[INDEX |
NATIONAL
|
WORLD
|
PERSPECTIVE
|
COLUMNS
|
MONEY
|
ENTERTAINMENT
|
HEALTH
|
TECH
|
LETTERS
|
SUBSCRIBE]
FinalCall.com News
Business & Money
America’s Bailout Prescription
By Cedric Muhammad
-Guest Columnist-
Updated Oct 24, 2008 - 12:42:00 PM
Can It Heal A Global Economy and Prevent Another Great Depression?
(This is part one of a three-part series.)
“Stocks lost more than 7 percent, $872 billion of investments evaporated and the Dow fell to 8,579… It all took place one year to the day after the Dow closed at its record high of 14,164.” AP, “Dow drops to 8,579, reaching ‘03 levels” (as published in The Arizona Republic), October 10, 2008
“In this crash, you will be harder hit than in the crash - fall of the stock market in 1929.”
“Independence.” The Honorable Elijah Muhammad; July 14, 1972; Muhammad Speaks
“Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president” when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting.” “The Economic Consequences of Mr. Bush,” Joseph E. Stiglitz; December 2007; Vanity Fair
“By coming together on this legislation, we have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country. We have shown the world that the United States of America will stabilize our financial markets and maintain a leading role in the global economy,” President Bush said on October 3, 2008 of the just passed bailout package—which he soon signed into law—formally known as the ‘Emergency Economic Stablization Security Act’
The very next week the Dow Jones Industrial Average dropped 18% from 9955.50 to 8451.19. The worst 5 days in the 112-year history of the Dow.
The Emergency Economic Stabilization Act of 2008 (EESA) provides up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets that are clogging the balance sheets of financial institutions. EESA requires the Treasury and other government agencies to modify troubled loans—many the result of predatory lending practices—wherever possible to help American families keep their homes. The legislation requires companies that sell some of their bad assets to the government to provide warrants so that taxpayers will benefit from any future growth these companies may experience as a result of participation in this program (a warrant gives the holder the right to purchase securities—usually a share of ownership - at a specific price, within a certain time frame.) The law mandates that corporate executives who made bad decisions not be allowed to dump their bad assets on the government, and then walk away with millions of dollars in bonuses. EESA also establishes an Oversight Board so that the Treasury cannot act in an arbitrary manner. It also establishes a special inspector general to protect against waste, fraud and abuse.
President Bush promised, “Taken together, these steps represent decisive action to ease the credit crunch that is now threatening our economy. With a smoother flow of credit, more businesses will be able to stock their shelves and meet their payrolls. More families will be able to get loans for cars and homes and college education. More state and local governments will be able to fund basic services.”
Although the promises are bold there are more than enough reasons to question their accuracy and the power of this bill to save the U.S. economy from financial collapse.
For 26 Days America Goes It Alone
“At today’s meeting of the G-7 Finance Ministers and Central Bank Governors, we finalized an aggressive action plan to address the turmoil in global financial markets and the stresses on our financial institutions. This action plan provides a coherent framework that will direct our individual and collective policy steps to provide liquidity to markets, strengthen financial institutions, protect savers, and enforce investor protections,” said Treasury Secretary Henry Paulson on October 10, 2008. These words suggest that prior to that date there had been no “action plan” which “provides a coherent framework that will direct” the “individual and collective policy steps,” of the nations of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. This crisis reached a critical stage after the bankruptcy of Lehman Brothers and the emergency sale of Merrill Lynch to Bank of America on September 14th and 15th respectively. Yet, it took a month for officials to announce an international action plan and framework to coordinate individual and collective policy steps. A ‘go it alone’ mentality is apparent – like that which preceded the Iraq war. Those 26 days of America attempting to solve a global crisis on its own, may eventually be recorded in history, as a fatal error in judgment.
America is not a closed economy. Decisions made in America affect the world and vice-versa. The late economist, Jude Wanniski, perhaps put it best in his book, The Way The World Works, writing, “… if the U.S. government does such and such, the impact of those actions on other nations might well feed back on the U.S. economy, causing unemployment. The world is not fragmented, but integrated, which means that every economic event that takes place someplace in the world is felt virtually everywhere in the world. And theories that treat the U.S. economy as if it were closed when in fact it is in constant interaction with the rest of the world are likely to be deficient or worse.”
“We are not a family sitting around a kitchen table. We’re the central bank for the world. Our liquidity is the world’s liquidity,” said Albert Keidel, Senior Associate, Carnegie Endowment for International Peace on the October 9, 2008 edition of The Diane Rehm Show.
Treating America as a closed economy is a factor that produced this crisis and deformed the bailout package.
America not only exports its culture, products, and ideas, but also economic policies and financial instruments.
One in particular—mortgage-backed securities –a type of asset backed by a collection of mortgages—have been transmitted from New York City, and the nation’s commercial banks, all across the world. Those imitating these practices, instruments, or investing in them, are now in crisis.
The banking panic that started in America, has spread to Europe. On Sepetmber 25th, Washington Mutual, the America’s largest savings and loan, was seized by the FDIC and most of its assets transferred to JPMorgan Chase. It was announced on September 29, that Wachovia, the 4th largest bank in the United States, would be acquired by Citigroup (an arrangemant that would later unravel.) That same day, the government of Iceland took over Glitnir, Iceland’s third largest lender. In the United States, as part of the bailout package, signed by President Bush on October 3rd, the amount of money in bank and savings accounts that the FDIC covers was raised from $100,000 to $250,000 per depositor. By October 6th Germany, Ireland, Greece, and the UK either guaranteed bank deposits or raised bank deposit insurance coverage limits.
On September 29th Sec. Paulson said: “I commend the action taken by Chairman Bair and the FDIC today to facilitate the sale of Wachovia Bank to Citigroup in an orderly fashion to mitigate potential market disruptions. I agree with the FDIC and the Federal Reserve that a failure of Wachovia would have posed a systemic risk.”
If America is part of a global financial system and the leading economic official in the United States’ government recognizes systemic risk, then a $700 billion bailout plan designed for a domestic economy, without international coordination, is insufficient to the task.
This narrow thinking was visible early when the Treasury Department left foreign-owned banks with significant operations in the United States out of its proposal. The decision was reversed after pressure from the influential Financial Services Roundtable—a lobby of chief executives of the nation’s most powerful banks, brokerages and insurers. The September 22, 2008 Wall Street Journal, says this group virtually re-wrote the Bush Administration’s new position to include foreign banks.
Within hours of accepting the Financial Services Roundtable position, Sec. Paulson could be seen on ABC’s This Week With George Stephanopolous saying, “If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution.”
Why did this take a full week to acknowledge?
Overcome By Derivatives And Inordinate Self-Interest
In the 1970s America’s economy revolved around manufacturing. At that time financial services—commercial banking, insurance companies, brokerage firms, mortgage services, credit card issuers, hedge funds and mutual funds - were a relatively smaller segment of the economy.
Today, the financial services industry represents an estimated 21% of the United States economy, the largest segment.
“[Secretary Paulson] has no sense of the extent to which Wall Street has taken over what he likes to call ‘the real economy.’ Unfortunately, if you look at the numbers, finance is the real economy, said Kevin Phillips, political and economic commentator, and author of Bad Money, on the October 9th Diane Rehm Show.
Few understand the evolution of American finance, which has even left the use of paper behind.
This can be seen in how The Fed creates money.
On the October 7th edition of The News Hour with Jim Lehrer, Professor of Economics, Alan Blinder, and former Vice Chairman of The Board Of Governors of The Federal Reserve System explained, “We use the euphemism ‘print money’ but what that really means, is that somebody is on a keyboard creating electronic images of money. Large amounts of money are not cash.”
The economic shift underway is enormous. Mr. Blinder thinks 40 million American jobs might eventually leave the country.
The money sector’s growth involved a useful instrument – derivatives – that, like research into the atom, took on a ‘Frankenstein’ effect – eventually growing out of control. The name ‘derivatives’ comes from the fact that these instruments and contracts are derived from an underlying asset: bonds, commodities, and stocks. Originally intended to limit risk and provide a form of insurance (for generations farmers have used futures contracts on such commodities as corn and grain to provide insurance against poor weather and crops), these instruments have begun to resemble a Las Vegas casino – with derivatives available for any economic or financial scenario imaginable - systemically spreading risk throughout the financial sector, encouraging corporations to issue more debt, and banks to create more mortgages.
The October 8th New York Times article, ‘Taking Hard New Look At Greenspan Legacy’ says, “George Soros, the prominent financier, avoids using the financial contracts known as derivatives ‘because we don’t really understand how they work.’ Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential ‘hydrogen bombs.’ And Warren Buffet presciently observed five years ago that derivatives were ‘financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.’”
In a section, of Bad Money, called “The Evolution of Critical Derivatives, 1972-2005,” we learn of the origin of the derivatives most closely connected with the current crisis, “So-called risk management techniques proliferated in the 1990s and thereafter, but the products that became famous in 2007-8 (mortgage-backed securities, collateralized debt obligations, collateralized mortgage obligations, credit default swaps) had varied origins, catching hold in the 1990s but ballooning in the 2000s. Mortgage-backed securities (MBSs) arose from the secondary market in 1970, and in 1983, FNMA introduced the first collateralized mortgage obligation (CMO). Sperry Leasing Finance Company developed the first asset-backed security (ABS) in 1985. The collateralized debt obligation (CDO) was invented in 1987 by Drexel Burnham but developed during the 1990s. Credit default swaps (CDSs) came into use during the early 1990s, but their volume metastasized only during the 2000s.”
Efforts to regulate the estimated $531 trillion derivatives market have been blocked since 1997, and are not addressed in the bailout.
Now, add secrecy.
In the May 23, 2006 BusinessWeek, in an article, “Intelligence Czar Can Waive SEC Rules,” it was revealed that on May 5, 2006, President George W. Bush gave his presidential powers to intelligence czar John Negroponte, in order to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. BusinessWeek states, “Administration officials told BusinessWeek that they believe this is the first time a President has ever delegated the authority to someone outside the Oval Office.”
The article states, “Unbeknownst to almost all of Washington and the financial world, Bush and every other President since Jimmy Carter have had the authority to exempt companies working on certain top-secret defense projects from portions of the 1934 Securities Exchange Act…A trip to the statute books showed that the amended version of the 1934 act states that ‘with respect to matters concerning the national security of the United States,’ the President or the head of an Executive Branch agency may exempt companies from certain critical legal obligations. These obligations include keeping accurate ‘books, records, and accounts’ and maintaining ‘a system of internal accounting controls sufficient’ to ensure the propriety of financial transactions and the preparation of financial statements in compliance with ‘generally accepted accounting principles.’”
The connection between public companies and the intelligence community is documented in a Jan. 4, 1987 New York Times “‘The Company’ as Big Business” by Clyde H. Farnsworth
Secrecy, and the manner in which the derivatives market developed and remains unexplained to the American people, brings to mind these words from A Torchlight For America by Minister Louis Farrakhan regarding America’s condition, “The root of her suffering is basic immorality and vanity, where greed, lust and inordinate self-interest has become the way of life. When the desire for the realization of self-interest becomes excessive, the first casualty in this struggle is ‘truth.’ The leaders in the society, in their struggle to achieve inordinate self-interests, engage in hiding the light of truth from the American people. Without truth the American people are left paralyzed, unable to constructively address their problems.”
Now they are left with a bill - $700 billion and counting…
(All Final Call Readers Of This Series Are Urged To Listen To The October 9, 2008 edition of The Diane Rehm Show “The International Response to the Financial Credit Freeze” and “The Future of American Capitalism.” Available online at: http://wamu.org/programs/dr/08/10/09.php#21985)
(Cedric Muhammad is a business and political economist who advises entrepreneurs and small businesses through his company, CM Cap. His weekly “Cedric Muhammad and Black Coffee Program” can be viewed every Wednesday from 12 p.m. to 4 p.m. EST at The Black Coffee Channel, http://www.blackcoffeechannel.com.)
