Let me start by saying that I am not an economist.
However, Treasury Secretary Paulson’s remarks yesterday did not do much to put me at ease about the bailout. In a news conference, Paulson communicated that the $700 billion dollars would NOT be used as initially stated, to take “toxic” mortgages off the hands of the nation’s lenders. Apparently, half the money is already gone…injected into banks so that they can make loans again…which they are NOT doing, choosing instead to hoard the money. Paulson NOW says that the remaining bailout money will be used to buy stocks in a variety of lenders (car loan providers, credit card companies, school loan institutions, et cetera) to “bolster their balance sheets“…so they’ll start giving loans again. He was also clear that the money would NOT go to the auto industry…since they would require a more comprehensive solution.
He added, “This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”
And immediately following these remarks the stock market plunged 400 points.
Now again…I’m not an economist. And it appears that this change of plans is the right thing to do. In many ways it more closely resembles the “direct infusion” strategy that the European countries are following. It’s the right thing to do because this crisis involves ALL lending, not just mortgages and real estate consumer confidence.
HOWEVER: Does Paulson not realize that this is a “confidence-driven” system? A mere month ago, he’s saying that buying up the bad mortgages is the solution, and must be performed immediately or we will suffer a total collapse. To suddenly publicly announce changing THE ENTIRE FOCUS of the plan…does not inspire much confidence. “The sky is falling” predictions expressed with a thinly-veiled sense of panic…do not inspire confidence, either.
This follows news reported earlier this week that there was a “shadow bailout” we weren’t meant to notice. The Treasury Department issued a quiet five sentence notice dramatically changing (in a fashion that is arguably illegal) tax policy…this change would provide banks with approximately $140 billion dollars in tax breaks by effectively repealing a 22-year-old tax law.
After the Labor Department reported this morning concerning how many more newly laid off citizens are pursuing unemployment benefits, the market dove again before rebounding.
Are you sensing a pattern, yet? What effect on confidence to all these steps and statements have?
If not, what if I told you that President Bush spoke just a little while ago? It’s an established fact that, as Will Ferrell said recently on SNL, “the stock market goes in the crapper” each time the President speaks on the economy. Despite this, Bush has come forward today to tell us, “Government intervention is not a cure-all.” Wow. The bailout has just started and he’s already telling us the equivalent of “don’t get your hopes up.” He went on to say (in one of his most gross abuses of logic to date) the the free market is not to blame, nor was our lack of regulation: “Many European countries had much more extensive regulations and still experienced problems almost identical to our own.”
President Bush…their recessions…were caused by OUR recession. Here’s the causal chain: Our unfettered, unregulated market crashed because of greed and fraud unrestrained by rules and enforcement…and we dragged their countries economies down with us, and whether or not they had more or less regulation was inconsequential. Does he really have that little understanding of the interconnected nature of the world’s economies? His statement is a bit like saying “there’s no use wearing a seatbelt when driving, because some people wearing seatbelts get killed, too.”
And on top of it all…the regulation that’s supposed to be involved in the bailout itself…isn’t being done. The independent oversight positions mandated by Congress? Still unfilled. The first monitoring report, required by the bailout bill? Nowhere to be seen. Eric Thorson, the Treasury Departments Inspector General has said, “I don’t think anyone understands right now how we’re going to do proper oversight of this thing.”
I said earlier that I’m not an economist…but see, you don’t have to be to know that this ISN’T BEING HANDLED PROPERLY. We’re going to fix the problems caused by lack of oversight with an expensive plan that has no oversight? Our leaders can’t do any better than to trot in front of the cameras, scared, and tell us that this plan may not work? The plan, only six weeks old, already needs to be totally revised on the fly and at the whim of the Treasury Secretary? Since the old plan of sinking money into housing lenders so they’ll give new loans (which they aren’t doing) didn’t pan out…the new plan is to give money to ALL kinds of lenders so they’ll give new loans (which we have no assurance that they will do, either)?
It’s about confidence – perhaps the real problem is that Bush and his ilk…don’t inspire any.