America's big economic flimflam

By Dennis Byrne
Chicago Tribune

The $700 billion financial bailout may be the biggest flimflam ever pulled on the American public. It has all the earmarks of a good con: Bankers and assorted Wall Street grifters will make off with hundreds of billions of dollars, abetted by Washington politicians, while we get stuck with the tab.

We can thank Wells Fargo & Co, a big Western bank, for exposing this swindle for what it was by agreeing to buy Wachovia Corp., a troubled Eastern bank, thereby rescuing it from a government-arranged shotgun marriage with Citigroup Inc.

We need to step back for a moment to appreciate Wells Fargo's good deed. Start at the beginning: Deflation in home prices caused the value of mortgages (and their derivatives) held by banks (and other investors) to likewise lose value. Not knowing their "real" value, these banks and other lenders aren't willing to risk lending money to anyone—consumers, businesses or other banks. Thus, the credit market has "locked up."

We're told the only way out is for the government to cough up $700 billion, which supposedly will allow banks and the others to somehow put a value on their diminished assets and, thus, get back to the business of lending. Wells Fargo discredited that scenario. It did exactly what Washington said couldn't be done: It put a value on a failing bank, Wachovia: $15.1 billion.

In effect, Wells Fargo bet its money on the value of Wachovia's portfolio of toxic mortgages, something Wall Street said couldn't happen until the bailout deal was struck. Actually, the Wells Fargo deal was done before the bailout and it came without government involvement or taxpayers' money, unlike the proposed Citigroup deal.

This needs emphasis: The government, through the Federal Deposit Insurance Corp., planned to put taxpayers into the middle of a risky and costly deal that the private sector—Wells Fargo—was willing to undertake on its own. Does this mean that government should have done nothing to help resolve the credit crunch? No, it only means that the government's panic-driven bailout might not have been the best way to do things, as 100 of the nation's top economists warned.

Only time will tell if, as the economists asserted, the bailout is unfair, too ambiguous and a drag on capital markets for decades to come. One thing we do know, however, is that before the bailout was enacted on Friday, the Dow Jones industrial average was up more than 300 points, supposedly in anticipation of its enactment, but after the House sealed the deal, the index fell 157 points, a swing of more than 400 points. Oops. Wall Street sages suddenly opined that the "market" considered the $700 billion bailout to be no big deal after all, because the life preserver may be arriving too late.

This is curious, because there's plenty of cash to lend; the nation's money supply hasn't shrunk, it has expanded. Already, we're seeing stirrings in the private sector—no thanks to the bailout—that say now is a good time to gobble up bargains. Witness tycoon Warren Buffett's big investments in GE and Goldman Sachs. And we never know when the logjam of pent-up demand for housing will break.

Here's the supreme irony of the bailout: Easy credit, low interest rates and Wall Street legerdemain launched us into this mess. The cure, we're told, is more of the same: easy credit, made possible by the accounting hocus pocus of the bailout, for the truly unworthy. Plus another $110 billion in earmarks for lawmakers, exactly what everyone says is bad. And the source of all this dough? Borrowed from, among others, foreign purchasers of Treasury notes, and paid back by us. And if we can't borrow enough, we'll just print more money. The cure for bad credit is, well, more bad credit. Flimflam hardly describes it.