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Cartoon: Paulson's New Plan

Cartoon: Looting the Treasury

Paulson and Bernanke Testify on the Bailout

"I am very proud of the decisive actions by Treasury, the Fed and the FDIC to stabilize our financial system," Paulson told members of Congress in his prepared remarks. "We have done what was necessary as facts and conditions in the market and economy have changed."

read the CNN article

My thoughts: Paulson remains clueless.

The Bailout is Failing. I Am Shocked!!!!

The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers...

The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms...

Mr. Paulson conceded that he had scrapped the plan he originally sold to Congress in September, which was to have the Treasury Department buy hundreds of billions of dollars worth of illiquid mortgage-backed securities in order to free up banks to resume normal lending.

The program is still called the Troubled Asset Relief Program, or TARP, but it will not buy troubled assets. “Our assessment at this time is that this is not the most effective way to use TARP funds,” Mr. Paulson said.

Instead, Treasury will step up its program of injecting capital directly into banks and, for the first time, expand it to include financial companies that are not federally regulated banks or thrifts.

read the New York Times article

My thoughts: Socialism and central planning still do not work. The market is down 22% since the bailout. We were told we must do something or the markets would crash. We did something and the markets crashed anyway. The crisis in large part was caused by the inability of people to pay back loans. Now Paulson is mad that banks won't extend loans to people with poor credit. The banks learned there lesson, Paulson did not.

Free Market, Capitalism, and the Bailout

Bush said that his economic advisors, led by Treasury Secretary Henry Paulson, will provide further details on how this "rescue plan" will take shape:

They will make clear that each of these new programs contains safeguards to protect the taxpayers. They will make clear that the government's role will be limited and temporary. And they will make clear that these measures are not intended to take over the free market, but to preserve it.

Up is Down. Right is Left. Freedom is Slavery. We come not to bury the "free market," but to save it... just the way FDR saved capitalism!

But, to paraphrase another Savior of the Free Market, who enacted wage and price controls to save "capitalism" from itself... "Let us make one thing perfectly clear": There is no free market. And the "capitalism" they are "saving" has nothing to do with "free markets." Call it "state capitalism," or "corporatism," or "neofascism." Call it whatever the hell you want... but don't call it a "free market."

As I argued recently, the state and the banks are virtual extensions of one another, two aspects of the same structure, a "state-banking nexus," if you will. The effective
nationalization of financial institutions in this country is just a continuation of a long history of government intervention.

source

The current state and the current banking sector require one another; neither can exist without the other. They are so reciprocally intertwined that each is an extension of the other.

Remember this point the next time somebody tells you that "free market madmen" caused the current financial crisis that is threatening to undermine the economy. There is no free market. There is no "laissez-faire capitalism." The government has been deeply involved in setting the parameters for market relations for eons; in fact, genuine "laissez-faire capitalism" has never existed. Yes, trade may have been less regulated in the nineteenth century, but not even the so-called "Gilded Age" featured "unfettered" markets.

One of the reasons I have come to dislike using the term "capitalism" is that it has never, historically, manifested fully its so-called "unknown ideals." Real, actual,
historically specific "capitalism" has always entailed the intervention of the state. And that intervention has always had a class character; that is, the actions of the state have always, and must always, benefit some groups differentially at the expense of others...

It is therefore no surprise that the loudest advocates for the effective nationalization of the finance industry are to be found on Wall Street; at this point, failing financiers welcome any government actions that will socialize their risks. But such actions that socialize "losses while keeping the profits in private hands" are a hallmark of fascist and neofascist economies. They are just another manifestation of "Horwitz's First Law of Political Economy": "no one hates capitalism more than capitalists."

In the end, the proposed Paulson Plan is nothing more than a "heist," as Robert P. Murphy argues, "a grand scheme in which the public will end up owing hundreds of billions of dollars to holders of new debt claims issued by the US Treasury." Such a plan will only compound the problem.

read the entire post

My thoughts: Two outstanding posts for Chris Sciabarra. He clearly makes the case that capitalism does not mean free markets.

Bailout Cost: $2.25 Trillion

Critics like Barry Ritholtz said it's about time the U.S. got onboard, even though he warns it could cost up to $3 trillion. ABCNews.com spoke with Ritholtz, the author of "Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy"...

read more

In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.

All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.

from the New York Times

Demystifying the Mortgage Meltdown

Demystifying the Mortgage Meltdown: What It Means for Main Street, Wall Street and the U.S. Financial SystemGlenn Yago and James R. Barth

Watch the video here. (72 minutes)

Powerpoint slides (84 slides)

Back in March 2008, Treasury Secretary Henry Paulson told CNN, "I have great, great confidence in our capital markets and our financial institutions."

Just six months later, it was a different story. "The financial security of all Americans . . . depends on our ability to restore our financial institution to a sound footing," the secretary noted in a press release...

The story of the mortgage meltdown began when the Federal Reserve, in response to the recession of 2001, began slashing interest rates to historically low levels. The result was an era of easy credit that made homeownership more accessible. Soon new mortgage products were introduced, promising instant access to the American Dream.

Many subprime borrowers joined the party via adjustable-rate mortgages (ARMs), enjoying artificially low teaser rates and banking on the hope of refinancing down the road. The market encouraged this kind of wishful thinking...

read more here

The Economist on the Bailout

SAVING the world is a thankless task. The only thing beyond dispute in the $700 billion plan of Hank Paulson, the treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, to stem the financial crisis is that everyone can find something in it to dislike. The left accuses it of ripping off taxpayers to save Wall Street, the right damns it as socialism; economists disparage its technicalities, political scientists its sweeping powers. The administration gave ground to Congress, George Bush delivered a televised appeal and Barack Obama and John McCain suspended the presidential campaign. Even so, as The Economist went to press, the differences remained. There was a chance that Congress would say no.

Spending a sum of money that could buy you a war in Iraq should not come easily; and the notion of any bail-out is deeply troubling to any self-respecting capitalist. Against that stand two overriding arguments. First this is a plan that could work (see article). And, second, the potential costs of producing nothing, or too little too slowly, include a financial collapse and a deep recession spilling across the world: those far outweigh any plausible estimate of the bail-out’s cost.

read the entire article

The $700 Paulson Plan: Free Market Commentary

From left, Henry M. Paulson Jr., the Treasury secretary; Ben S. Bernanke, the Federal Reserve chairman; Christopher Cox, the Securities and Exchange Commission chairman; and James Lockhart III, the director of the Federal Housing Finance Agency.


A collection of free market and capitalist critiques of the current "financial crisis" and proposed bailout.

The Bogus Financial Crisis: an interview with Robert Higgs (about 15 minutes)

What Credit Crunch?

from Carpe Diem

Well here we are in September and bank credit continues to look very robust. As Robert Higgs points out consumer loans are up, commercial and industrial loans are up, even real estate loans are up. Overall, total bank credit is up with just a slight sign of leveling off in recent weeks. So where is the credit crunch?

from Marginal Revolution

The other, more fundamental flaw in the nation’s economy—consumption backed by debt instead of savings—also originated largely as a result of government policy. It has to do with deficits and debts that we were told did not matter, entitlements that we were told were fully funded, and borrowing guarantees that we were told were only a “last resort.” The funny thing about last resorts is that they always get the last laugh.

from Wall Street Socialism, Alvaro Llosa

That malinvestments must now be liquidated merely reflects the mistakes made in the past, induced by bad government policy at the Fed and other credit-related agencies, such as Fannie and Freddie. Of course, some of the necessary adjustments will be painful for the parties directly involved. But the huge bailout now beingconcocted in Congress will only compound the errors of the past by keeping some malinvestments on life support, deferring the day that lenders must write off bad debts, and preventing the entire financial system from returning to a semblance of economic viability without ongoing subsidies and bailouts that impoverish the taxpayers and threaten the entire economy.

from Credit is Flowing, Sky is Not Falling, Don't Panic by Robert Higgs

Of course, everyone engaged in this hysterical flailing will assert that the objective is only to save capitalism in a crisis. Such government saviors always make that claim, oblivious to its absurdity. Franklin D. Roosevelt and his gang claimed to be saving capitalism, too, but look at what was left of it when they had finished their work.

from Does Wall Street Have a Death Wish? by Robert Higgs

The focus on regulation, narrowly defined, distracts attention from all the ways that the government has made the financial and housing industries unstable through guarantees and other privileges. Those guarantees systematically transferred the risk of dubious mortgage lending from bankers to taxpayers. It’s a classic case of Baptists and bootleggers, Bruce Yandle’s term for when moralizers (promoting, for example, the “American dream through home-ownership for all”) and rent-seekers (the building, banking, and real-estate industries) implicitly team up to push government intervention.

State Capitalism in Crisis by Sheldon Richman

Admittedly, we do need protection from recklessness. But oddly, the same people who condemn Wall Street for its irresponsibility support government bailouts -- even as they say bailouts are a necessary evil. When will these folks see that the promise of rescue encourages recklessness? The best way to discourage it is to make clear that no one is too big or important to fail. Market discipline is the best protector of the public. But that requires laissez faire-- no privileges whatever.

from Government Failure by Sheldon Richman

What now? First: no bailout! Cut the GSEs loose and let them do what other businesses do on hard times: renegotiate contracts and revalue assets. Will there be another Great Depression? Recall that what turned a recession into the Great Depression was the Federal Reserve’s deflation of the money supply. A bailout is not required to avoid that catastrophic mistake.

from Bailing Out Statism by Sheldon Richman

Failure of Social Engineering?

source

For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac -- who in turn pressured banks and other lenders -- to extend mortgages to people who were borrowing over their heads.

The Economic Crisis: Clearing the Fog by Charles Krauthammer

More than a negligible amount of the blame for the mortgage meltdown can be traced back to multiculturalism: government-mandated affirmative-action lending, demographic change, illegal immigration, and the mind-numbing effects of political correctness. The chickens have finally come home to roost.

The Mind-Numbing Effects of Political Correctness by Mark Perry

Sources for free market commentary:

Mises Institute

lewrockwell.com

Foundation for Economic Education

Independent Institute

Marx, Engels, and Paulson

Cartoon: Financial Bailout

Financial Crisis

Henry Paulson: Socialist

On Friday, Treasury Secretary Henry Paulson—the former CEO of Goldman Sachs—announced an unprecedented plan to salvage the largest banks in America. Just days after declaring that a bailout of Lehman Brothers would constitute an unacceptable moral hazard, a Republican administration has decided that the only way to keep the American economy alive is to have the federal government take the reins of some of the largest financial institutions in the world.

There is a term in political philosophy to describe a government takeover of a critical industry: That term is socialism. The government is telling us that capital and credit markets cannot, for several reasons, solve the current crisis on their own—only the federal government and its massive taxpayer base have the authority and the resources to solve it. That is state socialism: the philosophy preached by the founders of the Second International, by the radical wing of the American labor movement, through the formation of the Soviet Union and its satellites, and now by Henry Paulson...

read the essay

Financial Crisis

This past week marks a decisive turn in the evolution of American capitalism.

Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression...

Also scrapped is the notion that government's role is to get out of the way, limiting itself to protecting consumers and small investors, setting the rules of the game and stepping in -- only rarely -- to cushion the economy from shocks like the 1987 stock-market crash or the 1998 collapse of hedge fund Long-Term Capital Management. Both of those episodes involved government jawboning and flooding the markets with money. In contrast to today, neither time did the U.S. take significant amounts of taxpayer money or anything approaching the nationalization of a major firm...

It is too early to say whether Mr. Bernanke and Mr. Paulson have made the right call and will bring the crisis to a close, despite global stock markets' ebullient reaction Friday. If the fear does subside, then talk will turn to writing new rules for a financial system that has changed more in the past six months than in the previous decade. The government has bailed out financial institutions -- and particularly their creditors -- and taxpayers will pick up the tab for many of the institutions' bad decisions. That could encourage bad behavior in the future. So, the government needs to craft a new regulatory regime to reduce those incentives.

read the WSJ article

Financial Bailout

Treasury Secretary Henry Paulson on Sunday called on Congress to move swiftly on the Bush administration's $700 billion proposal to bail out the financial system...

President Bush asked Congress on Saturday for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis.

The legislative proposal is the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression...

The plan would allow the Treasury to buy up mortgage-related assets from American based companies and foreign firms with a big exposure to these illiquid assets. The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit...

The administration's proposal also requests that Congress authorize an increase to the nation's debt ceiling. Currently, it's set to rise to $10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009. But the proposal requests that limit be increased to $11.315 trillion to allow for the purchases of mortgage-backed assets....

"We're talking about hundreds of billions of dollars, but remember this is not an expenditure, this is money that is being used to purchase illiquid mortgage assets that are very difficult to value," Paulson said on NBC's "Meet the Press."

read the CNN article

Paulson on the Economy

Treasury Secretary Henry Paulson described the commercial banking sector as "sound," and said Monday he doesn't rule out additional government bailouts for the future.

"We're working through a difficult period in our financial markets right now as we work off some of the past excesses," said Paulson in a press conference in Washington. "But the American people can remain confident in the soundness and the resilience of our financial system."

Paulson's comments came as Lehman Brothers (LEH, Fortune 500) is filed for the biggest bankruptcy in history after it failed to find a buyer, triggering a 94%stock plunge to 20 cents a share.

Paulson said times have changed since the government brokered the March bailout of Bear Stearns, and that he never considered that type of support for Lehman.

"I never once considered that it was appropriate to put taxpayer money on the line when it came to Lehman Brothers," said Paulson, a former chairman and CEO of Goldman Sachs.

But he didn't rule out future bailouts in the financial services industry. When a reporter asked Paulson if there would be "no more" bailouts, he replied: "Don't read it as no more. Read it as that ... it's important, I think, for us to maintain the stability and orderliness of our financial system."

Paulson said the finance industry's woes stemmed from the "housing correction," which would take another few months before it reached its peak.

read the CNN story

Calls for Resignation

`I sincerely believe that Henry Paulson and Ben Bernanke should resign,'' said Bunning, a Republican from Kentucky on the Senate Banking Committee. ``They have taken the free market out of the free market.''

Paulson and the federal regulator for Fannie and Freddie placed the two largest U.S. mortgage-finance companies in a government-operated conservatorship on Sept. 7, ousting their chief executives and eliminating their dividends. Treasury also may purchase up to $200 billion of stock in the firms to keep them solvent.

``We no longer have a free market in the United States, we have a government controlled free market,'' Bunning said in an interview. Paulson, a former chief executive officer of Goldman Sachs Group Inc., ``is acting like the minister of finance in China.''

read the article