Ben Stein on "the Bailout"

An approach to consider:


September 28, 2008

Everybody’s Business THE NEW YORK TIMES.COM

In Financial Food Chains, Little Guys Can’t Win By BEN STEIN

IMAGINE, if you will, that a man who had much to do with creating the present credit crisis now says he is the man to fix this giant problem, and that his work is so important that he will need a trillion dollars or so of your money. Then add that this man thinks he is so indispensable that he wants Congress to forbid any judicial or administrative questioning of anything he does with your dollars.

You might think of a latter-day Lenin or Fidel Castro, but you would be far afield. Instead, you should be thinking of Treasury Secretary Henry M. Paulson Jr. and the rapidly disintegrating United States of America, right here and now.

But I am getting ahead of myself. First, I am furious at what the traders, speculators, hedge funds and the government have done to everyone who is saving and investing for retirement and future security. Millions of us did nothing wrong, according to the accepted wisdom of the age. We saved. We put a large part of our money into the stock market, as we were urged to do. Because the market wasn’t at ridiculously high levels, it seemed prudent to invest in broad indexes, foreign indexes and small- and large-cap indexes.

Now we have had the rug pulled out from under us. Our retirements have been put into severe jeopardy. The “earnings” part of those price-to-earnings ratios turns out to have been fiction for some financial companies, which normally account for a big part of total corporate earnings. In fact, earnings of giant finance players were often wildly negative, creating a situation rarely seen since the Great Depression, when the aggregate earnings of the Dow 30 were negative.

The current negativity occurred because of wild, casino-type operations of big finance players, creating liabilities way beyond anything we could have reasonably expected. This looks a lot like theft on a spectacular scale — of our wallets, our peace of mind, our futures.

Second, according to what I hear from my betters in the world of finance, the most serious problems are not with the bundles of subprime mortgages themselves — a large but not lethal quantum as far as I can tell — but with derivatives contracts tied to subprime and other dicey debt. These contracts are superficially an attempt to “insure” against risks of default, hence the name “credit-default swaps.” In fact, they are an immense wager — which anyone with lots of money or borrowing ability can enter — about how mortgage-backed bonds, leveraged loan bonds, student loan bonds, credit card bonds and the like will perform.

These wagers entail amounts many times larger than the total of subprime loans. In fact, there are roughly $62 trillion in credit-default swap derivatives out there, compared with about $1 trillion of subprime mortgages. These derivatives are “weapons of financial mass destruction,” in the prophetic words of Warren E. Buffett. (Apparently believing that the worst is over, at least for one big investment bank, Mr. Buffett is now investing in Goldman Sachs.)

The swaps market has been unregulated. It has been just a lot of people making bets with one another. Some of them made incredibly fortunate payoff wagers against the mortgage bonds, using credit-default swaps as their wagering vehicle. I am not sure who the big winners are, but they are out there, and the gains were big enough to cripple the part of Wall Street on the losing side of the bets.

Almost no one (except Mr. Buffett) saw this coming, at least not on this scale. But let’s get back to the man of the hour. Why didn’t Mr. Paulson, the Treasury secretary, see it? He was once the head of Goldman Sachs, an immense player in the swaps world. Didn’t people at Treasury have a clue? If they didn’t, what was going on in their heads? If they did, why didn’t they do something about it a year ago, when saving the world would have been a lot cheaper?

If Mr. Paulson and Ben S. Bernanke, the chairman of the Federal Reserve, didn’t see this train coming, what else have they missed? What other freight train is barreling down the track at us?

All of this would be bad enough. But by far the most terrifying item I read in my morning paper last week was this: Mr. Paulson demanded that Congress forbid judicial review of his decisions on use of the money in the mortgage bailout. This would amount to an abrogation of the Constitution. Not only would his decisions be sacrosanct and above the law, but so would the actions of his pals in the banking world in connection with this bailout.

The people whose conduct got us into this catastrophe have not only taken our money, hopes and peace of mind, but they apparently also want a trillion or so more dollars to put into their Wall Street Buddy System Fund. This may be the most dangerous attack on the law in my lifetime. What anarchists even dared consider this plan? Thank heaven that minds more devoted to the Constitution on Capitol Hill are questioning this shocking request.

By the way, if we are actually thinking about tossing the Constitution out the window, why not simply annul these credit-default swap contracts? With that done, the incomprehensibly large liability of the banks would cease, and we wouldn’t need this staggering bailout. Shouldn’t we consider making the speculators pay some of the price?

WE have survived housing-price corrections before. Why is this one causing so much anguish? It must be the side bets, the credit-default swap bets, multiplying the effect of the housing downturn many times over. Maybe we should just get rid of these exotic bets and start again without them. “Insurance” on market moves is always a bad idea, because it does not tamp down market disruptions but instead greatly magnifies them — as in the disastrous effect of “portfolio insurance” in the 1987 crash.

Then there was Mr. Paulson’s insistence that there be no compensation caps for executives of companies being bailed out by the factory workers, the farmers, the schoolteachers and the medical doctors. He told a skeptical Congress on Tuesday that if these caps were put into place, bank executives simply wouldn’t participate in the bailout or sell us suckers their debts. Fine with me. If the banks are in good enough shape so that petulant executives can simply opt out rather than live on a few million a year, maybe we don’t need the bailout at all. Maybe we would be better off if those executives simply bailed out and were replaced by people with more sense and more patriotism.

One final little thought bubbles into my mind: Maybe the bailout should not be of the banks at all, but of homeowners themselves. Maybe if we make the government the buyer of last resort of homes, we will stabilize the markets, stabilize the debt associated with the markets and take the gain out of the credit-default swaps for the speculators. Yes, price would be a huge issue, but so it is for Mr. Paulson’s plan for buying debt from banks.

Why not? We do it for farmers. Why not for the individual homeowner? Oh, right. Because Treasury secretaries don’t know any of those people.

Ben Stein is a lawyer, writer, actor and economist. E-mail: [email protected].

 

Great READ!!!!



spek

 

For a long time I was apathetic about this whole credit crisis thing. I was willing to let the "experts" in DC figure it out. I'm now in the anti-bailout camp. I only wish the damage could be limited to the punks who thought up this crap.

 

I always like Ben Stein's commentary. Makes things simple for simple guys like me.

Well, that and he hit on my wife when she worked at the Ritz Carlton here in Phoenix. She was disgusted, thankfully.

 

I'm with you TUSooner. Let's let personal responsibility and accountability rule the day for once.

 

NIce to know the House email server crashed.....

 

The House has the SLOWEST web servers. I'm trying to email my representative to say, "Keep voting no" but the pages take minutes to load. I hit the URL about 30 seconds BEFORE I started typing this post.

 

Exactly. I wanna help small business more than anything. The big bankers and mortgage companies need to suffer like the rest of America is.

 

That's reeeallly long read...

 

in related news, HIS wife is from Idabel.

 

i like this idea:

 

That is the third time that has shown up, and none of people who post it find the huge math error in it.

 

Yeah, like several orders of magnitude math error.

I like the Dave Ramsey plan:

http://www.daveramsey.com/media/pdf/the_common_sense_fix.pdf

 

Arithmat-owned.

That guy still stinks at long division.

 

i didn't actually read it, I just thought it would be funny.

 

You could also mention that he should get a less ridiculous haircut after voting no.

 

Dave Ramsey is a VERY knowledgeable Real Estate person, Veritas. What chance does his advice have of being supported by Barney Frank, Nasty Pelosi and Harry Reid?

 

700 billion dollars isn't going to fix a problem that consists of 32 trillion dollars worth of unraveling derivatives. It will only postpone and make the situtation worse. I used to be worried that my kids would be paying back all of the money that the US government had borrowed. Now I am convinced that the US government will default and erase the National Debt.....that is actually a best case scenario for my kids, IMO.

BTW, Dave Ramsey's plan would be inflationary but it would work. The FED and the various Western governments won't support it because it empowers individuals and lessens their control over the purse strings....ie their control over economic power.

 

I could get behind that Dave Ramsey plan. I would just add something that would be akin to prosecution of individuals that created this mess, including Paulson.

 

You got that right. Paulson telling us what we should do right now to get out of this mess is like the neighborhoods biggest drug dealer telling us what we need to do is just give him more access to drugs so all of his clients don't go on a rampage and take out the law-abiding citizens in the neighborhood.

He is using scare tactics and coersion to save his money addicted colleagues on Wall Street whie not recommending any real reform that will prevent the problem from happening again.