Honest Answers about the Financial Collapse

Deregulation, Disaster, and What Happens Next
Filed under Uncategorized

After sending a letter to the congressional leadership on Monday urging them to slow down and protect taxpayers, I flew to D.C. Tuesday morning at the request of my colleagues at Consumer Watchdog.

The appalling bailout bill drafted by the Bush Administration – a three page surrender of 700,000,000,000 taxpayer dollars and the authority of the legislative branch – was reason enough to catch the next flight. But there were also rumors that the insurance industry would try to sneak into the bailout bill separate legislation (HR 5840) that would authorize Treasury Department bureaucrats to nullify state insurance laws. Consumer Watchdog had worked with House Speaker Pelosi’s office to ensure that the author of that bill – Rep. Paul Kanjorski of Pennsylvania – amended the bill to protect California’s Proposition 103, but the rumors of last minute trickery got my attention. And it seemed that nobody in D.C. was really speaking up for taxpayers.

My main mission in DC was to see if I could develop some interest in the proposal I made on Monday: capping the interest rates that banks and credit card companies charge us to borrow our own money. Since March, the Federal Reserve has been lending banks and other Wall Street firms taxpayer money at 2.25%. But they’ve been turning around and lending that money to us at rates of around 6% for home loans and the usual 20% for credit cards. In recent days, mortgages rates have gone up, rather than down. It’s an outrage that we are going to give Wall Street billions of dollars of our money and let them borrow billions more at around 2% and then we have to borrow our own money back from them at two or three times what they pay.

Working with Public Citizen, the Washington-based consumer group, we formulated a set of principles we called a “Patriotic Plan” for the bailout, featuring the interest rate cap and some other protections. Drawing on the lessons we learned in the California electricity deregulation debacle, we proposed conflict of interest rules that would bar the Wall Street firms who get bailouts from also being paid to “consult” with the federal government. And we don’t want federal officials who give out billions of our money to then go to work for the companies that get it. The opportunities for graft and corruption in this bailout are enormous.

You can read my statement here along with the other materials we distributed to members of Congress and the news media.

Then we went up to Capitol Hill, to the Rayburn office building where the House Banking Committee was meeting. The room was already full of bankers, lobbyists, etc. There was a long line to get in – I was told that lobbyists hire people to stand in line for them so they can do their dirty work and still get a seat. Like most other Americans, I was on the outside looking in. It was not a pretty sight.

The members of congress I talked to seemed stunned.

By issuing his three page bailout bill last Friday, Treasury Secretary Paulson cleverly set Wall Street’s expectations that the full $700B would be paid right away. (No one has ever explained the amount; it seems to be a number that Paulson thought would be so huge it would comfort Wall Street.) When public outrage led some in Congress to demand more details, Wall Street got angry. The market went down, lending slowed to a crawl, Paulson and Fed Chair Bernanke warned of economic ruin, and the panic that Paulson invited in the financial markets became political panic in Washington. Meeting with the Bush appointees behind closed doors, members of congress were told that the country would collapse into a Great Depression if the bailout didn’t happen ASAP.

So, I was told, the bailout was a done deal and that it had to be done by Friday. And while there will be congressional lip service paid to taxpayers – some kind of ridiculously weak limits on the salaries the Wall Street losers can get – and perhaps help for the relatively few Americans facing foreclosure, there really won’t be anything like a quid pro quo for most Americans. At least not now. Some people on the Hill told me that reforms needed to safeguard the public’s money, and regulation to prevent future debacles like this one, will be taken up by congress “later.”

I am dubious. After all, we’ve been through this before in California, on a smaller but still ridiculous scale. The deregulation of electricity rates in 1998 very quickly led to “shortages” and skyrocketing prices. Pretty soon, the utility companies were facing bankruptcy. So Wall Street and the energy companies joined together to threaten Gov. Gray Davis and state lawmakers that they would downgrade California’s credit rating and refuse to lend to the State of California unless they agreed to use taxpayer money to pay the energy companies’ bills. Davis and the Legislature capitulated, hiring those same Wall Street firms to float bonds to cover the exorbitant cost of the electricity bought by the state. Only later did we obtain proof of our suspicion that the shortages were manufactured by ….Wall Street energy speculators. Meanwhile, the debacle cost the people of California $70 billion, and its economy has never fully recovered.

Today’s “crisis,” like the electricity “crisis,” is all about the greed of schemers and speculators. And with the “bipartisan” agreement that the bailout is absolutely necessary, there is no opportunity for anyone to get answers to questions like whether the bailout will even solve the problem. (The Congressional Budget Office concluded this week that it might not, but nobody’s paying attention to CBO.)

Meanwhile, the California Legislature never went back to restore regulation of electricity rates. My guess is that once Wall Street gets its $700 billion, Congress will be just as happy to move on. I know I won’t. Will you?

Comments Off on A Report on My Trip to D.C. Posted by Harvey Rosenfield on Thursday, September 25th, 2008


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