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Government Leaders Said Bailouts Were Needed Because "The House Next Door Was Burning Down" . . . Were They Right?
The New York Times wrote on July 16th:
In retrospect, Congress felt bullied by Mr. Paulson last year. Many of them fervently believed they should not
prop up the banks that had led us to this crisis — yet they were pushed
by Mr. Paulson and Mr. Bernanke into passing the $700 billion TARP,
which was then used to bail out those very banks.
In his latest trend forecast, Gerald Celente writes:
It
was the familiar fear tactic — one that had worked in the past and
would work again — an economic version of the Bush/Cheney argument for
the Iraq War. The people were told that Saddam Hussein had weapons of
mass destruction and ties to Al Qaeda. If he wasn’t stopped, the next
cloud would be a mushroom cloud.The pretense was different but
the game was the same: instill fear in a panicked public and they will
follow their leader, regardless of how shallow the reasoning or how big
the lie.Just as the nation was hurried to war before it could
be proven that Saddam Hussein had no weapons of mass destruction or Al
Qaeda ties, so too there was no time to debate what might happen if the
“too big to fail” failed...While the national pastime of
“follow the leader” is always the path of least resistance, it comes at
a high cost … financial ruin and/or war and death. In either case, when
disaster strikes, the followers typically absolve themselves of any
direct moral responsibility for both the outcome and for the role they
played in allowing it to happen.
Celente is over-the-top, right? Tin foil hat time, right?
Well,
maybe. But Congressmen Brad Sherman and Paul Kanjorski and Senator
James Inhofe all say that the government warned of martial law
if Tarp wasn't passed:
Bait And Switch
Indeed, the Tarp Inspector General has said that Paulson misrepresented some fundamental aspects of Tarp.
And Paulson himself has said:
During the two weeks that Congress considered the [Tarp] legislation, market conditions worsened considerably. It
was clear to me by the time the bill was signed on October 3rd that we
needed to act quickly and forcefully, and that purchasing troubled
assets—our initial focus—would take time to implement and would not be
sufficient given the severity of the problem. In
consultation with the Federal Reserve, I determined that the most
timely, effective step to improve credit market conditions was to
strengthen bank balance sheets quickly through direct purchases of
equity in banks.
So Paulson knew "by the time the bill was
signed" that it wouldn't be used for its advertised purpose - disposing
of toxic assets - and would instead be used to give money directly to
the big banks? But he didn't tell Congress before they voted to approve
the Tarp legislation? Does that mean that Paulson either actively misrepresented
the purpose of the legislation or else committed a lie by omission -
holding his tongue even though the fundamental idea behind his bill had
changed?
It was a bait-and-switch, whether or not it was an intentional one.
The House Next Door
And
while I have never heard of Obama and Bernanke's "house next door"
speeches before, Celente does a good job of pulling the rug out from
under their rationale:
Asked why taxpayers should be
forced to foot the bill to bail out banks, brokerages, insurance
companies and other institutions that had made bad bets, Mr. Obama
responded, “You know, if my neighbor’s house is on fire, even if they
were smoking in the bedroom or leaving the stove on, right now my
main incentive is to put out that fire so that it doesn’t spread to my
house.”When asked the same question seven months later, Ben
Bernanke resorted to the same illegitimate analogy: “If you have a
neighbor, who smokes in bed. And he’s a risk to everybody. If suppose
he sets fire to his house, and you might say to yourself, ‘I’m not
gonna call the fire department. Let his house burn down. It’s fine with
me.’ But what if your house is made of wood? And it’s right next door
to his house? What if the whole town is made of wood? Well, I think
we’d all agree that the right thing to do is put out that fire first,
and then say, ‘What punishment is appropriate? How should we change
the fire code? What needs to be done to make sure this doesn’t happen
in the future? How can we fire proof our houses?’ That’s where we are
now. We have a fire going on.”Comparing a neighbor’s house on
fire to spending trillions to bail out failed financial institutions is
a totally fraudulent, puerile and transparent analogy … one that
happened to be accepted without question by the entire media and
foisted upon the public as the logic of the wise.“Smoking in
bed” and “the house on fire” bore no relationship to the reality. More
to the point, what if your neighbor is a compulsive gambler who lost
his fortune in Vegas and is now losing his house? Should the “whole
town” be taxed for generations to come so that your neighbor is able to
retain possession of his McMansion? And for his gross failures, should
he be further rewarded with millions in “executive compensation” so he
can travel first class back to Vegas to continue his wasteful,
profligate ways?
Preventing the Next Fire
The bottom line is this. If the fire at the neighbor's house was threatening your house, wouldn't you want his matches taken away? Especially if he had lit fires that had burned down other houses in the past?
Unfortunately, as I have previously pointed out, Obama's proposed economic regulations are like a law which makes arson illegal, but exempts convicted arsonists.
The top independent economists warn that the economy will not stabilize - and hundreds of billions or trillions of additional dollars
will need to be thrown at the giant banks and financial companies -
unless the fundamental problems are actually addressed and fixed. They
agree that - to date - Obama, Summers, Geithner, Bernanke and the rest
of the boys have not done so.
Indeed, I would argue that the government is actually handing out matches
by encouraging the financial giants to hide the extent of their toxic
assets (through funny accounting and the continued use of SIVs),
restart the shadow banking system, re-lever up, and engage in new types
of financial schemes such as securitization of life insurance policies.
As I wrote
a year ago, by trying to put out the raging fires of deleveraging, the
government was ensuring that they would grow and wipe out the whole
forest.
And as former head BIS economist William White wrote recently, we have to resist the temptation to blow another bubble every time the economy gets in trouble:
Forest
fires are judged to be nasty, especially when one’s own house or life
is threatened, or when grave harm is being done to tourist attractions.
The popular conviction that fires are an unqualified evil reached its
zenith after a third of Yellowstone Park in the US was destroyed by
fire in 1988. Nevertheless, conventional wisdom among forest managers
remains that it is best to let natural forest fires burn themselves
out, unless particularly dangerous conditions apply. Burning appears to
be part of a natural process of forest rejuvenation. Moreover,
intermittent fires burn away the undergrowth that might accumulate and
make any eventual fire uncontrollable.
Perhaps modern
macroeconomists could learn from the forest managers. For decades,
successive economic downturns and even threats of downturns
(“pre-emptive easing”) have been met with massive monetary and often
fiscal stimuli...Just as good forest management implies cutting
away underbrush and selective tree-felling, we need to resist the
credit-driven expansions that fuel asset bubbles and unsustainable
spending patterns. Recent reports from a number of jurisdictions with
well-developed financial markets seem to agree that regulatory
instruments play an important role in leaning against such phenomena.
What is less clear is that central bankers recognise that they might
have an even more important role to play. In light of the recent surge
in asset prices worldwide, this issue needs urgent attention. Yet
another boom-bust cycle could have negative implications, social and
political, stretching beyond the sphere of economics.
Whoever
started the fire in the first place, and whether or not there was
really a crisis which required bailouts the first time around, the fact
is that the government is ensuring more - and - bigger fires in the
future.
- advertisements -
as absurd as many of them are, these metaphors do help bring into focus what has actually happened here.
regarding william white's assessment...schumpeter isn't rolling over. he's having a heart snicker.
*hearty
the progeny of fire is green shoots...
If I knew Ob was going to give turbo tim a job and continue bushing things up I never would have voted for him.
You understand all of this when you understand the calamity that was about to occur September - October 2008 was massive, life-threatening losses for Paulson and his bankster friends. Anything that would have happened, if left to fail, would have been manageable as far as the overwhelming majority of Americans. And we'd be far better off. Can't you hear them? "By God, this means I'll only have . .what ten or twenty million left. . I'll...I'll be practically broke. . . ruined. . the Park Avenue condo. . the club. . the boat. . SWEET JESUS WE CAN'T LET THIS HAPPEN" I'm telling you as sure as anything that is true the Great Ruin that was prevented was ONLY THEIR RUIN, not ours. And being complete (and dangerous) sociopaths, they would then stop at nothing to make sure it did not happen. This is the cold, hard, vicious reality we are dealing with. And our failure was that the cops were nowhere in sight, and they are still in retreat. Justice is the loser in this one. That is why we are all here.
This is the absolute truth!!!!!!!!!
I am almost certain the majority of Americans don't understand this. If I ever see Blankfien on the streets......
No I don't want the house to burn down. I don't want the neighborhood to burn down. I want every under capitalized insolvent bank closed. I want to see felony indictments for fraud. We need to start bringing Madoff plenty of new cellmates at club fed. These banksters made billions gambling and they need to pay, that includes shifty Paulson, turbo Timmy Geithner and uncle Ben. Oh and I want my TARP money back.
Bernanke's answer sounded so much better than the truth.
http://punditkitchen.com/2008/10/03/political-pictures-mafia-700-billion...
TARP isn't the problem. Excess entitlement expansion with little to no real value added to this lifeless economy will be our death knell.
Hell, years of easy credit leading up to the TARP bailout probably rendered all subsequent actions useless.
Barry is so negative. From fire comes opportunity. Opportunity to rebuild my house, remedy the things I did not like, and create an entirely new list of things I hate about my new house....sigh.
Most of all, it is an oppty to get rid of all that crap collecting dust that would otherwise have filled up a moving van, when I move.
Man was not meant for such sedentary life.
It was the familiar fear tactic — one that had worked in the past and would work again — an economic version of the Bush/Cheney argument for the Iraq War. The people were told that Saddam Hussein had weapons of mass destruction and ties to Al Qaeda. If he wasn’t stopped, the next cloud would be a mushroom cloud.
The pretense was different but the game was the same: instill fear in a panicked public and they will follow their leader, regardless of how shallow the reasoning or how big the lie.
As I remember it, the "people" were not for this at all. CNBS was reporting e-mail running 99-1 against the bailout. It was just the bought and paid for congress that believed this TBTF crap. Vote out anyone who supported TARP
I think you meant "house next door" not "house next store". Good work, regardless.
The roof, the roof, the roof is on fire....burn motherfucker burn
I just know that Michelle's ass is getting bigger as we speak.
If the house next door was that of a terrorist, I would bring smores.
Just because that house was burning does not mean mine will.
Does he think we are 5?
If one were fiscally responsible, the house next door would be insured, and the real valuables placed in a off-site lock box. That's why those in solid credit standing have a right to be more than a little pissed off.
As for the house on fire, if someone was smoking and started the fire, but was still in the house... would I risk life and limb to save him/her? Not likely, but I wouldn't necessarily cheer for the house to burn faster, either. Our government would do the saving, pay for the hospital bill AND give the offenders a bigger house.
Okay, I've expanded and cleaned up the essay . . .
Shoot the neighbor, Protect your house. Clean the gene pool. So many turds, so little time.
Interesting timeline from Kanjorski on why the TARP switched from buying toxic assets to shoveling money at banks.
Too bad we've ended up doing both.
Don't know if I heard it here or somewhere else but Paulson's biographer during the crisis on the timeline for what the $ were to go for said the following. He said that the day before the hearings Paulson told him the money would be not be used to buy the toxic assets because they couldn't determine a price, so the money was going to be given to the banks directly. The next day he told congress, under oath, that the money would be used to buy the toxic assets.
it was the Vanity Fair piece.