Do the Bank Bailouts Pass the Smell Test?
By Paul Craig Roberts
The explanation that has been
given for the financial crisis does not match up with the solution that has
been devised. Moreover, the windows into the crisis offered by the authorities
are opaque rather than transparent.
The only clarity we have is
that the crisis is resulting in financial concentration and that the bailout
constitutes a massive raid by financial crooks on both taxpayers and central
bank reserves in the US and Europe.
The public monies that are
being directed to private financial institutions are huge. According to news
reports, Germany is devoting
$540 billion to shoring up German banks, England
is devoting $73 billion, and France
has pledged over $400 billion. The US
now has four separate bailouts underway, $800 billion for banks, $200 billion
for Fannie Mae and Freddie Mac, $85 billion for the insurer AIG, and $25
billion for the US
auto industry. These figures add to more than $2.1 trillion.
Some of these public monies are
for purchasing troubled paper assets. Others are to be directly injected into
the banks as public supplied capital for private financial institutions, an
ironic outcome for the free market ideology that resulted in the deregulation
of the US
financial system. According to news reports, in England the entire $73 billion is
being poured into banks as publicly supplied new capital. In Germany $135 billion is for
recapitalizing troubled banks. In the US Treasury Secretary Paulson is talking
about using bailout money to purchase non-voting bank shares.
How is it possible that a
financial crisis of such magnitude hit with such suddenness and urgency,
catching finance ministries and central banks unaware?
If the problem is what the
public has been told, namely that defaulting subprime mortgages are reducing
the income flows through to the holders of the mortgage-backed securities, why
isn't the bailout money being used to refinance the defaulting mortgages and to
pay off the foreclosed mortgages?
That would restore the value of
the mortgage-backed securities, and it would not be necessary to pour huge
amounts of taxpayers' money into recapitalizing banks and purchasing their bad
There is not an unmanageable
number of defaulting mortgages. According to the US Treasury estimate, 90-93%
of the mortgages are good. How does a 7% or 10% default rate on US mortgages
translate into a systemic worldwide financial crisis?
The popping of the US real estate
bubble could not produce worldwide systemic financial crisis without the
mark-to-market rule, short-sellers, and a great deal of hype and orchestration.
Why did Secretary Paulson let Lehman Bros. fail when every other firm is bailed
out? Did Lehman's failure, by unwinding its own large portfolio, push hedge
funds and banks into panic selloffs that spread the crisis at home and abroad?
The US Congress held no
hearings on the crisis and consulted no independent experts. Congress responded
dumbly to the financial crisis, just as it did following 9/11 when the Bush
regime handed it the PATRIOT Act and the Afghan invasion. To secure Congress'
acquiescence to the Paulson bailout, the Bush regime used threats of meltdown
and martial law to panic Congress into turning over vast amounts of money for
which accountability is lacking. The hype behind the Paulson bailout is the
financial version of the mushroom cloud evocation used by the Bush regime to
panic Congress into accepting the US
invasion of Iraq.
Is yet another hidden agenda at work?
It is unclear how the bailout
will play out. The monies for the US bailout will have to be borrowed
abroad or printed. If foreign central banks need their dollar reserves in order
to bail out their own banks that are polluted with toxic US financial instruments, the US
Treasury might not have an easy time in the debt market. Moreover, the interest
expense on an additional borrowed $700 billion will raise the US current account deficit and
burden US taxpayers with higher interest payments. If the money has to be
printed, inflation and dollar devaluation will depress living standards for
If the US economy sinks deeper
into recession, lost jobs and rising interest rates on troubled mortgages will
result in more defaults and foreclosures, thus further impairing
mortgage-backed securities and requiring Congress to put more burdens on
hard-pressed US taxpayers in behalf of the banks.
The authorities have blamed
subprime mortgages for the crisis. Why then does their solution fail to address
the problem of the mortgages? Instead, the solution directs public money into an
increasingly concentrated private financial sector, the management of which is
not only vastly overpaid, but also has escaped accountability for the financial
chicanery that, allegedly, threatens systemic financial meltdown unless bailed
out by the taxpayers.
Perhaps my nose is too
sensitive, but this bailout doesn't pass the smell test.
Paul Craig Roberts was assistant
secretary of the Treasury during President Reagan's first term. He was associate
editor of The Wall Street Journal. He
has held numerous academic appointments, including the William E. Simon Chair,
Center for Strategic and International Studies, Georgetown
University, and Senior Research
Fellow, Hoover Institution, Stanford
University. He was
awarded the Legion of Honor by French President Francois Mitterrand. He is the
author of Supply-Side Revolution: An
Insider's Account of Policymaking in Washington; Alienation and the Soviet
Economy and Meltdown: Inside the
Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions: How
Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of
Free Press. Online
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