Saturday, January 10, 2009

Bailout based on a lie?

About two weeks ago, Joshua Holland wrote an article for AlterNet suggesting that the so-called "credit crunch" was a scam, a means of siphoning off trillions of dollars to our major financial institutions to do with whatever their greedy little hearts desired.

Few people today question that the Troubled Asset Relief Program (TARP) "was a boondoggle of an intervention that's flailed from one approach to the next, with little oversight and less effect on the financial meltdown."

But, says Holland, the real tragedy is that TARP "was sold to Congress and the public based on a Big Lie."

In other words, in spite of Bush's warning that "Major financial institutions have teetered on the edge of collapse ... [and[ began holding onto their money, and lending dried up, and the gears of the American financial system began grinding to a halt," some economists are coming to the conclusion that was all a lie and a set-up to move taxpayer money into the hands of those running the banking community.

As Holland points out, such a phony Bush operation would be in character for he "used the threat of thousands of al-Qaida sleeper cells in the United States to sell Congress on the Patriot Act, the specter of mushroom clouds rising over American cities to push through the Iraq war resolution and the supposedly imminent crash of the Social Security system to push for privatizing Americans' retirement savings."

And aren't we glad he failed at that last maneuver?

Everyone's aware, says Holland, that the economy's in the toilet and few new loans are being issued to individuals and businesses, but he wonders if this is "because credit has dried up for qualified borrowers."

The economist, Dean Baker, says no. The problem isn't a "credit crunch," but rather has to do with the fact that housing wealth has collapsed, costing consumers trillions of dollars, and the markets collapsed to the tune of about $8 trillion [this was written a couple of weeks ago, so those figures may have increased]. Contributing to the mess is the fact that much of the wealth accumulted during the Bush era consisted of paper only. When that "vaporized ... consumers stopped buying, and businesses, anticipating a long slowdown, stopped seeking the loans that they might have otherwise tapped to expand their operations."

Here's the crux: If qualified borrowers can get loans because banks "are hoarding cash or lending has stopped because of a drop-off in demand for new loans," then Paulson's plan makes sense.

But, says Holland, the situation changes if people are busted and businesses aren't out looking for loans. Then, TARP involves pouring money into institutions [without rules or regulations on its use] which in turn use that money for purposes other than what was intended, e.g. bonuses for CEOs, purchasing other banks, retreats costing hundreds of thousands of dollars, etc.

Researchers at the University of Minnesota "crunched" some numbers and concluded that "'interbank lending is healthy' and 'bank credit has not declined during the financial crisis'; that they've seen no evidence that the financial crisis has affected lending to non-financial businesses' and that 'while commercial paper issued by financial institutions has declined, commercial paper issued by non-financial institutions is essentially unchanged during the financial crisis.'"

Baker believes that "'some banks are undoubtedly anticipating more write-offs from other loans going bad, so they will hang on to their capital now rather than make new loans." But, there are others, it appears, holding on to their cash hoping to buy less sound banks.

Holland suggests the economic crisis is "a product of long-term imbalance in the economy, and the idea that it's primarily a pathology of the banking system in isolation is a misdiagnosis that, if uncorrected, can only result in a longer, deeper and more painful recession than might otherwise be the case."

You can read the entire article here.

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