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Add to FavoritesIt's a little late to wonder whether the $700 billion bailout will prevent a recession, since we are already 18 months into the most severe recession since the Great Depression. We've had some dramatically bad turns of fortune around the world, and $700 billion no longer seems like a lot of money given the trillions that are being printed by governments to bolster banks and prop up some kind of floor beneath the markets and worldwide prices for goods and services. At this point, the question is no longer whether $700 billion will rescue banks, but whether any amount of monetary stimulation will return workers to almost-full employment and allow a consumer-driven economy in the U.S. to once again lift the economy of the entire world.
For now we know that $700 billion is only a drop in the bucket compared with the reckless losses that were suffered by banks and insurance companies during 2002-2007. Now we know that excessive greed inflated a dangerous, gleaming bubble of prosperity, and there is no way to keep that bubble inflated. It is burst.
I marvel, now, that more financial gurus didn't see this coming. In 2006, when our neighbors across the street sold their house for three times what they had purchased it for in 1992, I was amazed. They proceeded to turn that profit around and leveraged it into three more houses that they expected to flip in a short time. But they weren't quite fast enough. The housing market started its downward spiral before they were able to sell more than one (at a loss), and now they are in pretty desperate straits. The thing is, they wouldn't have been able to afford their own house at the price they sold it for in 2006 - jobs in this area just don't pay high enough salaries to service debt on these nouveau-riche waterfront homes.
The latest bailout plan, announced not long ago by new Treasury Secretary Timothy Geithner, is to merge public and private investment funds as a source of funds to buy toxic assets from banks' balance sheets, since so many of these speculative homes have landed squarely back in the banks' lap after foreclosure. As I see it, the most likely scenario is that savvy private investors will insist on cherry-picking those assets, leaving banks with a little more cash (so far, so good) and even more toxic assets, on balance (what to do with them?) Will these banks loan freely, restoring liquidity to consumers? Probably, if they continue to be run by the same numbskulls who got them into this fiasco in the first place.
Because it's all about the American consumer, isn't it. The entire world is waiting with bated breath for the American consumer to max out their collective credit cards, again. I don't know about you, but I haven't received a junk mailing for a new credit card for several months (hurray, they were a pain to shred, anyway). I don't know about you, but my spending has definitely been curbed. We've got too much, anyway, and frankly we can get along with a lot less. Quite happily, in fact. I can hardly believe I would spend $4 on a cup of coffee. What was I thinking? And, I know I'm not alone. My friends (who would likewise use a credit card to buy a cup of coffee, how insane we were) are telling me the same thing. This financial disaster has been bitter - our retirement accounts have been decimated. But we've learned a painful lesson, and we won't make that mistake again soon.
So if it's all about the American consumer, then I have to say ... the recession won't be over for a long while. More businesses will go belly-up (those extravagantly-priced luxury goods that appealed to the Joneses just aren't going to be as readily available in the near future, I suspect, since fewer people care anymore about keeping up with them); more homes will go into foreclosure as unemployment continues to weigh on the economy; more U.S. dollars will be desperately printed by the Treasury and thrown into circulation (but we, the consumers, won't see much of that; those dollars will continue to find their way into the pockets of financiers who still believe they are masters of the universe). Remember, the recent stock market rally (March, 2009) was started because of an internal memo at Citigroup that January and February earnings weren't so bad; we have yet to see the actual first quarter 2009 results revealed. More speculation.
Neverthe less, there is a silver lining to this cloud, if we can return to the work ethic and saving habits of our parents and grandparents, who after all pulled us out of the Depression and set us on the path that led to such prosperity that America became the envy of the world. If we are not too spoiled as a society, we will recover. If we are not too dependent on government handouts, we will recover. If we can retain our freedoms, we will recover.
Learn more about this author, M. Halyard.
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No
The $700 Billion bailout will not prevent a recession and it is likely that the original sum of money requested will only be the tip of the iceberg. Here's the bottom line. The Fed plans to avert an economic disaster by spending $700 Billion of our money to help huge bank and insurance conglomerates which never should have been allowed to get so large in the first place. If anyone believes that $700 Billion will end the crisis, I have some property I'd like to sell them too. Unfortunately, the property is not worth the value of its present mortgage and that bothers lawmakers, because they are heavily invested in the same banks they want American taxpayers to bail out.
According to the Center for Responsive Politics, twenty-seven lawmakers owned stock in AIG last year, worth between $6.4 million and $20 million and fifty-four lawmakers own stock in Bank of America which is now a buyer, not a seller in this financial crisis. Our elected officials didn't feel that it was necessary to tell us the fine details of the closed door buyout proposal. Shouldn't we be informed about foreign banks that are also slated to benefit from the proposed bailout?
American taxpayers are expected to pay for the greed and unmanageability of the huge corporations which our own lawmakers helped to create in exchange for political contributions. The ABA (Washington's premiere lobbyist group for the American Banking Association) has donated millions of dollars to our elected officials. It is curious that the person leading the effort for the present bailout (Senator Chris Dodd, Chairman of the Banding Committee), has accepted more than $20 Million in campaign contributions from the ABA, in addition to money from AIG, the insurance giant we now feel compelled to bail out.
Americans should be aware that the top three recipients of financial sector contributions between 1989 and 2008 were Hillary Clinton ($31M), Barack Obama ($28M) and John McCain ($26M). Senator Chris Dodd (Dem-Connecticut) who is coincidentally Chairman of the Banking Committee was not far behind as a recipient of over $13M.
What is more frightening than the money our elected officials have accepted from the financial sector in the past is that the ABA lobbyists are at it again. They are working very hard to shove this bailout package down the throats of hard working Americans, by throwing more money at our elected officials in exchange for their votes on this deal and their not concerned about party affiliation.
For those of you now wondering where to pin the blame for the current financial mess, you need look no further than both Democrats and Republicans with the majority of the blame going to U.S. citizens for continuing to ignore lobby reform. In November, 1999, key legislation was passed with bipartisan support in both the House and the Senate, labeled the Gramm-Leach-Bliley Financial Services Modernization Act. President Clinton supported and eagerly signed the bill which was sponsored by Phil Gramm (a former Republican Texas Senator, now working for banking giant UBS); Jim Leach (a retired Iowa Senator who is now a supporter of Barack Obama), and Tom Bliley (a former Virginia Congressman who chaired the House Commerce Committee and is currently a Washington lobbyist representing the Commercial Mortgage Securities Association). Citigroup lobbied aggressively for the bill as it had recently merged with Travelers Insurance and needed our lawmakers to support a change in Federal law to keep the newly joined corporation together. Although John McCain was absent for the vote and Barack Obama was not yet serving in the Senate, Joe Biden voted in favor of it.
Before we hand over our checkbook to lawmakers who may have a personal agenda, let's look instead at what might happen if there is no bailout. Some very large unscrupulous companies who charge unfair interest rates will go out of business. That's a good thing. Many small businesses and private citizens could contact their local Mafia representative to obtain better interest rates, which might actually save them money in the long run. The Mafia usually keeps their word about a guaranteed credit line. The default rate would be minimal.
The Chinese, who currently hold most of the debt owned by the very largest banks would lose a significant amount of money on paper as some of this debt will be "written off" as uncollectible but they can afford the loss. Conglomerate monopoly banks like Bank of America, Citibank, Wachovia, J.P. Morgan and the like will fold. They will eventually be replaced with local banks which will start popping up in towns all over America. The local banks will actually get to know its customers before making loans to them. They will take an interest in local businesses and try to help and loan money to those who have legitimate business or credit needs and are a viable risk. Instead of charging outrageous interest rates like 28%, these small banks will need to be competitive because they will not have a monopoly. Customers will suffer some short term discomfort as they will know longer be able to phone customer service centers in India to discuss their account.
Local banks may be unwilling to extend credit to companies who are buying foreign products because of the high risk involved in foreign transactions. Americans may have to purchase their produce from local farmers instead of from the large box stores that are currently importing tainted products from Mexico and other countries. Our Chinese toy imports would decline along with the number of sick children. Because of the devalued dollar which may ensue as a result of bad foreign investments, Americans will be forced to purchase products manufactured in America as the inferior products presently being purchased from other countries would no longer be affordable. Cottage industries will surface throughout small town America. There will be a massive need for local manufacturers to supply everything from clothing to furniture and even machine parts for manufacturing them. Steel may once again be manufactured in Pennsylvania instead of China and structures may once again become reliable.
There will be loss of money, of course. The Wall Street fat cats may even have to forfeit their summer cottage in the Hamptons. Senators Chris Dodd (D-Connecticut) and Kent Conrad (D-North Dakota) may have to sacrifice their privileged VIP loans which were obtained from Countrywide Mortgage and obtain regular loans like the rest of us.
Americans will survive all of these changes and flourish but we will first face a very severe recession or worse, a depression. Hopefully, this entire financial mess will make us realize how important lobby reform is and will force America to once again become a leading manufacturer.
Learn more about this author, Gail Kerry.
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