November 17, 2008
The debate concerning a possible bailout of the “big three” automakers (General Motors, Ford and Daimler Chrysler) has now reached the House of Representatives. House Minority Leader, John Boehner (Republican from Ohio) has voiced his opposition to this latest bailout, indicating that it will not receive much support from Congressional Republicans.
In the words of Yogi Berra, we are experiencing “déjà vu all over again”. This process started with the plan of Treasury Secretary Henry Paulson, to bail out banks and other financial intuitions holding mortgages of questionable value, at a price to the taxpayers in excess of $700 billion. Back on September 22, when that bailout bill (now known as TARP) was being considered, Jackie Kucinich and Alexander Bolton wrote an article for TheHill.com, discussing Republican opposition to this measure. Their article included a prophetic remark by Republican Congressman Cliff Stearns of Florida:
“Bailout after bailout is not a strategy,” said Stearns, who said that taxpayers could be left with a huge bill.
Yet, “bailout after bailout” is exactly where we are now. On November 15, T-Bone Pickings appeared on NBC’s Meet the Press. Tom Brokaw asked T-Bone Pickings for his opinion on the proposed “Big Three Bailout”. The response was:
I wonder what you’re going to do about the next industry. Is it going to be the airlines or what if Toyota and Honda want some help, too? I don’t know. I don’t know where it stops.
Once again, we are presented with the need to bail out yet another American industry considered “too big to fail”. However, this time, we are not being asked to save an entire industry, just a few players who fought like hell, resisting every change from rear-view mirrors, to fuel injection, seat belts, catalytic converters, air bags and most recently, hybrid technology. Later on Meet the Press, we heard the BBC’s Katty Kay quote a rhetorical question from unidentified “smart economists” that included the magic word:
Can it withstand the shock to the economy if GM were to go?
Later on the CBS program, Face The Nation, Massachusetts Congressman Barney Frank, Chairman of the House Financial Services Committee, used similar logic to that expressed by Katty Kay, when he stated:
When you talk about the negative shock that would result from bankruptcies of these companies, right now …
The magic word “shock” is once again playing an important role for the advocates of this newest rescue package. I was immediately compelled to re-read my posting from September 22, concerning the introduction of the Paulson bailout plan, entitled: “Here We Go Again”. At that time, I discussed Naomi Klein’s 2007 book, The Shock Doctrine: The Rise of Disaster Capitalism. Klein’s book explained how unpopular laws were enacted in a number of countries around the world, as a result of shock from disasters or upheavals. She went on to suggest that some of these events were deliberately orchestrated with the intent of passing repugnant laws in the wake of crisis. She made an analogy to shock therapy, wherein the patient’s mind is electrically reformatted to become a “blank slate”. Klein described how advocates of “the shock doctrine” seek a cataclysmic destruction of economic order to create their own “blank slate” upon which to create their vision of a “free market economy”. She described the 2003 Iraq war as the most thorough utilization of the shock doctrine in history. Remember that this book was released a year before the crises we are going through now.
Ms. Klein’s article, “In Praise of a Rocky Transition” appeared in the December 1, 2008 issue of The Nation. She discussed Washington’s handling of the Wall Street bailout, characterizing it as “borderline criminal”. Would the financial rescue legislation (TARP) have passed if Congress and the public had been advised that the Federal Reserve had already fed a number of unnamed financial institutions two trillion dollars in emergency loans? Naomi Klein expressed the need for the Obama Administration to stick with its mantra of “Change You Can Believe In” as opposed to any perceived need to soothe the financial markets:
There is no way to reconcile the public’s vote for change with the market’s foot-stomping for more of the same. Any and all moves to change course will be met with short-term market shocks. The good news is that once it is clear that the new rules will be applied across the board and with fairness, the market will stabilize and adjust. Furthermore, the timing for this turbulence has never been better. Over the past three months, we’ve been shocked so frequently that market stability would come as more of a surprise. That gives Obama a window to disregard the calls for a seamless transition and do the hard stuff first. Few will be able to blame him for a crisis that clearly predates him, or fault him for honoring the clearly expressed wishes of the electorate. The longer he waits, however, the more memories fade.
When transferring power from a functional, trustworthy regime, everyone favors a smooth transition. When exiting an era marked by criminality and bankrupt ideology, a little rockiness at the start would be a very good sign.
The Obama Administration would be wise to heed Ms. Klein’s suggestions. It would also help to seriously consider the concerns of Republicans such as John Boehner, who is apparently not anxious to feed America another “crap sandwich”.
Manifesto
For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense. From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008. Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis. The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent. Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.
I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website. Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe. Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances. It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious. Be sure to read it. What I present here are some hints as to the significance of this important essay:
For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). My favorite comment from Mish appeared near the conclusion of his summary:
On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:
David Reilly began the Bloomberg Business Week piece this way:
That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:
At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers. In the United States there is no such concern. The public is much more compliant. Whether that will change is anyone’s guess.