To say that what Congress did on Friday was disappointing would be an understatement. What Congress did was, and remains, downright dangerous. A huge sum of money has been thrown in the direction of institutions and people who are either malevolent or ignorant. Banks and other institutions find themselves holding assets that have been significantly devalued because, surprise, someone discovered they were packed with toxic mortgages. If these banks and other institutions purchased these investments without knowing what was in them, then they were grossly negligent in not having done due diligence. And if they did know, then their actions in acquiring this junk are totally malevolent.

Now that the giveaway is underway, the industry already has started to prepare America for the bad news, namely, that this raid on taxpayer dollars won't solve the problem. According to this report, despite the legislation having passed, lending won't ramp up overnight, it might not get underway for weeks, and it might take even longer for things to get better. In the meantime, hundreds of billions of dollars flow into the marketplace and nothing happens? The folks who testified at Congressional hearings that they had no clue may have been telling the truth, but those who engineered this so-called bailout surely knew what they were doing. When they discovered that American opposed the idea, they worked out a deal. They added $150 billion of unrelated tax provisions to the legislation, and in turn persuaded several dozen legislators to switch their votes. Consider this quote from House Republican leader John Boehner, "We've made this bill better." Better? It's the same legislation, with a variety of "vote getters"tacked on, as I described in Why Vote Aye for Bad Legislation?.

According to various reports, such as this story, banks are drowning in cash but are reluctant to lend money. Why? We're told that they are "paralyzed with fear." Fear of what? That they are incapable of distinguishing a credit-worthy loan applicant from someone not qualified to borrow? That they are incapable of figuring out which fancy, exotic, smoke-and-mirrors creative investment packaged by the wizards of Wall Street they should buy? Here's some advice to the banks. Try making loans to people, one at a time. Ignore the packaged deals and other theoretically cool but pragmatically stupid investments cranked out by a generation of investment bankers who either outsmarted themselves or, as is more likely, embarked on one of the if not the most, outrageous greed-inspired money grabs in history. In other words, these banks don't need money. They need that unique combination of intelligence and honesty that is no less lacking in the financial services market as it is in the political arena.

What should have been done? The problem that should have been attacked with money is what underlies the crisis, not the symptoms and not the losses incurred by investment bankers, banks, and other institutions complicit in the crisis or negligent in their investment decisions. The crisis exists because a very small percentage of homeowners, perhaps as few as 3 or 5 percent, cannot meet their mortgage payments. Imagine what would happen if $700 billion were used to pay interest and principal on the roughly 1,500,000 home loans that are bad. The loans generate payments, the strange investment vehicles in which they are packaged recover their value, bank balance sheets return to normal, and the crisis is handled.

Instead, consider what will now happen. The Treasury will seek to borrow $700 billion so it can buy these bad mortgages, as described in Where is the Money to be Found?. What is the effect of that borrowing? I'll quote myself:
Borrowing money increases interest rates, which benefits some investors and hurts borrowers. Borrowing money also makes the nation even more beholden to those in a position to lend the money, namely, foreign countries and foreign investors rolling in dollars accumulated when Americans purchased foreign oil, foreign goods, and foreign services. Having a nation that spends beyond its means borrow even more money to bail out bad debts arising from individuals who spent beyond their means is not unlike pouring gasoline on a fire.
Good money is thrown after bad, while the folks who profited from this debacle chuckle all the way to their off-shore bank, leaving behind some underlings to take the FBI heat.

So the national debt increases by $850 billion, soon to be followed by the impact of $500 billion annual budget deficits. On the heels of that escalating national debt comes the looming crises in Social Security and Medicare. According to the 2007 Financial Report of the United States Government (Dec. 2007), as of September 30, 2007,the future unfunded costs of Social Security, Medicare, and other obligations has reached $53 trillion. Yet there are politicians who continue to advocate cutting taxes, and whose votes were obtained when tax reductions were tacked onto the bailout bill. Hanging onto the mantra that we can tax cut ourselves out of the mess, they seem to ignore the reality that we tax cut ourselves into the mess. Had the wealthy faced the tax rates in effect before the 2001 reductions, had they not had the advantage of special low tax rates for capital gains and dividends, and had they not available the tax breaks tailored to their wants, they would not have had the funds with which to play what someone else called "casino capitalism." I've always wondered what one does with a $10 million or $50 million annual income. Perhaps you have, too. Now we know. It's house money, and it lets the wealthy take enormous risks that they shift onto the rest of us. As the Secretary of the Treasury admitted, this bailout legislation puts taxpayers at considerable risk. Risk of what? We'll soon be finding out. It isn't going to be pretty.
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