No Bailout: Stop Rewarding Incompetence.

Interesting to note that Paulson himself was involved in investment banking and no doubt richly rewarded for his services and he is just one among many now high up in the financial administration that is proposing the bailout plan.

No Bailout: Stop Rewarding Incompetence
By Dean Baker
A friend recently sent a note reminding me that back in 2003, whensome of us were warning about the dangers of the housing bubble, AlanGreenspan, the person most responsible for the housing bubble, wasbeing knighted by the Queen of England. If we look at the list ofbanks and financial institutions that have crashed or now threaten tocrash, we can find a long list of people who brought their companiesand the economy to the brink of disaster and yet have received tens orhundreds of millions in compensation.We can also find a long list of people in top policy positions,including the current Fed chairman, Treasury Secretary, and President,who celebrated the soaring house prices and loan excesses of thehousing bubble. These people now expect to receive even greaterauthority due to the failure of their policy. This must stop.There is no doubt that the world financial system faces unprecedentedstrains as a result of the incompetence of our business and economicelites. The collapse of the system of finance that we started to seelast week would be a genuine disaster. We would not be able to carrythrough the normal financial transactions -- using credit cards,making payments with checks, or getting money from ATMs -- that arethe basis of modern life.However, we did get through the crisis last week with quick actions bythe Fed and Treasury. There is no reason to believe that withcomparable steps in the future, coupled with the raising the $100,000limit on deposit insurance, as suggested by Jamie Galbraith, that wecannot keep the financial system operating.Keeping the financial system alive, but in the intensive care unit, isnot desirable. However, given the integrity and the competence of theindividuals involved, it may be the best option.Secretary Paulson originally requested a $700 billion blank check thathe intended to shower on his friends and former colleagues in thefinancial sector. Fortunately, the Democrats in Congress balked andforced the Bush administration to back away from this position.President Bush is now willing to accept greater oversight,restrictions on CEO pay, and some commitment for giving equity inexchange for bailouts.This is good progress, but reports indicate that President Bush isstill refusing to change the bankruptcy code back to the pre-1991rules and allow judges to rewrite mortgage terms in bankruptcy. Thisis not hugely important -- the overwhelming majority of foreclosedhomes do not end up in a bankruptcy -- but President Bush's refusal tobudge on this issue doesn't sound like the behavior of someone who isworried about the collapse of the financial system.This raises the basic point that it is extremely difficult to trustthis administration. It was good to hear President Bush say that hedoesn't want the CEOs that wrecked their companies to profit from thisbailout, but does anyone believe that he will structure the bailout toensure that this does not happen? Similarly, he has gone along withthe idea that the government will get an equity stake in financialcompanies in exchange for buying their junk, but does anyone believethat we will get as good a deal as Warren Buffet did when he bought astake in Goldman Sachs?There can be no presumption of good faith from this administration.Unless the conditions are written in stone, for example specific rulesthat limit executive compensation using the same type of language thatCEOs use when they sign contracts with their companies, there is noreason for the public to believe that they will get a fair deal inthis bailout. The public should also demand that some genuineoutsiders, representatives of labor, consumer groups and othernon-Wall Street segments of society, have a direct oversight role inthis deal.If these demands are too extreme for the Bush administration, thenthey are not telling the truth about the financial crisis. If therisks are really as great as President Bush claims, then he shouldunhesitatingly agree to guarantees that will prevent the incompetentsfrom profiting further from their incompetence. We shall see.--------------------------------------------------------------------------------Dean Baker is the co-director of the Center for Economic and PolicyResearch (CEPR). He is the author of The Conservative Nanny State: Howthe Wealthy Use the Government to Stay Rich and Get Richer. He alsohas a blog, "Beat the Press," where he discusses the media's coverageof economic issues.

Critique of Summers

This seems a reasonable criticism of Summers. Dean does by the way think that there should be some steps taken to help people who may lose their homes but not speculators as Summers bailout would seem to do. I assume Summers would claim that the bailout might serve to calm the markets and prevent even further stock losses and create confidence.

Summers Calls for Bailing Out the Wall Street Boys

By Dean Baker | bio
In a Financial Times column whose logic escapes me, former Treasury Secretary Larry Summers calls for having the huge government created housing intermediaries, Fannie Mae and Freddie Mac, step in and start buying up more mortgages and mortgage backed securities. Summers’ says “if there is ever a moment when they should expand their activities it is now, when mortgage liquidity is drying up."

Let’s check the scorecard. The value of hundreds of billions of dollars of mortgage backed securities has just fallen through the floor because investors now realize that a very high percentage of the mortgages that back these securities will go into foreclosure. Now, why do we want a government agency to buy assets that are rapidly losing their value?




At the moment, it looks to me like we are seeing high-flying speculators getting nailed for making really stupid investment decisions. Being a mushy headed liberal sort, I like to see the government reach out to help people who are trying to get an education, who have lost their job, or need health care, but making really stupid investment decisions is not on my list. Perhaps Summers could write another piece explaining why it should be.

Summers begins his column by listing prior financial crises, starting with the stock market crash in 1987, and puts the current mortgage meltdown in this context. While I would not suggest a one-size fits all approach to financial crises, the government’s role in most of the crises on this list can be seriously questioned. For example, did the response to the 1987 stock market crash lead investors to believe that the Fed would/could bail out the stock market, and thereby lay the basis for the huge bubble of the 90s? In the same vein, did the Fed’s involvement in the unwinding of the Long-Term Capital Management’s position give a green light to investors to speculate in hedge funds, knowing that the Fed would step in to prevent the worst outcomes.

Bailouts have both immediate and long-term effects. When the immediate effect is to transfer taxpayer dollars to some of the richest people in the country that is bad news. If the long-term effect is lead investors to believe that they can engage in risky investments and the government will come to their rescue if things go badly, this is even worse news. So, I’ll take a pass on Larry Summers bailout.