Tuesday, September 23, 2008

Holding the Bag

Okay, lets say that they do eventually pass this bill (based on the latest news, it's not exactly a certainty). I heard on NPR that the Fed has $800 Billion in the bank, just looking for usury. So they lend this money to the government. And the security for the loan? Bonds. Lots of bonds.

How do these bonds get paid back? With taxes. For many people the connection between the federal debt, which is now limited to around $10 Trillion, and taxes doesn't appear so easily. The government has to sell debt when it runs out of money. And that happened a long time ago, long before many of us were born. So now we live in a debt economy.

Who buys the bonds? Other than the Federal Government with more than half the outstanding debt (I know, it's weird), foreign governments are the biggest customers taken together. China and Japan come most readily to mind. And then there is the rest of us. Many people have openly questioned what will happen if China and Japan decide to unload their bonds. The net effect is a weakening of our own currency.

When our currency grows weak, foreign goods, like oil, become more expensive, even if demand is low or flat. And one thing that the Bush Administration has been consistent about is weakening our dollar. That's a big part of what makes gasoline expensive to us. And they seem to think it's a plus. When oil was selling at $140 per barrel, there was a bit of press about how high oil prices are bringing jobs home. Nice. Here's one bizarre example.

It's easy to get lost in the details of the situation. Most people are very focused on the details of the pending legislation to fix the Wall Street crisis. But the big picture looks more like this:

  • If you work for someone else, you're not going to be able to charge more for your products and services like a business can when the dollar loses its value.
  • If you work for someone else, you're not going to be able to use your expenses to limit your tax liability like a business can.
Regardless of who you work for, if you don't have money to pay for the best in tax preparation and legal tax planning, you're not likely to be able to avoid the taxes that are coming to pay for this debt.

And that is the main problem with this proposed $700 billion bailout. The executives of Fannie Mae, Freddie Mac, AIG, Bearn Stearns, etc., all sang the song of free-market capitalism. Whether or not it's really a free market is open to question. And when it came down to owning up to their own mistakes, they want YOU to pay for it. It's only fair.

To put it another way, they privatize the benefits of capitalism while socializing the risks. Remember socialism? You know, the little brother to communism? That's what they're talking about. Big business works better if you privatize the economic benefits and socialize the risks. To put it in layman's terms: Executives keep getting paid even when you lose your job.

Since 1994, Republicans have been doing what they can to "de-regulate" the investment industry. Yeah, they de-regulated it alright. Anyone remember the failed experiment of de-regulating the power industry in California? I do. Power tripled in cost so that people like Enron executives could put their money in the Grand Cayman Islands as a safe investment.

The Bush Administration is really worried that the Democrats will load up the bill with restrictions, such as the restriction on executive pay for companies that get assistance from the government. I guess means testing is okay for poor people seeking welfare or unemployment, but for executives, that would be humiliating!

This week, they're "negotiating" on the terms of the aid. What I find interesting is that the negotiations are in secret. Why all the secrecy? It's our money too. Seems like they want to come up with a plan and spring it on the rest of. You know, like it's "now or never". At least Republicans are starting to speak up and point out alternatives other than handing the banks a big wad of money all at once. And then there is the insurance plan. Hmmm. Don't people buy mortgage insurance anyway? Now that I'm thinking about it, where are those insurance guys? The plan was submarined without informing Treasury Secretary Paulson. Some have characterized the effort behind this plan as a way to divert attention to McCain's "leadership skills".

I see also that the FBI is getting involved. It seems that there are four firms at the heart of the matter and they want to know why. And now they're letting people know that investigating the same companies for wrongdoing will be hampered when we give them a wheel barrel full of money to pay for their mistakes.

At the beginning of this week, we were talking about a huge bailout of the financial industry with almost no oversight or accountability. Democrats have been negotiating with the Bush Administration to require oversight. Many House Republicans still seem to insist that relaxing the regulations could help the situation. Even if there is some oversight, it will only be administrative oversight by unelected officials. Whether it's a handout of money, insurance or some other cooperative put together by the financial industry, one thing remains clear: control of the process is not in the hands of the people who are paying for it.
Post a Comment