When I arrived from Ireland on September 28, my mom picked me up from the airport. She was distraught by the hurricane and the economic downturn. I expressed the attitude that Hank Paulson was going to spend on the alleged bailout was misdirected and would probably be completely wasted. It would be better, I said, to give everyone a voucher to spend on education or housing–at least something tangible! “You don’t understand the financial system,” my Mom said. “If credit dries up, nobody will be able to buy a home or car. The system could collapse.”
I dismissed that reason. Who cares that these things will be temporarily out of reach. All I knew is that our top officials was trying to rush through a massive aid package and using words to stir up hysteria among people. Why on earth did we ever come to believe that our financial system was so precious and fragile that it demanded constant infusions of cash?
This fact was apparent to many early commentators and to people like me who simply felt it in their guts. Over time, the impact of this wealth transfer to a private bank is being realized…especially as state governments experience shortfalls. Who just spent money on our behalf? This kind of stupidity seems bipartisan. (Alan Grayson seems to have pounced on the inherent lack of transparency in these dealings (see this amazing video It gets really good at about 1:30) .
Robert Reich and Paul Krugman have been sounding the alarm for months. Here is Robert Reich’s recent post about how TARP 2 should be monitored:
But the easier and probably more correct argument is that American taxpayers wasted $350 billion. No one knows exactly where it went — at least two recent reports reveal that the Treasury had no idea — but we do know the money did not go to small businesses, struggling homeowners, students, or anyone else needing credit, which was the major public justification for the bailout. In all likelihood, on the basis of the skimpy evidence we now have, the money went instead to bank shareholders in the form of dividends; to bank executives, traders, and directors as compensation (directors of major Wall Street banks continued to pull down an average of $350K each in 2008 merely for sitting in on a handful of board meetings at which they obviously didn’t oversee very much); to some holders of bank debt; and to platoons of lawyers, accountants, and other financiers who have advised the banks about other places to park the rest of the money in the meantime.
Congress is now about to give the next Treasury secretary an additional $350 billion, as the second tranche of the bailout. One hopes that the new administration will use it better. Some suggested guidelines:
1. Do not use any of the money to buy stock in — that is, to “recapitalize” — the banks. This is a sinkhole of cosmic proportion. Citigroup, to take but one example, has so far received $45 billion of taxpayer cash since early October (along with some $250 billion in taxpayer-supported guarantees from the Fed for junky assets on Citi’s balance sheets), and is in far worse financial shape than it was three months ago. Perhaps, someday over the rainbow, these shares in Citi along with Citi’s lousy assets will be worth more than taxpayers paid for them. But we’re not in Wonderland yet and probably never will be. Giving Citi or any other big bank more taxpayer money is analogous to giving it to Bernard Madoff. It’s a giant Ponzi scheme. The money will disappear.
I am appalled by the amount of political influence which Citi has been allowed to amass. I have a personal grudge against Citi when in 2002 they treated me unfairly (and I cancelled the credit card immediately). I remember thinking, this kind of company is interested only in short-term profit, but because they deal so unscrupulously with their customers, I doubted they retained customers for very long. But apparently we are giving them billions of dollars because of their vital importance to the economy. Vital importance, my ass.
The idea that the American people have a vested interest in keeping a company like Citi sufficiently capitalized just struck me as as a ludicrous indication of our mixed-up priorities. Fortunately, there was a high degree on revulsion (especially among Republican congressman). But not enough, apparently to tackle the lobbying team convinced that Citi’s health was vital to our survival as a nation. The sympathy that our country has for high-stakes gamblers investors seems infinite…why are we unable to summon 1/10 of that same generosity for the less afflicted?