Part I is here. Full disclosure; I am not an economist or an accountant, nor do I play those parts on TV. The opinions expressed below are mine and are based on observation and reading.
As mentioned in Part I, Treasury Secretary “Tax Cheat” Geithner finally came up with more details on how the government plans to work out the mess in the financial and credit systems, how the administration plans on getting the “toxic assets” out to free everything up. I went through how these toxic assets came to be, how the government gave the green light, through the manipulation of Fannie Mae and Freddie Mac, and the improper regulation of the housing and financial systems, to bring the country to the economic precipice it is in now.
As I mentioned, whether Geithner’s plan will work or not remains to be seen. Although I am not an economist, I am very skeptical that it will. And it will be politics that will make things worse.
After Bear Stearns and Lehman Brothers shut down last year, after the government decided to let them fail, the Bush administration made the conscious decision to not allow that to repeat, for whatever reason. Insurance giant AIG was on the brink of financial disaster and the government gave it billions of dollars to stay afloat. Other banks that were on the verge of bankruptcy were forced to be purchased by other banks (eg., Bank of America bought Merrill Lynch) with assistance from the government. The government then took over Fannie Mae and Freddie Mac after years of financial malfeasance and regulatory neglect (heterophobe Barney Frank (D-MA) claimed he helped get Fannie and Freddie properly regulated in March, 2007; in light of the federal government takeover of the two, Frank’s claim is nothing more than passed wind). But after hundreds of billions of dollars being thrown everywhere, including the welfare checks disguised as tax refunds we all received from the IRS, nothing was getting the economy moving. Then Paulson came up with TARP.
To me, it didn’t seem like a bad idea at the time since Paulson did recognize what the problem was, toxic assets holding up the financial system like a blockage in an artery, and figured that only the federal government could do something to get them out. But after TARP was passed, Paulson did everything but get the toxic assets out, sending hundreds of billions of dollars to banks (some whether they wanted the money or not), AIG, and two of the Big Three U.S. automakers. The stock market took a complete nosedive thereafter, harming the personal retirement savings of every American who has the ability to have such an account. Plus, the government was already running at a deficit, and all of the government’s activity was done on money borrowed from other sources (mostly China).
At the same time, home foreclosures increased, which lowered home values for everybody, as people found it harder and harder to keep up with the payments on their homes, adding to the economic woes. These loans were adding to the toxic assets already on the books. Per usual, there are plenty of people ready to blame capitalism and the lack of proper regulation for putting these people on the hook. Law firm Traiger & Hinckley put out a report in January, 2008 providing cover for the effects of the Community Reinvestment Act (CRA) on today’s problems, as did University of Michigan law professor Michael Barr in his prepared statement before the House Financial Services Committee in February, 2008; in both cases, they ignore the fact that via Fannie and Freddie, a market in providing loans to low-income people had been created because of the CRA, allowing financial institutions that weren’t regulated like banks to add to the mess.
Then Barack Obama came into office. Since then, the stock market has dropped further, the economic situation has gotten worse, with Obama and his minions doing everything but fix the financial system, especially in the realm of wrecking the economy for years with Porkulus and the expansion of the federal budget, leaving generations of future Americans to pay for the mistake of electing this guy and adding more Democrats to Congress. Obama himself manufactured up the faux “outrage” against the bonuses received by some people at AIG after his administration helped put them in there. He was followed up by most of his fellow Democrats and some of the really dumb Republicans. Businesses have taken notice.
Finally we come to the Tax Cheat’s plan. And all it is is a rehash of most of what Paulson was going to do with TARP, with some exceptions; the exceptions, however, don’t mean that it’s going to work. In fact, I have serious doubts it will. Geithner wants to the government to “partner” with private financial sector firms to buy and sell the toxic assets, to get them off the books. But, the administration appears to want to continue with bailing out bad banks and other financial institutions (and companies in other industries) in order to what, keep them in business? How does rewarding failure actually help? On top of that, neither Fannie or Freddie are actually going to be fixed; regulating banks is done through the Treasury Department, but those two are regulated through HUD, which has a completely different agenda than Treasury (keeping financial institutions making loans to those who can’t pay them back). Besides, restructuring through bankruptcy will eventually get these toxic assets out of circulation; additionally, most of these companies are set up that if one part of the business fails (i.e., the financial part), it can be sold or liquidated to keep the whole business from failing.
Now Obama wants the Tax Cheat to have more authority to not only over-regulate businesses that don’t receive federal funds (determining pay scales and bonus levels), but also to have the authority to take over non-bank financial institutions if these companies appear (I imagine to be based on some left-wing model) to be on the verge of bankruptcy. How does this help anyone but those running on a bad business model, and keep taxpayer money invested in institutions that should fail in the first place? Considering that the federal government has given itself the authority to force companies to accept taxpayer funds, what we are seeing is the federal government becoming a very large protection racket.
What I wonder is if companies will continue to be foolish enough to ask for the “help” of the federal government (which still has no money), knowing what it will ultimately cost them? The individuals in many of these companies have been demonized just for working at those places, threatened with punitive action from the federal government and physically from the Obama-supporting racketeers from ACORN. I don’t see how any company is going to involve itself with the federal government knowing what could happen to them when (and it is when, not if) Obama throws them under the bus, as he has everyone else (Obama has a habit of doing this).
This is rapidly becoming a very dangerous administration, one that gets worse by the moment.