Letter to the leadership

I've become convinced that the Fed is going about this "rescue" of our economy all wrong. So I decided to send the following message to the Senate Leader, the Speaker of the House, and the chairmen of the Joint Economic Committee and the Banking, Housing, and Urban Affairs committee, as well as my own senators and congressman:

I am writing to express my opposition to the $700-billion bailout of the financial services firms. All it would do is postpone the inevitable by artificially sustaining the valuations of real estate and mortgage-backed securities above their intrinsic values.

If we didn't bailout the financial services sector, there would be economic repercussions. But it would be mostly localized to those sectors with values that are currently artificially inflated. It would not lead to the collapse of the entire economy.

It seems that secretaries Paulson and Cox forgot everything they learned in economics class. Otherwise, they'd realize that what would actually happen in the economy without the bailout is a redistribution of assets and debt to where they would be put to their highest and best use. This is what we should want to happen in our economy because it would actually lead to the strengthening of our economy in the long run, not the destruction of it.

If you want to put $700-billion dollars to use stimulating our economy, do it from the bottom up. Imagine the boost the economy would realize if we suddenly injected $700-billion dollars into it for things like rebuilding our infrastructure, developing alternative forms of energy, and providing healthcare to the uninsured. With that amount of money being injected into social good, the advancements and benefits the American society and economy would realize would far outweigh and counterbalance the drag that would be created on them from the retraction of the financial services sector.

Even the financial services sector would end up healthier in the long run. Sure, fiscally irresponsible firms would go under if we didn't bail them out. But there are plenty of firms that have put their assets to good use and neither greedily provided subprime loans nor loaded up their balance sheet with mortgage-backed securities. These are the firms that would end up dominating the financial services sector when the others go bankrupt, and Wall Street would be better off for it in the long run.

I ask that, if you must support some kind of economic rescue package, don't make it the one that secretary Paulson and president Bush have presented to you. It simply creates a moral hazard and encourages future irresponsible behavior by Wall Street fat cats. Make it one that will create long-run benefits to the future of the American people.

The media has been reporting that they're being deluged with such messages, with those opposing the bailout ten times as many as those supporting it. It seems the American people are dead-set against bailing out the greedy financial services firms. I hope congress listens to us when it comes time for them to vote. Unfortunately, as of now, it seems the congressional leadership has their collective foot on the gas and they're headed straight at the cliff of this bailout.

Putting out fire with gasoline

The US treasury secretary, Henry Paulson, was on FOX News Sunday today. He was trying to justify his proposed $700-billion bailout of financial institutions. His justification was anything but comforting.

For example, he said that the intent of the bailout is to "minimize risk" to the American taxpayer. Yet his approach to doing so is to purchase only what he called "illiquid assets" from the financial institutions who hold them. "Illiquid assets" is just another way of saying "worthless securities." How could there be anything of higher risk from a fiscal perspective than this?

He went on to say that he's taking this action to "avoid failure." Yet Paulson's approach to avoiding failure is to buy $700-billion worth of failed mortgages. That doesn't sound like avoiding failure. It sounds more like charting a course directly to failure and turning up the screws to full speed.

If Paulson wants to instill confidence in the American people about how he's handling this financial situation, he's going about it all wrong.

Super-Fed to the rescue?

In the wake of the recent upheavals in the financial sector, president Bush has come to the rescue. He and his economic advisors have come up with a Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets. Not willing to rely on the media's descriptions of it, I read the complete text of the actual proposal myself. It strikes me as a unidimensional, monolithic solution to a complex, multidimensional problem.

It's clear to me how this proposal would artificially inflate the valuations of mortgage-backed securities that otherwise lack a foundation of intrinsic value. I can see how this would benefit institutions and investors who own these securities. However, I fail to understand how the proposal rescues the two remaining members of the investment banking oligopoly or how it helps distressed homeowners who purchased homes they could not afford.

This Progressive is no economist but I do grasp economic concepts well enough to understand explanations about the economy. So I invite you to post comments to help me out. Please explain to me how bailing out AIG prevents the collapse of our financial system. I've heard a lot of economists claim that the bankruptcy of AIG would have led to the downfall of the financial system but none of them says why or how.

Bush's proposal permits the purchase of mortgage-related assets only from financial institutions. I understand how this benefits the fat cats on Wall Street who manage firms like AIG that irresponsibly speculated on such securities and how it pays off individual speculators who can now divest their REITs which would otherwise be worthless. But can you explain to me how it alleviates the pain felt by homeowners who irresponsibly obligated themselves to trust deeds that they knew they couldn't possibly afford to pay off when their interest rates reset?

It seems to me that the proposal does nothing for those responsible homeowners who only purchased a home when they knew they could afford to service the loan rather than betting on perpetual appreciation. It does nothing for those renters who recognize that they cannot afford to purchase their own home with an ARM and a leg. It does nothing for middle-class Americans who diversified their retirement accounts rather than investing them purely in REITs, even though they paid substantial returns early in this century. And it does nothing for the small businesses on Main Street that responsibly plow their retained earnings back into assets that they use in operations rather than in risky securities.

When I pull back and take a broad look at this proposal, I simply don't understand the positive macroeconomic impact it would have. I can see an elite cohort that will make out from it but I only see the proposal wreaking further damage on the economy at large. Somehow I can't see how piling an additional $700-billion onto our national debt will rescue us from economic collapse.

McCain now resorting to flat out lies

Did you see John McCain's ad about Senator Obama's comment regarding "lipstick on a pig"? It's completely disingenuous on its face. I heard Obama's entire statement in context, and he was explicitly talking about a couple of specific McCain positions, not Governor Sarah Palin. Yet McCain outright states that Obama was talking about Palin.

You should have seen Hardball the other night. Chris Matthews completely owned the McCain Mouthpiece who came on his show to talk about the issue. The guy got himself so twisted up in the facts that not even he could support the contention that Obama was calling Palin a pig. It's a must see!

Then McCain released an ad that says, "Obama's one accomplishment: legislation to teach comprehensive sex education to kindergarteners." The truth is that when he was in the Illinois legislature, Obama favored (but did not sponsor) a bill to provide "age and developmentally appropriate" material for older students. It also allowed parents to opt-out of the education. The only education that it allowed for children in kindergarten was to teach them to avoid sexual predators.

Furthermore, it wasn't his only accomplishment regarding education:

In reality, Mr. Obama not only helped administer a $49 million education project in Chicago in the 1990s, but also sponsored or co-sponsored measures that increased the number of charter schools in Illinois, and expanded federal grants to summer school programs and to historically black colleges.

Hands off the housing market

Whatever happened to the value of personal (or corporate, for that matter) responsibility in the United States? Since when must the federal government bail out every citizen and every corporation for everything?

The federal government is not obligated to bail out either those losing from the deflation of the housing bubble or those going bankrupt from the meltdown of the subprime mortgage market. It should definitely not be doing so with tax dollars. To do so takes taxpayer dollars to reward irresponsible fiscal activity and encourage such activity in the future.

Obviously, anyone who is a victim of predatory lending should be redeemed. The federal government guaranteeing a refinance for the victim, which they wouldn't be any more able to afford, is not the way to do it. Instead, the victim should be exempted from making payments greater than they can afford to the predatory lender or the holder of the fraudulent note. However, before qualifying for exemption, there needs to be an objective, quantitative, and consistent set of criteria established to validate predation.

The federal government should not be bailing out any other defaulting borrowers. They were irresponsible people who got greedy during the inflation of the housing bubble and purchased a home they knew they wouldn't be able to afford. They did so based on the assumption that real estate always appreciates and that they could resell their homes for a profit when their interest rates reset. Fiscally responsible Americans should not have to pay to bail out those financially damaged by that faulty assumption.

The Fed should not be bailing out the lenders of the defaulting loans either. As previously stated, that would reward making loans to people who cannot pay them back, thereby stimulating more such activity in the future. The American economy is not going to collapse if the lenders who made too many risky loans go out of business. On the contrary, it will be bolstered by becoming dominated by the responsible lenders who declined to make loans that the borrower could not afford to repay.

It's true that many lenders won't lose out because they already resold the risky mortgages on the secondary market. The funds and trusts that bought those notes should no more be bailed out than the lenders should. The owners of the funds and trusts should have read the prospectuses before buying shares so they knew the risk they were getting in to. Taxpayers who invest wisely should not have to pay for the losses of ignorant or greedy investors. The economic system would be churning along just as it is now had Bear Stearns not been bailed out.

People need to take personal responsibility for their actions. Defaulted loans should be foreclosed on, not rescued with tax dollars. The homeowners will lose their homes but they should be renting their homes anyway because they cannot afford to buy. Failing lenders should go bankrupt, not be bailed out by the Fed. There are plenty other responsible lenders to provide mortgages to responsible borrowers. When this happens, property values will drop back to intrinsic levels. Those who are now renting their homes because housing values have been artificially inflated by low interest rates and irresponsible real estate speculators will finally be able to buy their own homes.

The audacity of hype

Last week, Senator Barack Obama made an international tour. Senator John McCain is the very one who goaded Obama into doing so by belittling Obama's foreign policy experience. Now McCain has the audacity to spin hype about how presumptuous Obama was to give a speech at the Tiergarten in Germany. The media have been just as relentless at trying to trip Obama up. Even the sweetheart anchor, Katie Couric, tried relentlessly but unsuccessfully to weave Obama into a catch-22 on the 'surge' while he was visiting Jordan.

Meanwhile, as Obama was addressing 200,000 spectators in Germany, McCain showed him up by visiting a grocery store in Pennsylvania where the local Republican party was able to funnel an entire shopper to meet him and drive home the message about the rising prices of food. As if he did not wreak enough damage on Obama with that move, McCain followed it up by drawing a throng of six small business owners to the Sausage Haus in Ohio. At the Haus, McCain said:

Well I’d love to give a speech in Germany to -- a political speech -- or a speech that maybe the German people would be interested in but I would much prefer to do it as president of the United States rather than as a candidate for the office of the presidency.

Translation: "I would love for the German people to be interested enough in me to draw a crowd of even 200 people (let alone 200,000). Maybe then it would be worthwhile for me to visit there as a candidate instead of waiting to be President." This is what makes the media's hype about Obama's trip being presumptuous so audacious. McCain had just finished an international trip of his own, meeting with American generals and foreign leaders. Yet the press never asked him if perhaps he should have waited to be elected President before making his trip.

Granted, 200,000 Germans attended Obama's speech, which could have been seen by some as over the top. But it's not as if he put a gun to their heads and forced them to attend. They wanted to hear Obama speak to them. Isn't that 200,000 reasons enough for Obama to make his international tour, whether he be President or just a candidate?

An al-Maliki endorsement of Obama's candidacy?

This week, Nuri al-Maliki, the prime minister of Iraq, said he wanted US troops to withdraw from Iraq as soon as possible. He said that "US presidential candidate Barack Obama talks about 16 months. That, we think, would be the right timeframe for a withdrawal, with the possibility of slight changes." That's the sound of the US occupation of Iraq wearing out its welcome.

It makes you wonder what al-Maliki's position might be on Senator John McCain's candidacy. He was much less candid about that, saying that he did not want to recommend who American's should vote for. He did say of the two candidates, however, that "whoever is thinking about the shorter term is closer to reality. Artificially extending the stay of US troops would cause problems.

Should we consider that an endorsement of Senator Barack Obama's candidacy by al-Maliki?