I went to www.congress.org and left comments about the bailout. I suggest you do the same. Here was my inflation-adjusted "two cents:"
I oppose the bailout because it is a temporary fix that does not address the underlying problem. It is important for the government to bailout the holding corporation side of banks and protect the depositors’ funds. However if banks have excess liabilities from their investment activities they and their shareholders should foot the bill. These people have to stop relying on Wall Street socialism in order to survive. Over, at least, the period of 01 August 2007 – 19 March 2008 the market value of the S&P 500 increased only for brief periods in response to an announcement of government assistance. The S&P 500 was down 33% during all periods not in immediate response to an announcement of government assistance.
This very significant piece of information means there are underlying problems with the market which makes it unsustainable independent of government help. If these underlying problems are not corrected, then the erosion of market value cannot be avoided, but merely delayed.
The establishment line of the causes of the current financial crisis, those of the kind proffered in, say, the epilogue to the paperback edition of former Fed Chair Alan Greenspan’s book The Age of Turbulence, is that risk was miscalculated on mortgage-backed securities which became heavily based on risky mortgages.
There is a direct relationship between risk and yield for almost all investments. Investors (who tend to be naturally risk-averse) expect to be compensated for additional risk. So one way of measuring the risk assessed on an investment is to look at how many times it’s yield is above some low-risk baseline asset, like Treasury bills. High risk mortgages once yielding 20 times T-bills moved down to a 4-fold yield above T-bills indicating a very low risk assessment. The most risky of these mortgages, called subprime, went from accounting for around 7% of the bundle of secondary mortgage market instruments to around 20% of the bundle of mortgage securities.
Mortgage-backed securities like the mortgages themselves are primarily collateralized with home equity, the value of the underlying asset. When home values started to fall mortgages became more expensive than the value of the home and this created great uncertainty in the secondary mortgage markets because no one is sure what equilibrium prices home equities are going to settle into. Until the secondary housing market’s inventory of upside-down homes is liquidated, the home equity prices are unlikely to stabilize.
What Greenspan fails to mention is that problems like this are easily predictable. Households’ primary source of revenues is income. When the speculative markets started artificially inflating home prices, the bubble you’ve heard so much about, typical housing costs exceeded average income by about 500%.
It stands to reason that defaults are going to start occurring when people no longer earn enough to afford their homes; a fortiori in the case of mortgages that were risky to begin with. Another bailout will create another temporary spike in the Dow and the S&P, but it will still leave the structural problems with the economy unaddressed.
When Sweden faced a similar financial crisis it cost them about 2% of their GDP to fix it. 2% of US GDP is about $280 billion. Why the $700 billion? Are the Swedish just better than us at fixing financial problems? And why not use the Fed’s emergency funds to deal with the problem? What happened to that money? The country can’t go bankrupt in its own currency because the Fed is a financial institution without a ledger: if it needs more money it just prints more money.
Greenspan says that such a big bill can’t be hoisted on the shoulders of the Fed, because if they were to use that much of their emergency funds it would reduce the Fed's ability to contract the money supply or reduce the Fed funds rate or something. I have no idea what he is talking about. But I am willing to offer a bit of speculation here. No matter what source from whence the bailout funds derive, there is going to be a hyperinflationary effect to putting $700 billion (with a "B") into the economy. The dollar will plummet and in order to save themselves (and their purchasing power) from the deluge the rich recipients of the bailout will move their assets overseas, in forex accounts and the like. So the bailout is in essence one big "golden parachute" for the masters of the modern day industrial plantation known as the United States of America.
Selected References
LBO Special Report: http://www.leftbusinessobserver.com/...