Paulson's Panic

Why acting too hastily could create even more problems.

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What They Got Away With

A look at the CEOs who walk off with mountains of money

The Recession's Winners and Losers

Taxpayers: What About Us?

By Robert J. Samuelson | Newsweek Web Exclusive

Sep 24, 2008 | Updated: 10:23 a.m. ET Sep 24, 2008

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Call it Paulson's Panic. That's both unfair and accurate. It's unfair because Treasury Secretary Hank Paulson didn't create the underlying conditions that led to today's financial turmoil, and the failure for not quelling it is shared by Federal Reserve Chairman Ben Bernanke. But it's also accurate, because as world financial markets verged on panic, Paulson himself panicked. He saw no remedy except a massive bailout: having the government buy up to $700 billion worth of risky bonds.

Historians will judge whether his outsized proposal was necessary, but the notion that its congressional enactment—assuming that happens—would magically end the crisis seems like wishful thinking. Americans often delude themselves that all problems can be "solved" if only government would act "boldly." This may be another example.

Contrary to much commentary, Paulson's plan would not be the largest government intervention in the private economy since World War II. That distinction still belongs to Richard Nixon's imposition of wage and price controls in August 1971. True, Paulson would socialize unprecedented amounts of private debt, but Nixon asserted control over the entire economy. What's fascinating are the possible parallels between the two episodes, starting with a shared irony: Both came from administrations committed to "free markets."

When Nixon declared the wage-price freeze—a complete surprise because he had consistently opposed controls—the decision proved "wildly popular," Rice University historian Allen Matusow writes in his book "Nixon's Economy." By one survey, 75 percent of Americans supported it.

"There was widespread public rejoicing that at last the government was protecting the people," Herbert Stein, a Nixon economist, later observed. Consumer price inflation, which had been rising at a 4 percent annual rate, dropped toward 1 percent. People believed that by acting decisively government could outlaw inflationary psychology. It couldn't.

Inflationary pressures built up under the artificial lid of the controls. Moreover, the faulty economic doctrines that produced inflation—easy-money policies aimed at maintaining "full employment" of 4 percent joblessness—remained. When controls ended in 1974, inflation exploded to 12 percent. It averaged almost 9 percent from 1975 to 1981. Only the brutal 1981-82 recession, imposed by Paul Volcker's Fed and raising unemployment to 10.8 percent, ended the wage-price spiral.

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Posted By: taylor1940 @ 10/14/2008 11:37:31 PM

Nice article through which i got to know the inside story and the facts.
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Taylor
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Posted By: Davole @ 09/30/2008 7:13:59 PM

A Proposal to Resolve the Fannie Mae and Freddie Mac Financial Fiasco

In order to solve what has been termed the financial crisis, it is necessary to identify the cause of Fannie Mae???s and Freddie Mac???s catastrophic failure.

The cause of their downfall is the partisan democrat pressure put on those companies to grant sub prime mortgages to persons who would be unable to repay those loans.

The democrat senators and representatives, who mandated that financial background checks be considered unnecessary and unwarranted, facilitated that irresponsible granting of mortgages to those unable to repay. The motive of the democrat members of Congress was strictly and blatantly partisan - to buy votes, and to maintain years of party support.

In 2005, John McCain co-authored a bill to investigate and regulate the faulty business practices of Fannie Mae and Freddie Mac, but that was opposed and defeated by the democrats in Congress.

On many occasions, President George W. Bush introduced proposals to regulate the mortgage lending companies, but those calls for regulation were opposed, obstructed, and defeated by democrats who were obsessed with the continuance of faulty lending practices.

In order to reform the financial sector, it is necessary that the sleazy politicians and top administration of those 2 mortgage companies who perpetrated fraudulent activity be publicly identified, investigated, and severely punished for their undermining the national economy.

It is only reasonable to expose the corrupt financial practices and their facilitators, and to remove them from any further activity, before any effort can be made to resurrect the American economy.
Otherwise, any attempt to do so will be useless, because the problems and perpetrators would still be present to frustrate and obstruct any meaningful remedial action.
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Posted By: Davole @ 09/30/2008 7:12:31 PM

Continued - A Proposal to Resolve the Fannie Mae and Freddie Mac Financial Fiasco

The first step toward economic recovery would be to isolate all sub prime mortgages from the assets of Fanny Mae and Freddie Mac, and to group the remaining viable ones into several stock options to be offered for sale to the public, and also as a bailout measure.

That would result in an immediate infusion of cash into the banking sector, thereby ensuring that credit could be granted to qualifying loan applicants.

Individuals or organizations who choose to buy those stock options should benefit additionally from any profits later realized by their investments.

Also, any profits resulting from the bailout option should be refunded to the INCOME TAX PAYERS only, since they would be the ones who would have financed the bailout.

Likewise, but separately, the various questionable sub prime mortgages should be bundled together into other stock options which would be structured to contain a mixture of both somewhat and less redeemable loans.

Those sub prime mortgage packages should be offered first to democrats, especially wealthy ones, who might be attracted to them by their being valued at a price of 80 cents on the dollar, based on the face value of the mortgages.
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That would afford them the option to support what democrats viewed to be a noble cause (home ownership for the unemployed), and besides, it might enable the stock option buyers to profit by 20 percent if all of the sub prime mortgages would be somehow repaid by the homeowners.

Thus democrats, especially the likes of George Soros, Barack Obama, Ted Kennedy, Chris Dodd, Nancy Pelosi, Harry Reid, and Charlie Schumer (who supported the granting of sub prime mortgages irrespective of demonstrated ability to repay) would be able to ???put their money where their mouths are???!

Lastly, there should be a guarantee that no further sub prime mortgages be granted.
Home ownership is a GOAL for many financially responsible Americans - it is not a government sponsored RIGHT for all persons living legally and illegally in the US!