| Government of Thieves Rewards Greed 
By Paul Craig Roberts Just
as the Bush regime's wars have been used to pour billions of dollars into the
pockets of its military-security donor base, the Paulson bailout looks like a
Bush regime scheme to incur $700 billion in new public debt in order to
transfer the money into the coffers of its financial donor base. The US taxpayers
will be left with the interest payments in perpetuity (or inflation if the Fed
monetizes the debt), and the number of Wall Street billionaires will grow. As
for the US
and European governments' purchases of bank shares, that is just a cover for
funneling public money into private hands.
The
explanations that have been given for the crisis and its bailout are opaque.
The US Treasury estimates that as few as 7% of the mortgages are bad. Why then
do the US, UK, Germany,
and France
need to pour more than $2.1 trillion of public money into private financial
institutions?
If,
as the government tells us, the crisis stems from subprime mortgage defaults
reducing the interest payments to the holders of mortgage backed securities,
thus driving down their values and threatening the solvency of the institutions
that hold them, why isn't the bailout money used to address the problem at its
source? If the bailout money was used to refinance troubled mortgages and to
pay off foreclosed mortgages, the mortgage backed securities would be made
whole, and it would be unnecessary to pour huge sums of public money into
banks. Instead, the bailout money is being used to inject capital into
financial institutions and to purchase from them troubled financial
instruments.
It
is a strange solution that does not address the problem. As the US economy
sinks deeper into recession, the mortgage defaults will rise. Thus, the problem
will intensify, necessitating the purchase of yet more troubled instruments.
If
credit card debt has also been securitized and sold as investments, as the
economy worsens defaults on credit card debt will be a replay of the mortgage
defaults. How much debt can the Treasury bail out before its own credit rating
sinks?
The
contribution of credit default swaps to the financial crisis has not been made
clear. These swaps are bets that a designated financial instrument will fail.
In exchange for "premium" payments, the seller of a swap protects the
buyer of the swap from default by, for example, a company's bond that the swap
buyer might not even own. If these swaps are also securitized and sold as
investments, more nebulous assets appear on balance sheets.
Normally,
if you and I make a bet, and I welsh on the bet, it doesn't threaten your
solvency. If we place bets with a bookie and the odds go against the bookie,
the bookie will fail, as apparently happened to AIG, necessitating an $85
billion bailout of the insurance company, and to Bear Stearns resulting in the
demise of the investment bank.
Credit
default swaps are a form of unregulated insurance. One danger of the swaps is
that they allow speculators to purchase protection against a company defaulting
on its bonds, without the speculators having to own the company's bonds.
Speculators can then short the company's stock, driving down its price and
raising questions about the viability of the company's bonds. This raises the
value of the speculators' swaps which can be sold to holders of the company's
bonds. By ruining a company's prospects, the speculators make money.
Another
danger is that swaps encourage investors to purchase riskier, higher-yielding
instruments in the belief that the instruments are insured, but the sellers of
swaps have not reserved against them.
Double-counting
of assets is also possible if a bank purchases a company's bonds, for example,
then purchases credit default swaps on the bonds, and lists both as assets on
its balance sheet.
The
$85 billion Treasury bailout of AIG is small compared to the $700 billion for
the banks, and the emphasis has been on banks, not insurance companies.
According to news reports, the sums associated with credit default swaps are
far larger than the subprime mortgage derivatives. Have the swaps yet to become
major players in the crisis?
The
behavior of the stock market does not necessarily tell us anything about the
bailout. The financial crisis disrupted lending and thus comprised a threat to
non-financial firms. This threat would reflect in the stock market. However,
the stock market is also predicting a recession and declining earnings. Thus,
people sell stocks hoping to get out before share prices adjust to the new
lower earnings.
The
bailout package is a result of panic and threats, not of analysis and
understanding. Neither Congress nor the public knows the full story. If the
problem is the mortgages, why does the bailout leave the mortgages unaddressed
and focus instead on pouring vast amount of public money into private financial
institutions?
The
purpose of regulation is to restrain greed and to prevent leveraged speculation
from threatening the wider society. Congress needs to restore financial
regulation, not reward those who caused the crisis.
Paul Craig Roberts was Assistant Secretary
of the Treasury in the Reagan administration. He was Associate Editor of the
Wall Street Journal editorial page and Contributing Editor of National Review. Roberts
can be contacted at [email protected].
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