From the beginning of talk of a massive $700bn bailout, I fell on the side of Main Street – that infusing this bail-out money into the actual businesses that are suffering the most would have the best and most positive outcome. The Bush administration, Paulson and Congress disagreed, and instead offered the money to Wall Street, who has so far basically rejected it, simply because the powers that be (CEO’s, CFO’s, COO’s) don’t want to give up their perks after failing at their jobs. Well, that’s not the only reason, but it is one of the most reprehensible reasons.
Also, right from the beginning, Paulson could never give the people a direct answer on how he arrived at a $700bn figure, and why that amount of money infused into Wall Street would help the credit crisis.
During the time congress was debating the bailout bill, Paulson infused $630bn into the global financial markets, which was supposed to relieve the global credit crunch.
None of this worked. And other countries have had the distasteful job of bailing out banks over the past few weeks. Enter the G7 talks, and now the Chicken little sky-is-falling from the IMF. So, now, the whole bail-out has to be re-worked.
Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation’s banks — in effect, partially nationalizing the industry.
More interestingly, this new plan is not clearly thought-out.
While the Treasury says it still plans to buy distressed assets, the scope of that plan is unclear. Treasury Secretary Henry M. Paulson Jr. has refused to say whether the capital infusion program for banks would be bigger than the original plan to buy troubled assets.
Okay, then. No clear plans, once again. I think the people that are footing these bills should have someone at the helm of these bailouts, that has a clear and concise plan. And, here’s the thing. The global market didn’t just suddenly implode. Just like here in the US, the global market took a similar path, because these global companies were buying up bad, and fraudulent mortgages, just as Wall Street was.
…By the time that home in Stockton was supporting two or three ill-advised loans in 2005, those loans had disappeared into packages called asset-backed securities (ABS), then were to global banks, insurance companies, and pension funds—particularly in Europe. Like their US counterparts, the European financiers bought boatloads with borrowed money. Then they, too, shoved them off books into Structured Investment Vehicles that required no capital charge and little reporting.
With US investment banks making huge profits from packaging churning loans, volume in mortgage securities exploded. US investment banks then added another link to the chain, repackaging ABS securities into CDOs, or collateralized debt obligations. In that way, the Belgian-Dutch bank Fortis (and others) came to own a piece of Stockton. If one Stockton home defaults, the global effect is miniscule. But if lots of home loans go under, the damage reverberates globally—just as it is now.
The current global fallout might have been manageable, if banks hadn’t entered a massively interconnected circle of $55 trillion worth of privately negotiated credit default swaps.
There’s the clue in solving this problem.
Infusing billions into banks is like putting a band-aid on a broken leg. Doesn’t do squat. Nomi Prins gives us a suggestion that may actually work.
In the absence of a controllable framework, central banks around the world are paying for the excess of an unregulated financial system. What we need is a Glass-Steagall Act for our times. Can we regulate the $55 trillion credit derivatives industry unleashed by the US Commodity Futures Modernization Act of 2000? Can we have higher global capital requirements going forward, or put a structure in place that will both contain the current fallout and avoid future credit typhoons?
A controllable framework, complete with a return to regulations. It’s important to the taxpayers that are footing this bail-out to know that their money is being used in a responsbile way — not to appease greed.
