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Tuesday, October 07, 2008

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.

9 comments:

David M. said...

Gee Dennis. So you don't believe our Republican president and his Republican cabinet when they say that without the bailout, we would enter a depression? I wonder why? Is it something he said?


-Oh, and by the way, are you screening out comments you don't like? So much for your "Caution: Offense Ahead" claim of toughness.

Anonymous said...

This is so depressing that one hardly knows how to begin expressing the level of anger that I feel for those awful Leftists who insisted on the Community Reinvestment Act of 1995 that forced lenders to make irresponsible loans. The same crowd blaming the Bush Administration are themselves responsible for the problem.

They get the campaign funds and we get the bill -- not to mention the disappearance of our life savings in the stock market or no interest on T-bills.

As always, the taxpayer and responsible citizen gets harmed coming and going.

If we had an honest MSM, everyone would know who is to blame. Because of their collective dishonesty, Obama will benefit.

God help our country if he and the Democrats win big. Kiss this country as we knew it goodbye.

Margaret

Scott said...

Dennis-
Nice try, but idealogic. The Wells deal for Wachovia, should it be allowed will, in fact, cost the Treasury. An IRS decision that occurred just hours after the Citi-Wachovia deal was brokered by the Fed, allows for massive write-offs that did not exist. Wells won;t pay taxes for years if they are allowed to take Wachovia whole. Citi has so much of the same type debt that this IRS ruling is of zero benefit to them, and they therefore have no incentive to up their bid. So it is no great triumph of the free market that Wells came in after the Citi deal was done. It was just a newer, more beneficial government subsidy that came into play.
In fairness, you owe the readers of the Trib a correction and clarification. It would be the proper thing to do.

Scott in LGPark

David M. said...

Margaret - are you in a state of denial? Republicans controlled the House from 1995 – 2007 and the Senate from 1995-2001, and from 2003-2007. The last 8 years have been run by a Republican president who has completely frozen out the Democrats on any decisions - outside the bailout. There you go again blaming the media - there must be a conspiracy. Believe it – it is the fault of Republicans and their deregulation! Look who have done well under this administration – the rich! (Oh, let’s not tax the rich anymore, it will hurt the economy. (wink, wink))

Stephen Schade said...

Mr. Byrne:

You have overlooked a few points.

First of all, given the current climate, Wells Fargo is one of the few companies that could afford such a takeover. For the most part, only the government can pull this off.

Secondly, the Dow fell because of the bad jobs report. You clearly are misreading the tea leaves here.

Finally, credit is certainly not easy these days. Indeed, 40% of loan applicants get rejected.

Scott said...

Dennis-
I posted actual, verifiable facts relating to your op-ed and the misinformation in it. No response? Not even here where only a couple of people will see it? Though the correction really belongs in the Trib. Man up, Dennis. I used facts, not opinions. The least you could do is acknowledge your error.

Anonymous said...

bruttal ...old fox

Anonymous said...

Do you know where that $700-billion bailout figure came from?

I find it's weird that the Federal Reserve Chairman Ben Bernanke once mentioned that $700 billion figure in 2006 Washington post article.

Quoted from the article (Bernanke: Baby Boomers Will Strain U.S. - Oct 4, 2006)

If the government attempted a fix through spending cuts, spending for programs other than Social Security and Medicare would need to fall sharply _ the equivalent of "a budget cut of approximately $700 billion in nonentitlement spending," he said.

Here's the link of the article:
http://www.washingtonpost.com/wp-dyn/content/article/2006/10/04/AR2006100401596_2.html

Anonymous said...

David M,

My guess is if you weren't such a jerk, your comments wouldn't be screened.

Oh by the way, in case you have been sleeping for the past two years (which it sounds like you have) the dems have been in control of both the house and senate. If you look at where we are now vs. two years ago, I guess it may be easy to draw the conclusion that the biggest do-nothing congress in history is responsible for the current mess we are in. Really I wouldn't be that silly to think this only happened over the past two years. We all know the dems have been in the tank with Fannie and Freddie for a lot longer than that.