An Angry Appeal by the Ignorant Main Street Populist

By Steven C. Ferguson - Econometrics & Programmatic Trade:


The United States Senate has officially set our fine country, once founded on free-market principles, down the road to socialistic financial ruin. Despite public outcry from 166 world-renown economists, many responsible commercial bankers and banking institutions nationwide, former officials from the U.S. Treasury Department and Federal Reserve, numerous notable investors and market analysts, as well as millions of US taxpayers; one hundred ill-qualified legislators completely ignored their pleas, succumbed to the specter of financial catastrophe, and passed bailout legislation which (if passed by the House) will undoubtedly handicap the US economy for decades to come.

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They tried to apply more lipstick, this time on the Wall Street Bailout Pig. No doubt they based their rescue renaming campaign on focus group studies and clever marketing ideas. They all publicly insisted they did not want to vote for it. But had little choice and evidently less courage. And the most notably of them, George Bush, Barak Obama and Christopher Dodd (among others), told voters that they needed this bailout to make sure America could borrow more money. We don't need to borrow, we need to SAVE! The country, its corporations and its people!!

Well, this ignorant populist has a list of ten objections, which will surely be presented to members of the House of Representatives:

1. This $800 Billion subsidy of the banking industry completely defies free market logic. It is utterly amazing that the Federal Reserve, the U.S. Treasury and particularly investment banks absolutely scream at the mention of regulation, yet demand this backstop when they create a financial mess brought on by abject lack of oversight and enormous leverage. When did laissez-faire become "lose it free?"
2. Our government has officially passed its stamp of approval on morally hazardous behavior. Next in line: The Auto Industry. In its myopic demand for short-term profits from SUVs and Crossovers, it has likewise been rewarded with a welfare check. How many other industries will follow? The airlines industry? Travel industry? The list of greedy, short-sighted and even incompetent corporations is long.
3. The bailout does nothing to address the most significant cause of this crisis, which is absurd leverage. The Fed-induced housing bubble and its subsequent crash certainly compounded the problem of irresponsible and incompetent lending practices, risk-ridden securitization, and wide-spread sale of toxic debt. Evidently the fool in the shower forgot to turn off the hot water and burned the entire world with a stream of negative equity. But the casino-like gambling that some refer to as "investment banking" is the real reason for this banking crisis. Levered fifty-to-one and day-trading in the billions, institutions run out of cash pretty quickly when assets are marked-to-market instead of make-believe. However, it's no surprise when the house wins every time. Paulson and his Goldman (NYSE: GS) cronies apparently have made sure of it. Taxpayers must now forfeit all their winnings.
4. The cost of the bailout will saddle taxpayers with debt and risk for decades to come. Our deficit is already at unfathomable record highs. What comes after trillions? Democrats decry the cost of the Gulf War and yet they just voted to double down on that amount overnight. Taxpayers are not getting pay raises; their savings and home equity are depleted; and last I checked, money does not grow on trees.
5. Since money does apparently grow without bound on Federal Reserve printing presses, the inevitable result of this bailout will be a significant weakening of US currency. Certainly the G-7 has been doing a fine job of bolstering the dollar through their concerted efforts. And all currencies will eventually weaken as this contagion continues to spread. But it can only be a matter of time before US creditors issue their own margin call. I suspect the first trade protection legislation against China could raise long-term interest rates five points overnight.
6. The continued threat of frozen credit markets does not justify any such bailout. Neither does the closure of banks. As we have seen multiple times in recent days, there are free-market solutions to recapitalization. Their are also free-market solutions to lending, as well as to incompetently run business operations. Besides all of that, America needs to go on a debt diet. Higher interest rates represent a healthy free market response to excessive credit-dependency. Consider interest rates of two decades ago compared to today, and forget the Wall Street Welfare. Economic catastrophe is not imminent. "The Great Depression" is not right around the corner, unless of course, we hurry it along and then protract its duration with this bailout!
7. The proposed bailout will do little or nothing to encourage lending anyway! Efforts to this point have included over a trillion in liquidity injections from the Federal Reserve, $638 billion committed in a day! And yet none of this has had any appreciable effect. Bailouts of Bear Stearns (NYSE: JPM), AIG (NYSE: AIG), Fannie Mae/Freddie Mac (NYSE: FNM, NYSE: FRE) have met with similar futility. For a few days, government supported bond auctions at Fannie/Freddie allowed for quarter point reductions in mortgages, but lenders withheld 80% of the drop in bond yields. Nearly all of the spread was withheld by greedy lenders like Countrywide when it could have been passed along to potential qualified borrowers at a time of need. This bailout will simply flush another $800 billion down the drain.
8. The bailout includes a provision to buy toxic debt from foreign banks that reside in the United States. How long will it take for distressed debt to be transferred to banks that sit on US soil from their affiliated foreign offices. This provision alone provides reason to vote down the proposal as authored. Throw in all the pork, and the whole pig stinks!
9. Many alternative bailout proposals with lower cost and greater promise have been completely ignored in this legislative process. Instead, lawmakers seem to have narrowed their focus to the Paulson Proposal with limited changes. Is time so short that they must squander all $800 billion in haste? Have they banned all experts from the conversation? Are they incapable of original thought? Or are they content to trust the stooge that insisted the housing market bottomed a year ago and that subprime was fully contained in the first place.
10. Last, as long as we have put an end to the free market, much regulation should follow quid pro quo:

• Start with limits on compensation. No longer should investment bankers, deal-makers and CEOs be paid based on the size of their deal or their inflated profits. Forget about owning a 30% equity stake just for pushing the IPO. Hard working people have put their entire lives into a business, so don't expect a massive piece of the action for a few hours of work. Instead, join the rest of the US workforce and be paid according to cost structure and quality of workmanship. This is how the rest of working America lives.
• Next, expect oversight from government officials along with full public disclosure of all assets and transactions. Taxpayers want to make sure you don't go back to your gambling habits on our dime. And no more toxic debt concoctions guaranteed to make a quick buck with a public backstop.
• Interest rates will need to come down immediately. You borrow at the discount window. Make sure the yield you demand is only a small percentage above. Anything more is usury, and the taxpayer won't settle for that.
• Prepare to refinance bad loans. $800 billion will cover an awful lot of them. Foreclosures won't be permissible under the new regime. This is government housing after all.

In addition to the list of objections, this ignorant populist also has a list of all those who supported the bill. Interested readers should obtain their own. Let them know that we really want to vote for them next time, but we just can't. We want to save America from further Congressional calamity. And I'll do my best to make sure others who really want to vote for them feel that they cannot re-elect these Senators either.

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