resource rich states, such as Venezuela and Bolivia have embarked in a Statist direction. China and Russia are the most prominent nations that represent the new Statism.

The most essential reasons for the failures of the previous centralized economies were their inability to motivate workers and properly allocate resources. The former Socialist nations recognized the reasons for the failures and adjusted their economies to correct for them. The ‘iron rice bowl’ and guaranteed employment no longer exist in the new Statist nations; freer labor occurs in most industries. State planning has not entirely disappeared, but the overpowering command economies, which allocated resources, have been eclipsed by more market oriented economies that control demand and distribution. Although still lacking political and economic democracy, the new Statist nations have lifted masses from poverty and constructed impressive economies. Their economic advances pose a challenge to the prosperity of the western world.

The Statist world incorporates low wage consumer production. Its economic successes have generated excessive demand, created resource and material shortages and increased prices of raw materials. Capital has flowed from the western world to an emerging world. The accumulation of capital and reserves (1.3 trillion dollars in China, $500 billion in Russia, and $75 billion in United Arab Emirates) has diminished the financial dominance of America and Europe.

The Bush administration is lost in rhetoric and will not recognize that the nation is declining — economically, socially, and politically. Elevated productivity gains are no longer feasible and the mixed economies of the fast growing nations of China, India and Russia have advantages that are not easily overcome. The mixed economy allows controls of currency exchange rates, wages, prices, production facilities, health care expenditures and pension plans, which enable a quicker response to challenges and yield a competitive edge in the global economy. The United States has no choice but to become more social and align government and industry in common goals that will correct the dangerous trends. Some general concepts:

  • Cooperation between industry and the public, rather than free-wheeling economics, will enable more rational decisions and predictable operations.
  • Changes in life style that conserve energy (smaller cars, smaller houses) will lower energy prices, assist in the balance of payments and direct spending to domestic products.
  • Distribution of wealth will increase spending on vital goods and reduce spending of superfluous goods. It will also bring citizens closer together, increase faith in the system and ameliorate social problems; e.g.: crime, poverty, drugs.
  • End of military adventures will reduce military spending, reduce the deficit and allow re-direction of wasteful military programs to more beneficial social programs. Development of a National Pension plan, properly prepared of course, will resolve the Social Security and pension crises.
  • Development of a National Health plan, properly prepared of course and similar to those in other western nations, will resolve the Health crisis.
  • Agreements on “outsourcing” will limit job losses.
  • Development of an immigration plan will preserve jobs for American citizens and prevent competition for wages.

The Paulson Plan is another patch in a worn out American socio-economic system. The plan might be a temporary solution to a problem but it is not a solution to the problems. It disguises the actual problems, which are the stagnation of U.S. manufacturing, an inability to compete in the changed global economy, an unworkable banking system that is constantly in trouble, and the demand for unsupportable credit to promote growth. United States’ history shows that private industry has never provided solutions to recurrent economic problems. Changes in life style and a return to the social awareness that characterized the Roosevelt era might be more applicable solutions for assuring a revitalized America.

  1. The New Statism, The Rise of Corporate States,” Alternative Insight, Oct. 2007. []
  2. The Socialization of America,” Alternative Insight, April 2005. []

Dan Lieberman is Editor of Alternative Insight, a monthly web based newsletter and author of the book A Third Party Can Succeed in America. He can be reached at: alternativeinsight@earthlink.net. Read other articles by Dan.

5 comments on this article so far ...

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  1. Gliscameria said on September 26th, 2008 at 11:46am #

    The fact that they are willing to devalue the dollar to save these banks should tell you that the government is completely out of touch or doesn’t care about the working class.

    They want to spend the money on saving failed banks and bailing out a group of rich non-producers, while at the same time inflating the prices for things that the working class needs. They are essentially helping out their own and punishing the rest of us.

    Getting a car loan or starting a business really doesn’t matter when most poeple can’t afford to heat their homes or go to the hospital. This country is going to start looking like south Africa, where there is an entire rich class that has to hire guards to keep the poor out… shame is, we’re an armed populous.

    No more helping the top. We need a foundation. Let’s get some manufacturing jobs, public works… any jobs where someone actually MAKES SOMETHING REAL.

  2. MrSynec3 said on September 27th, 2008 at 12:00pm #

    Dan Lieberman wrote:
    “The relative stagnation of the U.S. manufacturing system and inability to compete in global markets, reflected by huge trade deficits”.
    I big to object. The trade deficit is not the result of the inability to compete in global markets but it is the result of shifting of production
    to foreign countries who has cheap labour and lax evironmental standard. Many of the products exported from China etc etc and
    imported here are nothing but U.S. products manufactured overseas.
    That also explains the stagnation of the U.S. manufacturing because
    a lot of manufacturing was shipped off-shore.

    Dan Lieberman also wrote:
    “The accumulation of capital and reserves (1.3 trillion dollars in China, $500 billion in Russia, and $75 billion in United Arab Emirates) has diminished the financial dominance of America and Europe.”

    Again I big to differ. Most of the capital and reserves of China are
    invested in U.S. treasury notes which help keep the finanacial dominance of of America .

  3. dan lieberman said on September 27th, 2008 at 8:07pm #

    I thank Mr. Synech for his comments, but don’t they prove my points?
    I didn’t say U.S. manufacturing companies are not competitive. I said the U.S. manufacturing system is not competrtitive. The fact that U.S. companies are using foreign labor proves that domestic production cannot compete with foreign production. This shifts purchasing power to foreign workers and reduces the purchasing power of American workers. For domestic producers to sell goods, requires printed money or credit to offset the value added by foreign workers , which is reflected in the huge deficits iof the trade balance.

    As for financial dominance, doesn’t this relate to who controls the investment and capital markets and not where funds are invested. ?After all, China hast the bulk of international investment; does it mean that China controls the capital marketds? Pure major investment banks no longer exist in the U.S. They have either gone bankrupt or merged with commerical banks. Recirculation of dollars by the Chinese to the U.S. is used to prevent decline of the dollar and keep Chines exports cheap. The investment has no relation to the dollar being the dominant financial instrument. Capital markets have shifted to the Middle East soverign funds and somewhat to China. The U.S. is still a player, but is it still dominant?

  4. David said on September 29th, 2008 at 6:05am #

    Stop the Great Bailout!

    Given the now likely passage of the Great Bailout, I’m mad as hell and I’m not going to take this anymore!

    If you’re mad as hell too and want to stop the passage of the Great Bailout, please visit http://ImMad.net to sign a petition, right now!

    Then spread the word about http://ImMad.net to as many people as you can, right away!

    This is our last chance to speak up.

  5. cg said on September 29th, 2008 at 7:44pm #

    Here’s the vote.

    http://clerk.house.gov/evs/2008/roll674.xml