Welcome back to James Call: Expert. Standard disclosures: I am not truly an expert, I just know more than you (maybe). And I do not proofread or fact check this thing unless called on it. Because I don't have the time.
Today reader "Mike" asks:
Do we really need this bailout?
It's a good question! The answer is "yes," because investment has frozen up. In essence, banks have all moved their resources into treasury bonds, and the yield is way down. I have to admit here I can't really keep my numbers straight in my head. I have been reading in the Times and online that the yield on these bonds, since everyone is going there, is about 0%. I.e., it's the modern day of equivalent of taking your money out of the bank and sticking it under your mattress. But then, the 30-year treasury is still at 4%ish. But... that's 30 years to hold on to that shit.
BTW, if my prior posts on this subject were too long winded for you to read: DO NOT WITHDRAW YOUR MONEY. The FDIC protects your deposit. For real.
Banks are so risk-averse that they're buying madd treasuries and that means there ain't no cash for nothing else. Your deposit is safe but the money from the banks to the businesses you work for is not. I saw the apocalyptic "3 million jobs lost in 6 months" figure from some economist, who I hope was just trying to scare us, 'cause, Jesus Christo. But payrolls are gonna be cut, big time.
We need to inject capital into the banks to get liquidity going again. This is what we did in the New Deal; it worked. It worked slowly, over time, but it did work. We also need to root out the toxic assets and get some oversight crankin' so we're not "throwing good money after bad".
Now - the big question is - what kind of bailout do we need. I'll just try to keep this short. I read a real eye-opening post on "naked capitalism" (google that shit) yesterday, basically calling for the nationalization of the banks. Not in the real rabble-rousing commie way, but, just as a business proposition for the government. That's, in essence, what Sweden did, I believe - took over the banks, sold off the crap, and eventually sold the bank back, earning a profit for the government. I think. They may have retained shareholder interest in the banks... I'm not sure.
The Dodd/Frank/Paulson plan, which has been replaced with the "Crap Sandwich" plan full of GOP horseshit, was along these lines. While the banks wouldn't be seized outright, the government would receive equity shares in the banks it bailed out. In essence, should these banks become healthy in the future, we (the people, as through our government, in theory) make cash on the deal. Again, probably 10 years down the line, but it could be worse.
Some of that money (20% of profits made) was gonna go to affordable housing - but, you know, "affordable housing" = "public housing" = "negroes" and also = "socialism", so the House GOP totally flipped out and axed that provision.
This "naked capitalism" post, and I don't want to overtly plagirize here, but it basically said, since the FDIC already insures deposits up to $100,000, why not just lift that cap and make the FDIC insure everything. Then get the FDIC, the FBI, and whomever in to investigate and inventory everything. I mean every fucking bank. And the ones that are solid get a little slap on the wrist for diddling around with CDOs but do get to retain their banks, while we sell off their toxic assets over time... and the banks that are up shit creek, the government completely takes over, sells crap off and restructures the bank, and then auctions it off, but not to the same people who had run the bank into the ground in the first place (the government can seize failed banks and run them on its own terms via the bank bridge facility of the FDIC, introduced back in the S&L days - a great provision!).
This plan also really doesn't require taxpayer funds. It just requires the Fed to put up a huge chunk of cash as a good-faith jesture. Again, this cash doesn't enter circulation unless it's really called for. Now, I suppose this is a terrible idea if the banks are just fucked fucked fucked beyond our wildest beliefs. But, I don't think they are... right? The real problem with this plan is it's political aspect - it's temporary bank nationalization, really really solid and good for our democracy, but "socialism" nonetheless. People hate that crap in this country, residual Cold War culture BS. Same with a single-payer system for health care: should be done, but is "socalistic" and therefore we're gonna get some watered-down compromise, maybe, someday.
No matter how it's done, the bailout is needed. And it's gonna suck, as taxpayers, to do this shit. But if we just buy up the bad assets and let these banks off the hook for bad behavior, restoring their credit in the process, then we really are "socializing risk and privatizing profit" like everyone is saying to sound all smart. HOWEVER, if we sell the bad assets and then retain at least partial government ownership of these institutions, then the whole financial sector - which has come to dominate, and on several ocassions royally fuck our economy up - will now be earning money for the people.
That's not to see the people can't spend their profit on dumb crap like tax cuts for the rich or bunker-busting nuclear missiles, but, hey, it's a start.
I would oppose total nationalization because that probably does discourage "innovation" and "risk taking" blah blah blah blah blah, but partial nationalization would be a great deal, because these banks will still want to make money, even if they have to share some of it with the government (direct via shareholder stakes, as well as taxes). A bunch of whiners will cry over the lost money, but it'll still be an assload of money. If someone buys me a car, for free, but says I have to share it with my cousin out on Long Island too, do I really whine about that shit? It's still a free car.
In short: yes, bailout needed, but needed for the future is a sizeable direct federal government stake in our financial institutions, no matter how commiefied that may seem. This will cost a lot right now, but if done right, can earn us profits sort of for good, until some rich fookers get rid of it in when Jenna Bush is elected President or whatever.
RECOMMENDED READING: Track down that "naked capitalism" post. Keep up with Krugman's blog at the NY Times website. Really consider giving Wall St by Doug Henwood a shot. I wish I knew more about Sweden's bailout history, and our own shoddy S&L past. It's on the list, for sure... P.S.: GREAT article in politico today about why the bill failed. Read it! http://www.politico.com/news/stories/0908/14108.html