Page 1 of 2 The cost of 'no government'
By Julian Delasantellis
In the inky blackness of the night, I hear them. Here in the US Pacific
Northwest, with the sun no longer ionizing the upper levels of the atmosphere,
I can hear AM radio signals from stations up to 3,000 kilometers away, all the
way to Chicago and beyond. For the most part they carry the buzz of call-in
political talk shows, and it all sounds pretty much the same from one end of
the radio spectrum to the other - when it comes to the financial system bailout
bill that went down to defeat on Monday in the US House of Representatives, a
violent, vitriolic, passionate, deeply visceral opposition to events
transpiring in Washington, DC, can be heard.
If I didn't know better, I might have thought that I was listening to voices
being broadcast from behind the borders of some oppressive dictatorship; it's
citizens, like resistance fighters in World War II Europe, desperately calling
out for help from the free
world. So great is the alienation of the government from its people on this
issue, you might have thought that the callers were making one final testament
of the truth, for surely they believed that come the next dawn would also come
the trucks to carry them off to the re-education camps.
One caller wants to know how the Congress can do the bailout; it's not in the
constitution. Another says that her brother-in-law is the deputy sheriff in a
small Minnesota town; he wants to issue arrest warrants for all 535 members of
Congress, and the police authorities in the Nation's Capital would have to
enforce them, for "it's in the constitution" (so is Article 1, Section 6,
granting members of Congress protection from arrest while Congress is in
session). One caller observes that the Second Amendment to the constitution,
the provision that guarantees the private citizenry the right to own handguns,
was "God's law, not man's law" - then she comments that what's needed is an
armed citizen posse to be formed in the US heartland and then go to Washington
to "take down" the perpetrators on Capitol Hill.
Is US Treasury Secretary Henry Paulson, the author of the bailout plan that
went down to defeat in a spectacular Gotterdammerung of financial market
catastrophe in the US House of Representatives on Monday, the face that
launched a thousand mobile homes?
Occasionally, the talk show hosts would try to steer the focus of the
discussion back to where Republican Senator John McCain adviser Karl Rove,
through the right-wing talking point transmission mechanism that is the Drudge
Report, wants it to be - the allegedly core role in all this played by Fannie
Mae and Freddie Mac, the US mortgage guarantor enterprises now taken over by
the government.
Unlike many corporations, these two institutions hedged their bets by putting
liberals as well as conservatives in the boardroom. Worse still, from
1999-2004, Fannie Mae was headed by Franklin Raines, a former Bill Clinton-era
budget director who, much like the current Democratic Party presidential
candidate, is black.
"This just proves" the talk show hosts would proudly proclaim, absolutely proud
and sure that they had just uttered an unassailable point of logic, "that you
just can't give mortgage loans to minorities!" Presumably that would mean about
20% of America's current population should be housed in South African
Soweto-style shantytowns.
But, amazingly, the Republican focus group spin didn't take. So inchoate and
amorphous was the rage in the heartland that it didn't even have the time or
inclination to accept much of the Fannie/Freddie as culprit shibboleth.
Americans were, and are, just like mad anchorman Howard Beale in 1976 movie Network,
"Mad as hell, and not going to take it any more." The "it" that Americans don't
want to take any more is any policy advice or prescription from anyone who
knows more about the situation than them - in other words, just about
everybody.
For that reason, I can't say I was all that surprised that the Paulson bailout
plan, modified over the weekend to include populist-flavored but ultimately
weak and irrelevant provisions limiting banker pay and providing for equity
participation in any subsequent bank share rally, was defeated 228-205.
In response, the major US stock averages had their worst nominal day in
history, with the Dow Jones Industrial Average losing 777 points. In percentage
terms, it was the third-worst day ever for the main US stock averages, just
behind the crashes of 1987 and 1929. According to Wilshire Associates, $1.3
trillion in stock market capitalization, in essence, of investor wealth, was
destroyed as a result of the vote. Absent a huge rally on Tuesday, the S&P
500 stock index will end September suffering through its third-worst month
since the end of World War II.
In anticipation of the bailout bill's passage, the US Federal Reserve and other
world central banks had been hosing down the markets with truly astronomical
quantities of liquidity injections to the short-term money markets, $630
billion on Monday alone (that just goes to show just how much wealth the
deleveraging monster is destroying every day).
The Fed and the other central banks had been hoping that this would have
settled and tided the markets over until the bailout money hit the markets.
Since that's not now going to happen any time soon, if at all, the Fed will
have to pull back, if only to reassure the currently hair-trigger twitchy world
markets as to the continued viability of its balance sheet.
There's not a lot of reasons to believe things will get much better soon;
absent more huge stock market declines, and/or a credit seize-up that puts
hundreds of thousands out of work before election day on November 4, it does
not now look like this issue will be revisited in a serious fashion before a
probable lame duck session of Congress after the election, when the solons of
the people will presumably find it easier to once again turn a more customary
deaf ear to the people.
If they're against the Paulson bailout, what do the opponents of the bill
suggest as a solution to the current crisis?
Over the weekend, a proposed alternative rescue emerged, and, like survivors
flailing in the frigid water as the Titanic sunk around them, desperate
Republicans swam towards it as if somebody was throwing out life preservers.
All you need to do, they say, to reflate the impaired values of the
mortgage-backed securities hurt by the decline in real-estate values and
property foreclosures is to pretend that all the bad things don't exist, and,
like children playing with pixie dust, just wish all the bad stuff away.
If you buy a corporate, government or mortgage bond, many things go into its
price. All other things being equal, a debt obligation paying a higher coupon
interest rate will command a higher price than an instrument paying a lower
interest rate.
But what really knocks down the value of debt securities is the possibility
that the debt won't get paid back, that the borrower will default on the
obligation. In mortgage-backed securities, with bonds comprised of hundreds or
thousands of individual mortgages rolled up into one security, each mortgage
default and foreclosure proportionally knocks down the value of the mortgage
securities containing it.
So that investors in financial institutions can have a clear view of the actual
state of a bank's health, the Securities and Exchange Commission, in an
accounting rule called mark to market, requires marking securities at risk of
default down to the prices they could command in the secondary market. As that
happens, the decline in the value of the asset that the bank owns, the
mortgage-backed security, shrinks the bank's capital base, so it is forced to
correspondingly shrink its loan portfolio. When the entire financial system
acts this way, you see the current phenomenon of deleveraging that is bleeding
the world financial system dry.
OK, if mark to market is so bad, why not repeal it? That's the solution
proposed by former speaker of the house Newt Gingrich. Let banks mark their
mortgage-backed securities at 100% of face
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
