Felicia Muftic " Weaning our economy off steroids
February 15, 2009
Alex ‘A Rod’ Rodriguez and Barry Bonds are not the only Americans who have been on steroids. So has the American economy. Low interest, little or no money down and borrow-the-rest risky deals, and lax supervision beefed up the muscles. The finance sector has been so addicted, it still wants its fix. But like our sport of baseball, they have been slow to catch on to the ire of their fans and the public. This past week, both A Rod, who confessed publicly to his sins, and our financial sector got buckets of cold water dumped over their heads.
Treasury Secretary Timothy Geithner outlined a very sketchy plan to rescue our financial sector. There were few specifics but there were promises of details later. He dropped some hints of policies to come, enough to cause a 380 point drop in the Dow Jones, though, for two reasons: 1)Wall Street hates uncertainty and Geithner provided plenty of that. The plan he unveiled looked like it was a chick that was not ready to hatch. 2) The outline he did present was enough to make the masters of the finance universe pop their antacids.
Left up in the air and giving Wall Street more fits of uncertainty, are several hot potato issues.
What will happen to all of those toxic failed loans on the financial institutions’ balance sheets? They cannot continue to free up the credit market and make more loans until those are removed. What Wall Street wanted was for our federal government to buy them up at their original value, even though they were worth much less now due to the real estate meltdown. In fact, no one knows how much they are really worth.
Geithner made it clear that a full-value buy up was not going to happen. Instead, he outlined a vague plan that would put those loan instruments up for sale on the market and that the federal government would guarantee up to a certain amount to make them attractive to investors. That way, the market would determine their value and private capital would help buy the toxic loans. While this was not the injection of performance enhancing drugs Wall Street hoped for, it at least takes part of the burden off of taxpayers and clears the way for banks and financial institutions to increase lending.
Of even more direct benefit to us in Grand County and to main street nationwide is $1 trillion lending program to make consumer and small business loans more available. About $50 billion would also be reserved from the TARP money to deal with the foreclosure crisis. What is different from the half of the TARP fund distributed by the Bush administration with no strings attached is that all of these new infusions of money are going to be administered by the Obama folks like a methadone drug rehab program … supervised, used for specific, health restoring purposes, and with strict reporting requirements. Stockholders will not benefit, since dividend payments will be restricted to a penny a share until the treasury is repaid, and executive compensation will be limited to $500,000 per year.
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Yes, this money is supposed to be paid back to the U.S. Treasury, but those banks and financial institutions who are going to receive it will be subjected to a stress test … meaning only some banks will be deemed sound enough to participate and others may be allowed to fail. This no doubt has got the stomachs churning on Wall Street, too.
We should give Geithner credit where credit is due because at least he is making an effort to protect taxpayers’ interests, structuring the deal so there is a hope of some degree of payback.
There are those, mostly economists from the far right Cato Institute, who think we should let the banks go under, scrap the stimulus plan, and rely solely on tax cuts to corporations and the rich. Sound familiar? Then, whoever is left standing will all rise like the phoenix from the ashes in the form of pure capitalism. I am not sure that families and our social and political structure could survive the additional pain from the ripple effect without demanding even more help from the government to bail them out. Voters certainly would not be demanding more of the same, any more than they are now.
We may just have to tinker with capitalism to save it. Geithner’s plan beats complete nationalization of our financial sector and it is mostly a temporary measure remaining in effect until economic health is restored.
Until Geithner unveils the details, credit markets are not going to thaw. Let us hope he does it soon. The suspense is killing a critical element in our economic recovery.