Honest Answers about the Financial Collapse

Deregulation, Disaster, and What Happens Next
Filed under Uncategorized

If Wall Street has its way, Congress is going to fast-track a bailout that will prove to be the most expensive boondoggle in American history. Here’s a letter I wrote today to congressional leaders:

September 22, 2008

The Honorable Nancy Pelosi
Speaker
U.S. House of Representatives
Washington, D.C. 20515

The Honorable Harry Reid
Majority Leader
U.S. Senate
Washington, D.C. 20510

Dear Speaker Pelosi and Majority Leader Reid:

I write to offer some initial perspective on behalf of the hundreds of millions of Americans who do not have lobbyists in Washington, D.C., and whose money – potentially trillions of dollars – is to be used to rescue Wall Street.

1. Slow Down.

The absence of oversight and accountability led to the current crisis. It cannot be solved by more of the same.

The legislation proposed by the Treasury guarantees nothing to taxpayers in exchange for the $700 billion they are asked to pay to bail out Wall Street. It contains no regulation of the firms or industries to be bailed out. It contains no provisions requiring transparency in the decision-making of federal officials in charge of doling out taxpayer money and no disclosure of how the funds are utilized by the recipients. Over the weekend, Treasury changed the terms of the deal to permit it to buy any “distressed” financial instrument, not just mortgages, in effect blowing open the doors of the Treasury. Failure to specify restraints or conditions on the use of public money will lead to unprecedented graft and corruption. These are crucial matters that are the responsibility of Congress to consider and to address through comprehensive legislation.

The short-term actions undertaken by the Fed and the Treasury last week have made billions of dollars available to financial institutions, addressing the immediate liquidity crisis. There is no reason for the Congress to join the panic and pass an ill-conceived and poorly understood proposal.

Finally, during the 2001 meltdown in California associated with electricity deregulation, energy companies manufactured a phony power shortage in order to press state lawmakers into bailing out the utilities companies, which had run out of money to pay skyrocketing wholesale electricity charges. It would not be surprising if Wall Street sought to pressure lawmakers into hasty action by once again closing down the financial spigots. Congress should ignore – and law enforcement should speedily prosecute – any such efforts. Indeed, access to the Fed’s overnight window and other resources should be made contingent upon each firm’s agreement to maintain stable operations in the marketplace.

2. Give Taxpayers a Stake.

Credit markets have arrested because no one knows the value of the trillions of dollars of various arcane securities that have been traded in recent years. How these so-called distressed assets will be valued when they are bought by the taxpayers is a serious issue; current accounting rules do not necessarily reflect the actual value of these financial instruments. Outright purchase could prove a windfall for the Wall Street firms – or not. The taxpayer’s largesse should not be a one-way street. Any bailout should give taxpayers ownership in the firms that are revived as a result.

3. Limit Interest Rates on Credit Cards and Mortgages.

For some time, banks have been accessing taxpayer money through the Fed at low rates – presently 2%. Yet Americans will attest that the interest rates on their mortgages and credit cards remain exorbitant, and there is little doubt that in the aftermath of this debacle, banks will attempt to raise the cost of consumer credit still further. Consumers should not have to pay interest rates of 7%-25% to borrow their own money from the bailed out banks. Congress should include floating caps on consumer credit in the bailout legislation – say, the fed funds rate plus three points. Since consumer spending has been the core of the U.S. economy, lower interest rates will also speed the economy’s recovery.

Thank you for your attention.

Sincerely,

Harvey Rosenfield

Comments (1) Posted by Harvey Rosenfield on Monday, September 22nd, 2008


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