Honest Answers about the Financial Collapse

In “Bailout: The Sequel,” the Bush Administration decided two weeks ago that the only way to convince banks and Wall Street to start lending again was to give U.S. banks a big hunk of the $700 billion in taxpayer money that Congress approved not even one month ago.

Unlike the original plan, under which the government would buy up “troubled assets” (a.k.a. “collateral debt obligations” and other byzantine Wall Street schemes with little connection to real world assets), the new strategy calls for public money to be showered on healthy banks so they will start to lend again, and, presumably, jump start the economy.

One problem: the banks aren’t lending. There’s been no significant decrease in mortgage or credit card interest rates. On October 9, a column in the Wall Street Journal noted that the banks had absorbed over $1.5 trillion in cash from the Fed, twice the estimated amount of bad mortgages, but seemed to preferred to hoard the funds rather than lend it out.

Then last Friday, PNC Financial spent $5 billion to buy National City Bank, a firm that’s been on the endangered list for months. The New York Times’ astute columnist Joe Nocera gave voice to the growing suspicion that “we’ve been sold a bill of goods.” Instead of using the money to reboot the economy, the banks are going to use it to do what they have done in the past: buy other banks. (Meanwhile, once it recovers, America’s financial marketplace will consist of a handful of big banks that have even less reason to compete with each other.) Or maybe boost their reserves. Or buy back their own stock. Etc.

When the British government bailed out its banks, it made sure it also got corporate voting rights in exchange. That gave the Brits the ability to order their banks to institute the necessary policies – even sack recalcitrant corporate executives and bring in people who would get the job done. But the Bush Administration couldn’t bring itself to demand voting rights from the U.S. banks it was bailing out. So, a few trillion dollars later, we’re still at the mercy of the same folks who caused this debacle.

Barely two weeks after Congress agreed to the $700 billion bailout of Wall Street, the original plan is dead.

In fact, there never was a real plan to begin with. From the three-page legislation first proposed by the Bush Administration on September 19, to the bloated 442 page version passed by the House on October 3, the Administration’s strategy remained pretty simple: let Treasury Secretary Paulson have $700 billion in taxpayer money and hope that the sheer size of it would inspire Wall Street to go back to work.

It didn’t.

As it turns out, it wasn’t just Congress that had no idea how Paulson would use the money to rescue the financial system. The financial system couldn’t figure it out either.

The problem with the bailout was the same problem that got us into this mess: the regulators were clueless. As worshipers of the free market, they were happy to allow the titans of the financial system to invent ever more indecipherable schemes by which to speculate and earn billions. And when that house of cards collapsed, the regulators had no idea what to do because according to their religion, this could never happen.

So it took the British to come up with the answer: pour the billions into the banks so the banks would start lending to each other, to businesses and to consumers. In exchange for nationalizing the financial establishment, the banks were required to give the British government (a.k.a. taxpayers) shares in their firms. So someday, when the banks recover, the taxpayers will get a piece of what is called “the upside.”

Initially, the Bush Administration couldn’t stomach that approach: using hundreds of billions in public money to rescue private enterprise was one thing. But allowing the government to take an ownership stake in a private corporation? Heck, that’s communism.

That was before trillions of dollars of stock market value went into the toilet. And before America’s export of the financial meltdown to the rest of the world led angry heads of state to show up at the White House gates.

Just as seamlessly as the passage of the British Crown from one king to the next, the Bush Administration Bailout transformed itself from the vague and probably unworkable notion of buying the bad debts of banks, investment houses and who knows who else to investing in the banks.

Meanwhile, guess what? The price of the bailout is way, way more than $700 billion. Wait till you read what it’s really gonna cost us. I’m working on that now.

Okay, Wall Street, Congress did what you demanded. $700 billion so you will go back to work. Is there anything else you need right now?

Let me tell you what Americans need — and didn’t get from Congress today.

First, we need across-the-board regulation of your business. That means ending the kind of speculation that generated trillions of dollars of paper wealth (and billions of dollars in compensation for you) but never built a school or hospital. And collapsed like a house of cards.

Second, we need you to stay out of the Capitol. Your lobbying of Congress led to deregulation. Our money should be put to work in the economy, not blocking or undermining the government oversight that had better be coming (see above). And we don’t want you advising our elected officials on who gets taxpayer bailout money, especially whether you get it.

Third, we need caps on how much you can charge us for interest when we come to you to borrow our money to buy homes or cars, send our kids to school or keep our small businesses afloat. We American consumers have kept this economy afloat for the last ten years, and it won’t come back until we do.

Fourth, we have no choice but to hope this bailout works — because we’re gonna want our money back from you.