Deal or No Deal?

Ok.  I hope you’ve read Beth’s post.  Pretty slick for her first post, huh?  Let’s talk about this bail out.

My question is pretty simple.  Why are we (the taxpayers) bailing out Wall Street?  Here are three quotes from W’s speech last night (you can read the full transcript here):

Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.

Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.

In today’s mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.

Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.

Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.

Now, is it just me or does it seem like there were some pretty lame decisions made?  I get that many consumers got into some mortgages that they couldn’t afford.  If we leave out those that were victim to predatory lending, then we can follow what some have suggested by allowing those who got into the wrong loan to deal with the consequences.

So shouldn’t we let the businesses do the same?  If “investors assumed these securities were trustworthy” and if they “believed they were guaranteed by the federal government” – an assumption at best which I’m sure could have been checked out by calling their CPA – shouldn’t these companies suffer the consequences just like the consumers?  Are we really going to put the welfare of a company over the welfare of the people?

Here’s what W says about that:

I’m a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America’s financial system are at risk of shutting down.

To be frank, I don’t really believe he would do that.  But let’s say for argument that he’s being sincere here (no laughing).  Let’s say that bailing out these corporations is really the right thing to do.  Should the taxpayers really be the ones to foot the bill?  How ’bout a great big NO!

Progressive talk show host Thom Hartmann offered an interesting idea on his show yesterday.  Spurred by an article written by Dean Baker, Hartmann suggests bringing back Section 31 fees.  What are these?  These are a tax (don’t get excited yet…  hear it out) on stock transactions.  According to Hartmann, Section 31 fees were originally put in place in 1933 to fund the SEC and were repealed in 2007.  When they were originally instituted, the tax was 1/300th of one percent.  In other words, a transaction of $100 resulted in a tax of $.03 (that’s 3 cents).  Hartmann suggests a Section 31 fee of .25%.  Using the same illustration, a transaction of $100 would result in a tax of $.25 (a quarter).  This is in place in other countries today.  Here’s a quote from Baker’s article:

In fact, we should look to borrow another policy from the United Kingdom that can help set our financial markets in order. The U.K. imposes a modest stock transfer tax of 0.25 percent on every purchase or sale of a share of stock. This sort of tax would make almost no difference to a typical middle class shareholder. However, a tax of this size, with comparable taxes on various other financial instruments, like options and futures, would put a serious crimp in the money shuffling business that has wrecked so much havoc on the U.S. economy.

Furthermore, such a tax could raise a great deal of money, easily in the neighborhood of 1.0 percent of GDP or $150 billion a year. Imagine that we could finance national health care insurance with a financial transactions tax, or provide quality child care and pre-school education, or build up a green 21st century infrastructure, or maybe just have a nice middle class tax cut of $1,000 per family.

There is no shortage of good uses for the money that could be raised through a financial transactions tax. This is the conversation that the country should be having. Instead of funneling tens or hundreds of billions of taxpayer dollars to the failed wizards of Wall Street, we should be talking about what they can do for us.

Sounds good to me!  Let’s let Wall Street bail out Wall Street and not the taxpayers, not you and me.

One thought on “Deal or No Deal?

  1. Okay, so say we don’t bail out wall street. Banks collapse, people get stuck with foreclosure, and banks get stuck with property. I’m okay with that ’cause I don’t own a house, and my bank failed yesterday. I’m pretty sure the FDIC insuired my $0.42 in deposits. However, Someday I am going to WANT to buy a house. There will be nobody to lend me money. And those who want too, I wont be able to afford the interest rate. And God forbid I need an auto loan tomorrow. Where will I get that from?
    I agree that a $700 billion bail out is a bit messed up. But don’t we have to do something? Don’t we have to save ourselves?
    I ask these questions without answers…but with a thought in mind….Should our economy fail we might regress to the barter system (since the $$ is based on nothing but consumer confidence). Should that happen, I’d be rich!

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