The more I think about it, the more I believe we were had when the federal government proposed that $700 billion bailout to primarily deal with the liquidity crisis.
At the time, nobody seemed to know what to do. When Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke jointly proposed the bailout in an attempt to avoid a repeat of the Great Depression, nearly everyone threw up their hands and concluded there was no alternative.
At first, some members of Congress — both Republicans and Democrats — balked at the huge bailout package. They said at the very least there should be some minimal safeguards since the legislation was drawn to give the secretary of the Treasury what appeared to be total power to determine how the bailout would be structured.
These concerns were addressed to some extent in the revised bailout bill which, among other things, staggered the bailout payments and provided for some congressional lending oversight for half of the $700 billion rescue package. Congress apparently assured that having waited and then passing the legislation on the second time it was presented to the House, it was in fact improved and would prevent our being ripped off by Wall Street for a second time.
We were told over and over by the experts in the news media and government that the real problem was in fact liquidity — banks were just not willing to lend, even to creditworthy applicants. I decided to write a letter to both Treasury Secretary Paulson and Federal Reserve Chairman Bernanke stating my concerns about the use of the federal guarantees and loans.
The letters follow:
October 9, 2008
Henry M. Paulson, Jr.
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20551
Ben S. Bernanke
Federal Reserve System
20th & Constitution Avenue, N.W.
Washington, D.C. 20220
As you have pointed out, the meltdown occurring in the United States is taking place in large part because of a lack of available liquidity, meaning that lenders — commercial banks in the lead — are not lending to applicants seeking to borrow in order to purchase housing, cars and other big ticket items that the economy relies on to flourish, as well as denying loans to small businesses and local governments seeking to borrow to pay their bills with municipal bond markets largely closed to them.
One of the purposes of the $700 billion recently made available as a result of legislation enacted by the Congress is to give additional liquidity to commercial banking institutions so that they can once again perform their leading raison d’etre — lending money.
The major reason for lack of liquidity — availability of loans — is fear, as you have stated, fear that the money will not be repaid either by individuals, governments or institutions, e.g., other banks.
Again, as you have stated, another reason offered by the banks for not lending monies is that much of their assets are now labeled “toxic.” It is these assets which, as a result of your efforts, the newly-enacted legislation addresses, freeing the banks of them by having the federal government buy them at a price below their original value, substituting cash to the banks.
If I have accurately stated the facts, why not by order of the United States Treasury and Federal Reserve direct the commercial banks to immediately commence loaning money to “creditworthy” applicants and at a scale comparable to loans individual banks entered into last year?
If the banks refuse to abide by such order, they would not be eligible among other punitive measures to sell their “toxic” securities to the Treasury. If the banks require a definition of “creditworthy,” your offices will supply it for the various situations that apply.
If the proposal makes sense, it can immediately be implemented and provide the credit needed. If it does not, I would appreciate knowing the reasons why.
All the best.
Edward I. Koch
Chairman Bernanke’s response, dated Oct. 16, is as follows:
Dear Mr. Koch:
I am responding to your letter of October 9, 2008, in which you recommended that the Treasury or bank regulators direct commercial banks to lend to creditworthy borrowers. You further suggested that banks that did not comply with such a directive would be ineligible to participate in the Treasury’s Troubled Asset Relief Program (TARP).
We at the Federal Reserve firmly agree that an unfreezing of financial markets and a resumption of lending activity is essential. Credit is the lifeblood of an economy, and continued economic growth will require that substantial credit flows be restarted.
But requiring directly that banks extend specified amounts of credit to creditworthy borrowers would entail many complications.
For example, bank regulators would need to create an objective definition for determining which borrowers were creditworthy.
Moreover, because the volume of banks’ credit activities can fluctuate over time for a variety of reasons, including those over which they have no control (such as the rate of economic growth in their geographical regions), determining appropriate targets for individual banks’ lending activities would be complex and potentially arbitrary.
In addition, because of the very large number of banking institutions in the country — ore than 8,000 — administering such a program would be extremely resource intensive.
However, we believe that the plans recently announced by the U.S. Treasury, the FDIC, and the Federal Reserve to bolster the capital of banking institutions and to guarantee certain liabilities of banking firms will be effective in strengthening the banking system and in fostering the extension of credit to sound borrowers.
The purchases of mortgage-related assets under the Treasury’s Troubled Asset Relief Program will also contribute to a recovery of the credit intermediation process by reducing the amount of opaque and difficult-to-value assets from the balance sheets of financial institutions.
Moreover, the Federal Reserve continues to provide large amounts of liquidity to the financial system through its standard lending program as well as through a wide range of new liquidity facilities, and these activities should further support credit intermediation.
To be sure, even with these substantial actions by the government, the recovery of our financial markets will take time.
Strains on financial markets and institutions are likely to remain considerable and will act as a drag on economic growth for the foreseeable future.
However, I believe that the government has now put in place an important array of tools that will enable us to address over time some of the most significant difficulties in our financial system.
As a result, with continued focus and effort to resolve these issues, we can look forward to a gradual restoration of lending activities and sustainable economic growth. I hope these comments are helpful.
Please let me know if I can be of further assistance.
Chairman Bernanke responded, but Secretary Paulson has not. On Nov. 7, The New York Times, in its masterful style, published an article authored by Steven Erlanger and Katrin Bennhold putting into context the problems we and other countries are facing.
The article states, “But there is a fundamental problem that is not easily solved by the usual economic policy tools: how to persuade rattled banks to start lending again — an essential first step to restoring economic health.”
It was shocking to learn, “Treasury Secretary Henry M. Paulson Jr. had to gather the chief executives of the nine biggest American banks and cajole them into accepting about $25 billion each in new capital. But having pleaded with the banks to take the money, and putting no government officials on bank boards, the government had little power to tell them how to spend it. Treasury officials also refused to tell banks to reduce their dividends or to increase their lending by any specific amounts.”
I find it incredible that this is happening and no one is calling foul.
Where are all the hotshots who supported Paulson in his psyching us all out by conveying that if we did not follow his plan, we would find ourselves in another Great Depression?
Why aren’t they at the very least denouncing what is now happening? We are keeping alive, in addition to banks, other institutions that have done a terrible job and were greedy.
Those companies should be permitted to declare bankruptcy so that someone in the private sector can buy them at a discount, if they are worth purchasing.
Everyone is lining up to get their federal handout.
AIG has come back for more and is to receive a total of $150 billion. The three American car companies, General Motors, Chrysler and Ford, have received $25 billion and want another $25 billion of taxpayers’ money.
Why not let them be bought by others in bankruptcy? There are those who say we are bailing out companies in order to prevent massive layoffs. In my view, those layoffs will come sooner or later anyhow because those companies are run by incompetents and no longer able to compete, while foreign companies like Toyota, manufacturing their cars in the U.S., are selling them and not seeking to be bailed out.
They make cars Americans want to buy.
In the meanwhile, the vast majority of Americans have lost upwards of 50 percent of their savings including in the stock market and their 401(k)s. Particularly heartbreaking are the financial futures of those already in retirement who are dependent on their now lost or greatly reduced savings, as well as the millions more who hoped to retire soon.
Plans should be made to bring to Washington hundreds of thousands, if not millions, of Americans? We should carry pitchforks to scare the hell out of government, particularly the newly-elected members of Congress as well as all of those re-elected recently, for failing us so miserably.
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