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The bailout is even worse than we know

I liked two rants that I found via this Chris Floyd post. The first is by Arthur Silber, whom Floyd is fond of quoting, and with good reason:

…the consequences we are now seeing are irrevocable and unavoidable. The bad debts must be accounted for and written off. A problem of massive bad debts and insolvency is not a problem of liquidity. This truth means one thing in terms of the “solutions” proposed: a massive bailout of insolvent financial institutions which includes keeping the bad debts in the system still longer is precisely the wrong action to take. It will not solve the problem, for this problem cannot be solved. But it will accomplish one goal: it will postpone the problem to another day, and it will make the problem worse, and it will cause still greater damage.

Do you know of a single government program that has not exceeded its original estimated cost? It is ridiculous to believe that this proposal will cost $700 billion. When all is said and done, as you will see only a few commentators acknowledge, this program will cost well in excess of one trillion dollars. On top of the national debt that already exists, what do you think this will do to the American economy for decades to come? One of the arguments in my post the other day can be expressed another way. Note how the debate has shifted: we are not debating whether this bailout should occur. We are debating in precisely what manner the bailout should occur. In other words: the only debate that should be occurring has already been consigned to history.

Here are some additional details that confirm the accuracy of arguments I have previously made. Note these passages from the Wall Street Journal:

WASHINGTON — The Bush administration and the Democratic Congress inched closer to agreement on a $700 billion plan to rescue troubled financial firms, with the Treasury making most of the concessions amid an increasing backlash from a range of economists and lawmakers.

The administration agreed to allow tougher oversight over the cleanup and provide fresh assistance to homeowners facing foreclosure, two Democratic priorities. In addition, negotiators neared agreement on allowing the government to take equity stakes in certain companies that participate in the rescue.

…

One broad area of agreement involves congressional oversight. Rep. Frank said the Treasury agreed to an independent board to monitor the bailout and report on its progress to Congress and the public. The board wouldn’t have authority to veto Treasury investment decisions, and the bailout’s launch wouldn’t be delayed while a board was being put in place.

Compare this to what I wrote the other day:

At this point, does anyone believe “strings” or “oversight” are worth a goddamned thing? Let me remind you of something that no Democrats and none of their defenders wants to be reminded of: the Iraq catastrophe. The Democrats have had the biggest “oversight” mechanism in the world — or to be precise, in the Constitution — since early 2007. The Democrats could have cut off all funding for this criminal war and occupation. They will not do it.

They could have impeached Bush, Cheney and several more of the leading criminals. They will not do it.

Add in the pattern the Democrats followed in the FISA debacle, with regard to the Military Commissions Act, and on a host of other questions, and you see what the Democratic opposition is worth. In a word: nothing.

Add in this: everyone, including every Democrat, now agrees that this is a “crisis” requiring action yesterday. Paulson, the Treasury Department, and the other players will have to be able to act immediately, and to act on a massive scale. And they’ll get all that — but with some “oversight.” How long will it be until the “oversight” catches up to what these criminals have done, if it ever does? After the fact, will the oversight mechanisms be able to reverse the actions of Paulson and others? What will be the additional costs of having to reverse some/most of those actions after the fact, if it can even be done?

Given the record amassed by this administration — and given the record amassed by the most pathetic Democratic Congress ever imagined in this or any other world — “oversight” and “safeguards” aren’t worth shit.

Excellent.

Earlier in the post, he quoted Mark Whitney of Counterpunch:

This cycle will persist until the bad debts are accounted for and written off or until the exhausted dollar-system collapses altogether. …

In truth, there is no fix for a deleveraging market any more than there is a fix for gravity. The belief that massive debts and insolvency can be erased by increasing liquidity just shows a fundamental misunderstanding of economics.

Also excellent.

The take-home messages: Just like the Republicans, the Democrats are evil, ignorant, disdainful, unconcerned, power-hungry pieces of shit, chief among them their annointed leader, Barack Obama, and they have done nothing about our inflationary Fed or the corrupt corporate-state socialist system that enriches the rich and well-connected at the expense of the rest of us, nor do they truly understand monetary theory, nor have they proposed that any substantial change be made, nor have they attempted to do so, nor will they; the Democrats will pass a bailout bill with their majority in both houses of Congress; any “oversight” of the Fed or the Treasury will be meaningless (or perhaps worse than meaningless, since idiotic voters will think there is oversight); THE INFLATIONARY, INTERVENTIONIST MONETARY POLICY WILL CONTINUE UNABATED WITH ANY NUMBER OF REPUBLICANS OR DEMOCRATS IN OFFICE!

A commenter to Chris Floyd’s post posted the link to his own analysis of the bailout, which I really appreciated, as evidenced by my comment on his post.

So, our great leaders propose this, and your first reaction is, “This is bullshit! They’re going to buy a bunch of worthless securities from the same scum that came up with the plans to create the worthless securities in the first place!”

But then you realize you’ve fallen into the media craptrap again. And even in resisting their bailout plan, you’ve forgotten to question the deceptive way the news is presented, because you are accepting the basic details of the plan before you resist it.

Thinking about it outside the confines of the T.V., here’s my stunningly obvious question. Like all stunningly-obvious questions, it reveals the dearth of analysis in corporate news, and thereby, their deceptions.

Stunningly obvious question: if the government was actually trying to spend a lot of money to keep all those mortgage securities from being worthless, even if they were planning to do so by wrongly indebting future generations of Americans, wouldn’t the simplest way be to fund the mortgages that the securities depend upon?

There it is. Another dimension of the whole scheme now jumps out at you.

If you accept the details of the bailout plan as framed by the corporate media, here’s the most critical explanation you can come up with (which Arthur Silber and Chris Floyd are both busy doing):

1) Wall Street begins artificially inflating the value of real estate by peddling sub-prime mortgages to people who can’t pay them;
2) Wall Street gets rich packaging and trading the mortgages;
3) The bubble bursts, people default on mortgages they can’t afford and lose their homes;
4) Wall Street forecloses on the lost homes, but prices are down and they can’t recover the “value” they have been attributing to themselves;
5) Wall Street holds MBS (mortgage-backed securities) that aren’t worth as much as they have been misrepresented to be, and houses that aren’t worth as much as they have been misrepresented to be;
6) Wall Street appears to be in trouble;
7) The government indebts the taxpayers $700 billion to buy some of the worst MBS from the big firms, thereby alleviating some of Wall Street’s loss.

While nefarious, this is not quite as dirty as what Wall Street actually did/is in the process of doing. This is obvious when you consider the fact that if the government used its $700 billion (or however much it will actually cost them) to fund those mortgages, the MBS held by Wall Street would still have their face value! The losses would be gone.

The end result of that policy would be that Wall Street would not lose their money–their securities would be worth what they had pretended, because the government was propping up the mortgages. Wall Street would make their dirty money, poor people would keep their homes, and the situation would be “solved” (inasmuch as any part of this charade can be solved).

But, they’re not funding the mortgages. Instead, they’re buying the securities off of Wall Street. Here’s the catch, though: by having the government buy the securities in order to validate the security prices, rather than fund the mortgages, Wall Street still gets to foreclose on all the houses.

Do you get it, now? Because the government is buying the securities rather than funding the mortgages, Wall Street gets to have its cake and eat it too: it gets to keep the artificially-inflated price of its crappy “securities,” and at the same time, it gets to foreclose on all the houses! It gets both pieces.

Poor people default, Wall Street gets houses. Wall Street then sells worthless MBS to the government at face value, and they make even more money than they would have made if their whole dirty subprime mortgage scheme had actually been paid off by the homeowners in the first place!

Here is the full deal, broken down:

1) Wall Street begins artificially inflating the value of real estate by peddling sub-prime mortgages to people who can’t pay them;
2) Wall Street gets rich packaging and trading the mortgages;
3) The bubble bursts, people default on mortgages they can’t afford and lose their homes;
4) Wall Street forecloses on the lost homes;
5) Wall Street sells its MBS to the taxpayers at face value;
6) Wall Street gets all the houses, and all the money

This wasn’t a failure of the system–it was on purpose. The reason that lending standards were relaxed under Chris Dodd were so that low-income homeowners could sign onto the deal in the first place. This helped inflate the price of real estate, which pumped up the MBS to such a value that they could be spread throughout the entire system. The broad diffusion of these securities mandated that later on, when the values began to drop, Wall Street could threaten the country with a genuine depression in order to justify its no-bid contract for sale of MBS to the taxpayers.

Wall Street gets houses, Wall Street gets cash, and the next several generations get the bill.

Posted in Democracy, Economics, Power elite, Rants, Socialism