What Should Uncle Sam Do?
In today's global economy, no one is too big to fail. Financial institutions engaged in similar activities should be governed by similar capital requirements, lending standards and the discipline of the marketplace, regardless of size.
Fannie and Freddie operated like hedge funds, arbitraging their implied governmental status, motivated by profits for shareholders. This leverage created systemic risks so large that the enterprises are now on the taxpayers' doorstep.
Given the risks of contagion, there was arguably a case for a short-term Band-Aid. In some sense it was preordained. But it should be allowed only if action is also taken at the same time to prevent this situation from ever happening again.
The current result was predicted three years ago, when we asked Congress to create a strong regulator over the enterprises' capital and activities, with power for an orderly resolution if they got into trouble and failed. The situation today would be much more manageable if action had occurred then. This is now the opportunity to finally get it done.
The price of short-term government support must be a long-term solution designed to protect taxpayers. Otherwise, we face the worst of both worlds—paying once now, and paying again as we continue to subsidize a larger and even more catastrophic financial market failure sometime in the future.
The Argument Against the Status Quo
Robert Rubin , Treasury secretary under President Clinton, now chairman of the Citi executive committee of the board
Since roughly a year ago, our credit markets have been experiencing what has increasingly become something of a perfect storm, as a consequence of a confluence of forces: underweighting of risk across asset classes, including credit extension; massive use of financial engineering, including with respect to subprime mortgages; low interest rates that led to a reaching for yield; rising housing prices that created complacency among borrowers and lenders as mortgage finance was used to fund consumption during a period of stagnant median real wages, and AAA ratings for certain investment instruments based on subprime mortgages. At the same time, consumption has run into increasingly powerful headwinds from the worst declines in housing prices since the 1930s, an explosive increase in oil prices, increasing mortgage defaults and other factors. All this adversely affects the economy, which could then possibly feed back into credit markets, consumption and investment.
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Member Comments
Posted By: melbee1971 @ 09/19/2008 10:26:28 AM
Comment: As a public high school teacher, the current state of our public (and private) institutions reflect our values as a society, from my point of view. I ask all readers to consider this comparison of the following American institutions: Wall Street, Financial Powerhouses, and our public schools...
We are bailing out these failing institutions with taxpayer dollars. The state of our public school system continues to decline. Bailouts and deregulation and more money for failing financial (private) institutions. But increased regulation and LACK of financial support for our PUBLIC SCHOOLS - does this tell us something about our overall priorities as a nation? Are we reaping what our leaders have sown for us?
Think about this, voters PLEASE! Not just for the sake of your own personal interests, but for the sake of our country.
Good teachers are being laid off and class sizes are growing. No child left behind is a law that requires improvements without the promised funding to implement these improvements. And our schools are listed as "failing schools" losing support from the federal government who "regulated" the schools in the first place.
What is left in our public schools is often a stressed out skeleton staff that does not have the resources to properly educate our students, our future, which we would hope will lead us someday.
More evidence is proving that No Child Left Behind (an unfunded mandate) has actually lead to increasing drop outs of our high school students. PLEASE don't blame the teachers for this. We don't want any child to fail. We are working as hard as we can. We are not "in it for the money."
Meanwhile, these corporate lobbyists have effectively secured deregulation and what they consider "optimal" conditions for their financial success (deregulation). And a few well-connected people have lined their pockets with enormous amounts of other peoples' money.
This sort of short-term gain at the expense of long-term growth way of thinking have really infected our entire way of running our society.
Unfortunately middle and lower class young people (the MAJORITY) of our future do not have the money or the resources to hire corporate lobbyists. Their teachers and their schools have very limited resources. And there is little to NO organized efforts to effectively support the reform and progress to lead our public schools to educate and prepare our future.
In every other developed and developing country we compare our students' progress with, there is a clear and dedicated effort to improve, fund, and prioritize education. We are and will be competing with these nations. In America, we are starving our schools while bailing out reckless fat cats who've thrived on greed. Is this the American Way? Or have we lost our way?
Let this be a lesson. Hopefully (as we say in class) we will learn from all of this and use it to improve, grow, and succeed.
Posted By: samser @ 08/05/2008 3:20:48 AM
Comment: In my opinion, (1) top executives for the duration of the bailout should not receive more than $500,000 annual compensation, and they should be obliged to stay on the job for a minimum of 3 years, until the mess they created is solved, if they fail to stay to solve the problem they should be penalized with a minimum of $1,000,000 fine, and (2) the government (The People) must get 10 percent of their current outstanding shares, as compensation for the risk being taken.
Sam Serr
Toronto, Ontario (Canada)
Posted By: samser @ 08/05/2008 3:18:51 AM
Comment: In my opinion, (1) top executives for the duration of the bailout should not receive more than $500,000 annual compensation, and they should be obliged to stay on the job for a minimum of 3 years, until the mess they created is solved, if they fail to stay to solve the problem they should be penalized with a minimum of $1,000,000 fine, and (2) the government (The People) must get 10 percent of their current outstanding shares, as compensation for the risk being taken.
Sam Serr
Toronto, Ontario (Canada)