HallSlug.com

Posts Tagged ‘bailout’

Hard Line Against GM and Chrysler Puts Bailout Firms on Notice

The administration’s display of authority sent U.S. stocks tumbling and raised questions about whether the government would take similar steps against top executives at U.S. banks that are also receiving government bailout funds.

The administration told GM and Chrysler they had failed to come up with restructuring plans that justify the billions of dollars in additional taxpayer funds they are requesting. GM was ordered to devise a new plan, while Chrysler was instructed to reach a deal with Fiat in which the Italian carmaker would take a stake in Chrysler.

The government is currently stress-testing the nation’s 20 largest banks and “maybe three fail the test,” said an executive at a large bank receiving government funds. Obama “could remove the heads of those banks,” the executive said.

“He had to do something dramatic; he had plenty of cause on this one,” the executive said, adding that the outlook for GM was extremely grim.

Only Half a Bailout

A week into the big bailout, banks are beginning to charge each other less for loans and companies are finding it easier to borrow short term. The Dow has been up and down, but so far this week, it is back above 9,000.

So has the worst passed? Probably not.

The unfortunate reality is that as long as millions of Americans continue to default on their mortgages and housing prices continue to slide, banks will continue to suffer big losses. Unless something is done quickly to help American homeowners avoid foreclosure and stay in their homes, those losses could swamp the bailout effort by exceeding the sums being spent to rescue the banks.

Despite the danger posed by foreclosures — to the bailout, homeowners, taxpayers and the economy — the Bush administration and Congress are still depending on banks and other participants in the mortgage industry to voluntarily modify troubled loans, say, by giving borrowers more time to pay or by reducing interest rates.

Mandatory modifications, bankruptcy, lawsuits — no one likes them, but they are tough tools for a tough problem. The bailout has dealt with only half of the problem: the credit freeze. Unless the government deals as aggressively with foreclosures, the system will likely face the abyss again.

Dems and Republicans Screwed the Middle Class Good

Last week, the Bush administration proposed a three-page bill to bail out Wall Street to the tune of $700 billion. It died in the U.S. House of Representatives earlier this week.

On Friday, though, the House approved a far bigger, broader, and beefier version of the bill–which has ballooned to a remarkable 442 pages. The vote was 263 to 171, with the bulk of the opposition coming from Republicans. Because the Senate already approved the measure, it immediately went to President Bush, who signed it into law.

The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on. (Think IRS agents posing as accountants or tax preparers and saying, “I’m not sure if that deduction is entirely legal, but it’ll save you $1,000. Want to take it?”) That section had expired as of January 1, 2008, and would now be renewed.

No More Corporate Welfare for Wall Street

This bailout was a terrible idea. Here’s why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.