September 22, 2008 -
Dean Baker on the Proposed $700 Billion Bailout of Wall Street, the Largest Government Bailout of Private Industry in US History
Its being described as the largest government intervention in private markets since the Great Depression. The Bush administration has asked Congress to swiftly approve a massive $700 billion package to rescue the crippled financial institutions on Wall Street. Some analysts say the final cost to taxpayers could top one trillion dollars. Over the weekend, the size of the proposed bailout grew as the Bush administration said foreign banks, including Barclays and UBS, should be eligible for the bailout.
Dean Baker, Economist and co-director of the Washington, D.C.-based Center for Economic and Policy Research. He is a frequent commentator and columnist, and his blog is called Beat the Press. He is the author of several books including The United States Since 1980 and The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.
Well, essentially, what the President has asked for is a $700 billion blank check. He wants Congress to hand over $700 billion to Henry Paulson to use to buy, you know, bad originally mortgage-backed securities. Theres apparently an effort by the financial community to broaden that, but basically he would have a blank check to bail out Wall Street.
And let me just make one point that everyone should be very, very clear on. This was not an accident, in the sense that this is like a hurricane. This was a totally predictable event. So when President Bush or Henry Paulson say, you know, we have to come to the rescue, it is because of their incompetence, because people who understood the economy—and putting myself among those, but there are others—we were warning about this a long, long time ago. This was a totally predictable event that brought us here.
The bailout should not be fun, if its constructed right. The way this should be constructed is, if youre on the edge of bankruptcy, you come to the Treasury, and you get the money. But guess what? Youre selling your company, and you also have serious limits on CEO pay. You know, you only get $2 million a year; hows that? Or maybe less. You know, some people have proposed less than that. But the bailout has to be punitive, if its serious. It shouldnt be a field day. We shouldnt have people lining up to get in. Thats telling us that this is not a serious bailout. So the idea that the administration is proposing is that the people who were engaged in incredibly reckless behavior, who made out like bandits, getting tens of millions of dollars in salary and compensation over the last few years are now going to get this $700 billion blank check from the American taxpayer. Its just unbelievable.
Well, weve been knowing since six years. The basic story was, we had a housing bubble, which, again, these people are supposed to be smart. Theyre paid tens of millions of dollars. They should have recognized the housing bubble. They should have recognized that house prices would fall, as they have been. And what that meant was, you made a loan on a house for $250,000, $300,000, $400,000, that house price was likely to fall. So if you did that with zero down, as many of them did, plus having mortgages, you know, the predatory mortgages, the subprime mortgages that have got them in particular trouble, these were guaranteed to go bad in many cases.
They acted as though house prices would just keep going up forever, and they could just keep, you know, going along these lines. They leveraged themselves to the hilt. The investment banks, like Lehman and Bear Stearns, leveraged themselves to a ratio of thirty-to-one. In other words, if they had $10 billion in capital, they had loans on the order of $300 billion. I mean, this was just asking for disaster.
And, you know, again, it did collapse. It was totally predictable it would collapse. You know, I didnt know when, didnt know exactly who, but it was totally predictable. And now theyre running to us and asking us for handouts. Think of what we do to welfare people, when they—you know, everything they have to go through to get, you know, a $500-a-month check, and these people want billions, no questions asked. Unbelievable.
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