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BAILOUTS SHOULD HAVE CONSEQUENCES.
My wise and just editor Harold Meyerson makes a slew of great points on the Big Shitpile today, but I want to zoom in on a particular point, which is that bailouts should have consequences. The Federal Reserve is trying a couple different strategies to try and stabilize the market. But the two most dramatic interventions are 1) extending credit to the 20 largest dealers in securities, the so-called "primary dealers." Previous to this, the Fed had only ever extended credit to heavily regulated commercial banks. And 2) direct bailouts, which is essentially what the Fed did when it shouldered $30 billion of Bear Stearns riskiest securities so JP Morgan could confidently purchase the flailing investment bank.
#1 has an obvious corollary -- if the securities dealers are going to get the advantages of banks, they should be regulated like banks. Part of the purpose of that regulation is to ensure transparency and responsible behavior such that taxpayers aren't left holding the bag when bad bets fail to pay off. That's the position we're now in with the securities dealers, but there's no reason we should ever have to be here again.
And #2 has an obvious corollary: If we're paying these companies, we should be buying something. As Harold says, "This solution doesn't look to be a great deal for the American public. It looks even worse when we recall that other governments -- including those of China, Abu Dhabi and Kuwait -- have also been bailing out our banks, through sovereign wealth funds, while getting shares in those companies in return. Can't the American people get as good a deal as the Chinese when our government bails out a major American bank?" There's no reason why not. If the banks are in such a state that they need to the Fed to bail them out, they're going to agree to the Fed's terms. And the Fed knows that. But so far, the only group the Federal Reserve has decided to help out was...JP Morgan. They made Bear Stearns agree to JP Morgan's terms, terms that seem ridiculously one-sided even given the uncertain condition of BS's assets. But there's no reason future bailouts can't be leveraged in the interest of taxpayers or the foreclosed.
COMMENTS (6)
I am completely shocked by the prospect that our federal government would dare think of giving tremendous amounts of taxpayer dollars to our largest richest companies and their investors while we get little back for the investment.
This must totally go against every single other expenditure over the entire history of the Bush Jr. administration, which heretofore had been so careful about getting us ordinary people rewards for our massive investments, no-bid contracts, and subsidies.
Posted by: El Cid | March 20, 2008 10:37 AM
I am a conservative that is also appalled at the bailout. I would have rather allowed the bank to fail.
If it never happens, what's the penalty for poor judgement?
Posted by: El Viajero | March 20, 2008 11:29 AM
Amen to the above commenters.
On a side note, it is weird to see "JP Morgan" written as it is in the post. It almost seems like we are talking about the man himself.
Posted by: georg | March 20, 2008 12:06 PM
Yes, to #1 and #2.
If we're giving them money, where's the control? No control, no money in my book. Just foolish to do otherwise.
And, by God, yes, we should be retaining assets if we're throwing money around.
We did it in the 80s with failing thrifts.
There's a lot the Feds could do with those empty properties. HUD is never suffering from an overflow of affordable properties. Maybe some Katrina folks would like to get out of their toxic trailers for a while. There are many possibilities that would benefit our country. None of them are even being explored at this point.
Unfortunately, both #1 and #2 suffer from the obvious disadvantage of reality:
The Repugs don't think basic rules apply to them.
They want a handout. But they don't want to give up anything in return.
That's why they're Repugnicans after all.
Posted by: Raven | March 20, 2008 12:38 PM
"But there's no reason future bailouts can't be leveraged in the interest of taxpayers or the foreclosed."
Errr, yes there is. The Fed is what we call a "captured agency" that works for Wall Street, not Main Street. This is especially true when you are talking about the Fed under Dubya.
Posted by: Dan | March 20, 2008 12:40 PM
If my money in the form of taxes is being used to bail out private corporations, I should receive part ownership, at a minimum in the form of future dividends and growth in value of assets.
So, any company receiving govt bailout should be forced to cede to the government some amount of shares; even if non-voting. Those shares should be held until either or both conditions are met:
a) accrued dividends equal the amount the government spent bailing out said corporation, plus interest;
b) the govt can sell shares at a price that covers the initial 'investment' plus interest.
I can hear now cries of "socialism", yet the act of the government bailing out these private entities already should make such cries superfluous.
Posted by: U.G. | March 20, 2008 1:36 PM