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Does The Bailout Pass The Smell Test?
The explanation that has been given for the financial crisis does not match up with the solution that has been devised. Moreover, the windows into the crisis offered by the authorities are opaque rather than transparent.
The only clarity we have is
that the crisis is resulting in financial
concentration and that the bailout constitutes a
massive raid by financial crooks on both
taxpayers and central bank reserves in the
The public monies that are
being directed to private financial institutions are
huge. According to news reports,
Some of these public monies are
for purchasing troubled paper assets. Others
are to be directly injected into the banks as public
supplied capital for private financial institutions,
an ironic outcome for the free market ideology that
resulted in the deregulation of the
How is it possible that a financial crisis of such magnitude hit with such suddenness and urgency, catching finance ministries and central banks unaware?
If the problem is what the public has been told, namely that defaulting subprime mortgages are reducing the income flows through to the holders of the mortgage-backed securities, why isn't the bailout money being used to refinance the defaulting mortgages and to pay off the foreclosed mortgages?
That would restore the value of the mortgage-backed securities, and it would not be necessary to pour huge amounts of taxpayers' money into recapitalizing banks and purchasing their bad assets.
There is not an unmanageable number of defaulting mortgages. According to the US Treasury estimate, 90-93% of the mortgages are good. How does a 7% or 10% default rate on US mortgages translate into a systemic worldwide financial crisis?
The popping of the
The US Congress held no
hearings on the crisis and consulted no independent
experts. Congress responded dumbly to the
financial crisis, just as it did following 9/11 when
the Bush regime handed it the PATRIOT Act and the
Afghan invasion. To secure Congress'
acquiescence to the Paulson bailout, the Bush regime
used threats of meltdown and martial law to panic
Congress into turning over vast amounts of money for
accountability is lacking. The hype behind
the Paulson bailout is the financial version of the
mushroom cloud evocation used by the Bush regime to
panic Congress into accepting the
It is unclear how the bailout
will play out. The monies for the
The authorities have blamed subprime mortgages for the crisis. Why then does their solution fail to address the problem of the mortgages? Instead, the solution directs public money into an increasingly concentrated private financial sector, the management of which is not only vastly overpaid, but also has escaped accountability for the financial chicanery that, allegedly, threatens systemic financial meltdown unless bailed out by the taxpayers.
Perhaps my nose is too sensitive, but this bailout doesn't pass the smell test.
Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan's first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider's Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow's Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.