Back in September, Hank Paulson urged swift passage of the now $810 billion bank bailout bill by citing heavenly retribution if it did not pass. Paulson succeeded in getting his money. But after spending nearly $300 billion there's scant evidence that it's helping. Congress was clearly wrong to put its faith in Paulson and it should cancel the plan and replace it with one that clearly defines the problem and demonstrates how the plan will solve that problem.
One piece of good news is that the London Interbank Offered Rate (Libor) has declined from 4.82% to 2.15% -- but lending still remains extremely tight. And it's possible that other programs, such as the Fed's plan to purchase $50 billion in commercial paper (CP), contributed to that Libor decline rather than Paulson's. Even more outrageous than the failure of Paulson's plan to fix the problems is that there is nothing to stop our money from paying $26.6 billion worth of banker bonuses.
Given this colossally wrong-headed plan, how did Paulson get his way? Not surprisingly, Congress has a weak understanding of economics and global finance. According to a Washington reporter I spoke with last month, Congress approved the Paulson plan because it believed that the former CEO of Goldman Sachs Group (NYSE: GS) must have known what he is talking about. They believed that if he was advocating a reverse auction plan to buy toxic waste that it must be the right thing to do. Unfortunately, faith is not a strategy.
Despite its flaws, about which I posted, Congress decided that its reelection depended on doing something. But Wednesday Paulson decided the reverse auction was not such a good idea after all. With no evidence that the plan is working and limited U.S. resources, Congress should cancel the plan and start with a new approach in January.
How so? We still have a problem which is getting worse. And Washington will have to do something to fix it. Since I believe that it would be a serious mistake to accept the conventional wisdom that led to this failed bailout plan, Barack Obama's economic team should conduct an independent analysis of how we got into the current situation. It should then develop a plan that will produce short-, medium- and long-term improvements in economic performance.
Rather than developing this plan in secret and announcing it to great fanfare on inauguration day, President-elect Obama should engage in a dialog with the American people to explain the problems we face and to describe how the plan will fix these problems. With consumer spending accounting for 70% of economic growth, Obama must restore America's confidence in the future of our economic and financial institutions if we are to climb out of this ditch.
Accomplishing this will demand the outstanding communications skills that won him the election. If nothing else, Obama won because he represented a chance to turn the page on a secretive, boastful, and ineffective approach to governing that got us into this catastrophic situation.
Now America needs a 21st century version of FDR's fireside chats. And it's up to Obama to deliver them.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing, will be published by Portfolio on December 26, 2008. He has no financial interest in Goldman securities.
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Reader Comments (Page 1 of 1)
11-14-2008 @ 10:57AM
Jason said...
Sadly, I think you are right about Congress and their lack of understanding the problem.
www.eeinvesting.com
11-14-2008 @ 12:41PM
Iridium said...
It's all very very simple. The entirety of the US economy was based on the increased equity of IRAs and housing. People borrowed on this paper wealth to finance the insane bubble that has now burst. That is why the bailout isn't working. All it does is address the continuation of policies that put us in this mess in the first place.
Right now the US economy is not in a recession based on long term growth trends. In fact it is still above the long term trend level of personal wealth and economic productivity. We are only in a recession based on the insane level of bogus paper that led to the Dow hitting above 14k points.
The key problem with the US economy is the wholesale reduction of middle class pay. There simply isn't enough business competition to create good paying jobs. The competition is to see who can merge with who to lower operating costs in order to increase your P/E ratio and drive your stock price. This only enriches the board and CEO, not the worker.
Housing still has 20-30% more to fall. The recovery can not begin until the average worker and first time homeowner can afford to buy a house. The biggest problem facing the housing market is that the majority of young professionals outside of the law and health care profession can not afford to buy the average house in a current middle class neighborhood.
For many young professionals the best job prospects are only in locations where housing is far outside the realm of affordability. Even making $80k a year it would be hard to afford a house in the DC, Bay, NYC, and LA areas. Even with the 50% downturn in some areas.
To fix the economy all the US government needs to do is:
1) Offer 1% above the current Fed rate to first time homeowners through the FHA with 3% down payment. This will enable millions of young workers to become homeowners. However loans should only be given to those with good credit.
2) Offer a 5% re-fi to any homeowner based on the current market value of their house. US banks must eat the loss and no bank should receive a bailout. Even a $50k initial loss on a mortgage still means a net profit over the life of the loan. If a person can not afford the payment on a McMansion then they should lose it, end of story.
3) Give major tax breaks and grant money for anyone starting a new business. Suspend the corporate Social Security and Medicare contributions for all new startups.
4) End welfare now. The trillion dollar hole costs the US economy more per year than this failed bailout. The deletion of the welfare program could give every business and worker a 30% tax cut.
11-16-2008 @ 1:22PM
The Haimster said...
Iridium is clearly insane.
We are all laughing at your superior intellect.
11-17-2008 @ 2:31PM
Jason said...
What do we really expect? Congress gave Paulson authority the authority to do as he decides is important. Congress has failed us again just like they did during the run up to war. As usual they are PASSING THE BUCK.
http://nomedals.blogspot.com
11-26-2008 @ 2:09PM
jim said...
Here we are, the vast majority of us are still paying our bills, drawing the same paycheck we were last year and not seeing any raise in our income. Now if we were corporate wall street or bank ceo's, we would be sitting pretty with the amount of tax payer dollars they have just been handed.
We will never be fairly represented by the lawyers that run our country, our government.
Sad but true, we put them there. So the question is, what do we do as Americans?
If our establishment would trust the tax paying hard working american with more of our hard earned money, a lot of this economic crunch would be eliminated. However government knows best remember. Paulson is the perfect example. I can't remember anyone asking me if I wanted my tax dollars to bail out corporate america. Here we are, the rich getting richer and the middle class if there is one stagnated by our economy and a lot of people that earn less that $20k a year wondering if they will eat next month. Really all we can do is keep our plow in the ground, have faith in the lord and our fellow americans and be sure not let big government ruin our lives, we have worked to hard and long for this to happen. Keep working hard, no matter what it takes. All things will work out.