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Who should pay to bailout Wall Street? If we put aside the politics of what is happening and just look at the simple question of fundamental fairness, the most obvious conclusion is that those who benefited most from the financial sector’s irresponsible behavior — and those who stand to be rescued by any "bailout" — are exactly the folks who should now be asked to pay the costs of that bailout.
And yet virtually no one is suggesting the most obvious condition for whatever bailout our financial wizards are demanding:
The most important condition to put on any bailout proposal is to impose a tax surcharge on the incomes of the wealthiest Americans to pay the bailout’s cost.
Moreover, we should leave that tax surcharge in place for as long as it takes to recoup the total bailout costs, which are still undetermined. If, for example, Paulson gets another $700 billion, to add to the $800 billion increase in the debt limit Congress gave him last July, we’re up to $1.5 trillion that needs to be recovered.
Tying the surtax to full bailout repayment will provide a strong incentive for those who don’t like taxes to insist on bailout approaches that actually work and minimize taxpayer exposure. They’ll insist on effective oversight and accountability for any bailout approaches and actions, as opposed to the Bush/Paulson approach of giving Paulson a blank check to spend at least $700 billion with no accountability whatsoever.
I don’t dismiss the need for other measures, but it’s not clear why some of the ideas being discussed are as important to attach now as conditions on any bailout. More on that next.
For example, some Democrats want limits on CEO compensation and "golden parachutes." That’s fine; people are angry and it may be good politics. But the amounts involved are trivial in comparison with the offenses. Getting CEO compensation realigned with the correct incentives for responsible management of the financial system is worthwhile, but there will still be plenty of support for that next year, without spending political capital now.
It’s possible Paulson and Bernanke are misleading Congress about the crisis. But if we assume there is an immediate and severe credit/trust crisis that demands quick action, there are several issues that should be resolved immediately:
1. Will the proposed bailout plan work? Where is a coherent defense of the mechanism Paulson proposed? Major questions about how he would decide how much to pay to purchase the "toxic" assets and how that value would achieve the desired result haven’t been answered in public. There’s doubt that a "reverse auction" can function without a standardized commodity, which doesn’t exist. And there’s doubt that simply removing the toxic assets from the balance sheets makes the affected firms any more solvent, unless the plan is to just give them money. [Update: And if the point is to pump capital into these firms, Krugman asks, where's our equity share? Dodd agrees.]
2. How should the approach be tested? Congress may need to authorize Paulson to start acting now, but it needs a near-term accountability check with an off-ramp if it doesn’t seem to be working. Why Congress needs to commit the full $700 billion with no strings now has not been explained.
3. Where’s the rescue plan for homeowners? That was supposed to happen in the July legislation, but even the limited funding for that effort was tied to fees from Frannie/Freddie — now controlled/owned by the government. We need guaranteed funding and a designated institution — see, e.g., Ian Welsh’s post or others — to start getting that relief into the system.
4. Who will pay for the cost, and when? The massive hit on our national debt could effectively cripple any efforts to deal with any other national problem, from health care, to industry retooling, to energy transformation. The fairest answer is a tax surcharge on the super wealthy to cover the bailout. Can anyone think of a sound economic or fairness reason for not demanding this?
It’s important to recall that in other times of national crisis — WWII — we raised taxes to pay for what needed to be done. Reagan raised taxes to avoid unacceptable deficits, and so did Bush 41, despite promising not to. It’s George Bush’s turn to raise taxes to pay for the costs he and his irresponsible policies have imposed on all of us. Let him sign the tax bill to pay for his mess; he’s earned it.
5. Finally, what else does the economy need now? The Democrats have a list, including another stimulus package with unemployment relief, infrastructure funding, better financial regulation, and so on. These are essential for the long run; but the chances of getting these measures should improve after the election.
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Hi, This was over at Balloon Juice and I’m curious what you think about the idea.
Brian J Says: This looks like as good a thread as any to put this in, so here I go. Earlier this morning, I wrote to Dean Baker about the transaction tax idea. One of the questions/comments I wrote went as follows:
2. I’m not sure of my opinion on the bail outs just yet. I’m not an expert on this stuff by any stretch, and after spending about ten hours away from the computer yesterday and coming home to see a proposed $700 billion bail out, it seems like things are changing so quickly that I’ll never catch up. (I’m trying, however.) At the very least, I’m open to the idea that the problem became so severe that it might—MIGHT—justify some sort of bail out. However, it’s going to cost us, so perhaps a transaction tax, at the levels you suggest raising what you say it could raise, might be a good idea if for no other reason than it might force the people who are involved in these transactions to pay for the government covering their asses
His response?
Yes.
Great idea, Scarecrow, but far too logical and rational to make it into law.
Yes, I would definitely ascribe to the “big bath” theory here (to use the terminology of corporate finance): if you have to take a huge hit, in the form of a 10%+ increase in the national debt ceiling, then you should structure a comprehensive package, including infrastructure funding, mortgage relief, etc. There’s no sense in waiting, and what’s another $300 billion on top of the $700 billion they are proposing to spend on the bail-out. I still think the bail-out is necessary (with the accountability and controls Senator Obama and others have proposed, built in) but there’s no sense in waiting on the other things. The Federal government should take the “bath” of red now rather than wait to do this piecemeal over time, risking further damage to the economy and financial system. Take all the pain at once, in all the ways that are necessary.
Like the surtax idea, esp because it would be a sirtax.
Make Bush be a bigger traitor to his class than FDR! Make him sign a tax increase on Richistan. It’s only fair.
And we know the Democrats stand for what’s fair, right? Right?
Let him sign the tax bill to pay for his mess; he’s earned it.
Oh yeah, he’ll do that. (not meant as an insult to Scarecrow)
Bush will pout his way out the door, the same as he’s done for all of these years now. Any minor correction to his demands will once again be unacceptable, vetoed, and the blame cast upon unreasonable D’s.
I am not sure about the chances of things improving after January. Unless we get 60 in the Senate — and that’s a long shot at best — expect Mitch and his team to work overtime to filibuster anything that their overlords don’t want.
I think now is the time to Shock Doctrine Richistan into submission.
In this case, I may have to disagree with you. I don’t think this is right time for tax increases… that should come with the overall rethink of Federal spending and financing priorities as part of the new presidency. What needs to happen now is a comprehensive bail-out package that takes the decific-spending and debt hit in one fell swoop, not just one benefits the bankers, but one that will end the recessionary spiral that we are in… including comprehensive mortgage relief, a huge infrastructure package, etc., etc. Heck, you might as well throw health care relief and shoring up the national trust funds into their too.. and take the accounting big bath. We can figure out how to pay for it later. In the meantine, restore confidence in the system AND make shrub take the deficit spending spending hit (what’s he going to do? veto it and go down in history as the depression pres?)
Yeah, that Fannie/Freddie fee sleight-of-hand sure worked well, didn’t it? What do we have, about a month’s worth of fees to help bail out millions of homeowners?
If there’d been a solution that helped homeowners a year ago, one like that blocked by the banks and the GOP, we wouldn’t be in this mess. So they have to pay for the mess, by handing their incorporation papers over to the US Government.
Oh, and Hank Paulson needs to find new work. Now.
David Bender of Politically Direct asks that we all call him Republican John McCain – every time we use his name.
Drop the Senator moniker, add the Republican moniker.
Make this a Democrat VERSUS Republican election.
Makes great sense.
but it needs a near-term accountability check with an off-ramp if it doesn’t seem to be working.
the bill has a two-year sundown – except that it doesn’t. The Secretary is empowered, under the bill, to continue to hold or purchase any “mortgage-related asset” without regard to the two-year period.
The definition of “mortgage-related-asset”? Mushy – could mean damned near anything.
This also is the best way to counter the smearing over many years, at a cost of billlions, of the word LIBERAL.
Rehab Liberal.
Shame the name Republican !!!!
Haven’t read anything on the transaction fee; however, some have suggested the financial institutions pay a fee for pooled insurance, which could have similar properties. I understand this to be a future reform and not something that gets out of the immediate crisis.
Scarecrow’s great post deserves your Digg
Let’s use RICO to seize the assests of every top officer and board member in companies which practiced Economic Terrorism against the U.S. Taxpayer.
I agree with the Shock Doc argument; so go for the most difficult thing, and if you can’t get it before the election, voters will know who stood in the way. My gut feeling is the Dems are asking for too little, and the Republicans, as always are lock step with Bush on giving us nothing — a “clean bill” that’s truly offensive.
brilliant – i love it.
Off topic. But check out this link: http://www.ustream.tv/channel/obama-sign-cctv-1
It’s a camera trained on a lawn sign. Obama sign. One was stolen. This one’s home made! And it’s streaming video onto the web… in case the thief should return.
Sign on window reads: “Attempt to nab Obama sign thief.”
As MayDaze says, “too logical and rational to make it into law”
But I like how we throw stuff in that politically we think we can’t get in order to get what will really be useful.
I also like the whole idea of people paying BACK the bail out. What is wrong with that? Shall we ask the right-wingers? Do you think that the WStreet banks should have to pay back their bail out loans?
One thing that I would like everyone to think about when making proposals for what to do is how to defeat the inevitable RW talking points for all of them. They will be out in force on Monday.
Knowing your audience and their typical replies is a basic communications strategy that we should all be prepared for.
You anticipate what Rush or Hannity will say and then you dismiss their points AND (if you are really ready to play) you demand that they support YOUR view point since it is really in line with what they have said in the past about other things.
And if you watch the Naomi Klein clip on the Bill Maher show you will see how someone like Andrew Sullivan has already created his own little talking points against Amy. It pisses me off, but he won’t be the only one who will be bringing up dismissive talking points.
We should be prepared for their insane arguments.
Hey Teddy I
already Dugg your Digg but was waiting for you to announce it!! What took ya so long??
Be willing to bet a nickel that in one of the debates, the moderator asks, “who should pay for this bailout? and should we raise taxes on some to keep the debt from getting completely out of control?”
They’ve used this “clean bill” argument so many times it’s ludicrous. As if doing things for the American taxpayer was dirty, or ensuring appropriate oversight, or extending unemployment.
It’s not like it’s more work for Chimpy; he still only has to sign the bill once. I suppose a dirty bill would keep Addington awake nights writing signing statements to nullify it, but still….
I can’t solve a problem unless I know what it is. I can’t assign value to an asset, unless I know what it is.
The problem is the banks don’t trust each other. We, the public, have to be allowed to look at their Level 3 assets, before we’re forced to buy them.
Done. Thank you.
I dunno. Charlie Gibson seemed most concerned about his taxes, and he’s shut out of the fall debates. But it would be nice to hear Ifill ask the Veep prospects.
We should be prepared for their insane arguments.
“It’s the taxpayers’ fault for entering into agreements they couldn’t afford?”
What! But I want to call him Crazy Manchurian Candidate John McCain.
Just reply that they are lying just as they always have … They never tell the truth, They knew that deregulation would bring out the worst in the greedy pigs it always has and it always will. Just think Robber Barons, Captains of Industry and so on that type of entity always need to be regulated so the rest of us don’t have to pay for their greed!
Crow Good post. Along with a “lifeline” for the financial system.. I mean wall street, there MUST be an accountability moment. WHO ARE “the tax payers” tossing the lifeline to?
Who took the ship on the rocks? Who has benefited from the previous course? They must not be rewarded and should be PUNISHED/ penalized, sanctioned/fined for the misdeeds and incompetance.
It’s probably not incompetence on the micro level as they knew what they were up to – get very very rich schemes. But there schemes have caused a ripple in the banking system, the credit system where normal folks and businesses go. They are broke so credit has dried up and the economy as a whole is now tanking. Why let them have more cash?
We need to clean house at wall street. New faces ALL OF THEM. And change the rules so this BS doesn’t happen again.
If the gov wants to be a lender… so be it. They can do it at reasonable rates and terms and leave the “private loan sharks” out of the credit business. Let the financial world hawk shares in corporations. END OF STORY. No credit swaps, derivatives or messing with pension funds.
Paulson’s gonna pay highest value for them, and use up all the money by January 19th. And there’s nothing to stop him in the “legislation” as written.
We need talking heads saying things like:
“This isn’t a bailout, it’s another power grab by the Bush Administraiton.
“Who’s gonna pay for this? Why don’t the beneficiaries pay?”
“Why is there no relief for homeowners with bad mortgages? If these mortgages are so bad the banks can’t sell them, why can’t we relieve those who actually hold them?”
“Is the federal government gonna keep people in their homes once they own all this bad paper?”
“How is Paulson pricing this paper if it’s got no established value?”
and, finally,
“It’s not a liquidity crisis, it’s an insolvency crisis.”
What does this mean for those of us who are just poor but not homeowners? Screwed again?
Republicans: The party of bigger tent cities.
In some forms of reverse auctions, the independent auctioneer thinks about the problem and then picks an opening price (or percentage of face value). Then you open the auction and ask, which of you with assets of this type are willing to sell at that price/percentage. If you get too many offers, you lower the price and hold another round at the lower price until the supply of offers meets the target you’re seeking. Something like that sets a clearing price. But it’s hard to see how that fits with our problem, because there are different types of products the firms want to sell, and they have different perceptions of value for each type. If that’s not true — i.e., if there is only a small set of product types — maybe it could work. I’m not an auction expert; it’s an art.
hey, here’s a thought;
where the HELL has ron paul been with his anarchists who made up the new word for it they now call “libertarians”?
I would LOVE to see how an anarchist parses this episode of “deregulation”…be fun to see
Why doesn’t the Treasury Department take over the entire financial system? If we’re going to nationalize the losses, let’s nationalize it all.
And, as Naomi Klein said, if we’re nationalizing things this month, let’s nationalize something that makes a profit, like Exxon!
And why does Hank Paulson still have a job?
Kudlow blamed it on poor people for wanting homes, and Democrats for making it possible. So I guess we should tax the poor to pay for the bailout.
We are going to be an entirely new American class! Serfs.
Ron Paul was on Wolf Blitzer today. Said something to the effect that intervention was wrong and leave market to come to its own price.
Or just tax Democrats.
This tax on the benefactors of the Wall Street excesses should be effective for fiscal year 2008. If not enacted immediately these recoups for this crap will be a year off and there will be all kinds of opportunitys for the sleeze to hide their ill begotten gains at Phil Gramms employer.
Yes, because they have to make Democrats the Tax and spend party! Where the Republics are the “Steal and get away with it party.” There are people who ADMIRE that in a party. Rich people. “I’ve got mine, pull up the ladder!”
I think that we really need to use the language of the right on this.
“This is a loan. And we expect it to be repaid! With interest.”
“Who caused this? Where is the responsibility? Who is the whiner party?
A stern father would put down the terms of the loan, in writing, and with penalties for breaking the rules. That is the authoritarian world view and they would understand a repayment on a loan, what is to hate about that? That is just business.
Gallows humor from TPM reader CC
I would have had some kind of respect for him if he said;
“the lenders that can’t afford to carry the loans should be forced to give them up, no forclosures allowed since forclosure is a regulation”
something along those lines would have worked for me fine
Thanks for the response. Neither am I an auction expert.
Another idea I heard was done for banks holding farm loans back in the 80’s??? In return for a one-time “lifting of the Kimono,” disclosure of assets, if no one bought the asset, the bank was allowed more generous amortization terms.
Thanks for all your great work at FDL.
and what happens to disabled serfs?
the answer is NOT to “raise taxes”, it is to “reclaim the assets and the redistribution of middle class wealth that caused the problem in the first place, when we get the assets that are not theirs that’s not raising taxes”
man, their heads will explode
Thanks. You asked great questions.
CREDO is passing around a petition to stop this,
FYI
What Treasury should be doing at the moment instead of this $700 billion boondoggle is assessing what the various tranches of mortgages are worth. As the bubble became more frenzied, less and less info and credit worthiness were needed for the loans. Then the individual loans were combined and mixed good and bad to get an acceptable rating from the ratings agencies. So in general the later tranches are likely to be more toxic than their earlier counterparts.
Treasury can start by saying something like the base value of any tranch is the face value minus 40% minus a figure based on a sliding scale of tranches of various ages. Now this may seem arbitrary (because any valuation will be to some extent) but it would allow holders of mortgage backed securities to actually come up with a real value for these assets and provide an agreed upon basis for financial companies around the world to see how good or how poor their positions are.
Under the current plan, Paulson would be buying the securitized instruments not the mortgages themselves. This is insane. If the money is going to be spent, then the government should get title. This would also help in turning around financing to long term fixed rate mortgages on these properties.
Now if these mortgages are going to be so converted to fixed types, somebody is going to have to write those mortgages. This means forcing regular banks to make such loans and hold a certain percentage of them for their life. If others are passed on, then there have to be strict rules about how they bundled and rated, and to what extent any leveraging can be done off them.
Next I would plain and simply nullify the credit default swaps. I would require that companies that sold these refund the fees to buyers.
I would then give financial institutions 30 days to assess their exposure based on the guidelines I had set up.
And only after I got a chance to look at and run the numbers would I start talking ballpark figures for the money I thought I would need to address the problem.
Along with this, I would re-impose Glass-Steagall, usury laws, and leverage limits and increase reserve requirements for financial institutions. I would limit derivative exposure of an institution to some figure, say 25% of its net worth. I would require transparency to the government and stockholders on the positions that an institution holds. Finally, more for commodities markets, I would limit who could trade in them, i.e. keep the commercial and physical speculators and throw out the non-commercial traders.
Quick thoughts but something to think about.
Include funding of single payer universal health care, which will give people the idea that they aren’t just bodies to absorb bad debt and bullets, that they have the right to live with health care and not go bankrupt. Imagine that.
And it might attract jobs back to this country if we had universal health care.
in the usa all the anarchists i know are left wingers and all the libertarians are rightwingers.
As is said “Screwed, blued and tattooed!”
maybe I should go back and read the entire Act, and imagine it in the sense of how it could work for a Dem administration…
‘Course, that would assume that any of the $7B is still left by January, 2009….
great list.
Here is a question. “President Paulson wants a “clean” bill. But just how clean is he? Can he be expected to punish his friends and reward his enemies? Who are his friends? Who are his enemies? Who is he sleeping with?”
Does the 700 Billion dollar man have skeletons in his closet that will be used against him? He NEEDS oversight so that he can stand up to his friends and protect him from his enemies.
Regulation. Good For Business. Good for Americans. Essential for Democracy. Perfect for Paulson.
Thanks very much.
a libertarian is a person who wants no regulation except those that help them
that’s an anarchist whether they want to call themselves the term or not
the term actually originates from anarchist;
[The French anarcho-communist Joseph Déjacque’s use of the word “libertaire” in a 1857 letter to Proudhon is said to be the first use of the term which translates into English as “libertarian.”]
per wiki
And if health care wasn’t a cost for business I wonder just how much more the American worker would be worth in the world Market??? You know what with HOW productive the American worker is compared to the rest of the world??
Good one perris.
Now let’s bumper sticker and sloganize this.
“Hey Wall Street! I want my money back. With interest.”
-Sally Housecoat and Joe 12 Pack, taxpayers.
Which is why I’m always puzzled that Corporate America is against Canada-style Health Care …
i don’t think that’s an anarchist anywhere. the anarchists i know, if i understand correctly, all agree that authority should always be questioned and tested to see if it can be justified. anti-authoritarian would, i think, be a more accurate term.
in fact, the anarchists i know are some of the most helpful, generous people i know – out to do what makes sense for everyone and not just for themselves.
The “We can’t do healthcare now” is a case of misdirection. The current system functions poorly and is overpriced. If we did it as it is done in other countries, we could have healthcare that was comprehensive, universal and cost as much as it does now or very likely less.
Great thoughts @ 49, Hugh !
Don’t know why those who are “too big to fail” can’t be permitted to fail. If it’s the credit markets you’re worried about, why not take the bail out money and lend it directly to borrowers. Eliminate middle men and protect depositors. Let the banks go hang.
Instead the bankers will get their golden parachutes. It should be clear the system isn’t working. We have to think of a new way to do things.
I haven’t seen this in the thread, maybe I missed it. This problem was caused by the ability of banks to sell loans. This separated the underwriting of the risk from the equity. That simply can’t be allowed to happen. IMHO, any solution has to address that.
I don’t know about that. We are in a Mexican standoff, if Mitch tries to filibuster a Democratic bill. The financial community cannot afford to wait this one out. The rest of us are screwed anyway, so we’ve got noting (much) to lose if it takes a few more weeks to sort things out.
what is really going on here IMO, is that the Chinese and the Arabs sent a note to Paulsen telling him clean this shit up and make the American people pay for it, or they re dumping US securities and everything else with a $ sign on it. We are no longer the masters of our house.
If you build your financial system like a house of cards, it will fall like one and so we need to change the way we build the system.
What we SHOULD do is let the system tumble down and protect those who have pensions in funds, retirement accounts and so forth. If we use taxpayer’s money for anything let’s keep the innocent whole and let the gamblers and the casino owners go down and before their out the door, they need to turn over the cash in the vault to the people (government).
Bail out who? Why? Do I care if there is a Merrill of a Lehman, or a Goldman?
wiki;
there is always some kind of compulsion, the compulsion of peer pressure which becomes the governing body, the compulsion of self preservation.
all a government is, the combining of brotherhoods, most natives support their government and the cumpulsion is in itself willing
for whatever reason, the term “anrachy” has become a perjurative
there is “anrachy” when people want the laws that protect only themselves
I can see where a group of people might think a particular government is malignant, they form their own set of “rules and regulations” that insure the greater good of their percieved brotherhood.
but that is not how the term has evolved, it is no a perjurative
I agree about the pressure from international investors. Who blinks first? If they start offloading Treasuries, they’re only hurting their long term prospects of getting their own investment back. The Middle East needs us to buy more oil. Then Chinese need us to buy more of their stuff. Like all debtors, we still have significant leverage.
John “Manchurian Candidate” McCain? Well, he is selling us out to the Chinese banks who are about the only ones that will have the assets to buy up these gov’t held bonds.
1968-1973 POW
2004-2008 POW
Prisoner of “W”
Republican John McCain – seems to get the Stockholm Syndrome rather effectively.
If we’re going to have to do this thing, there certainly does need to be oversight. Payback is also a consideration, these should be loan-term loans, not merely corporate giveaways. Even the car companies only want loans.
A good way to pay for these is to sell the oil leasing rights offshore for some real big bucks. I mean, if we are going to let the oil companies drill, make them pay big time. Then we should have first rights to the oil produced, rather than these fat cats playing a world game. And the oil companies should be required to increase their refinery capacities, which they’ve been shrinking for the past 2 decades. We need to become masters of our financial future here in America, not just victims of the corporate and big finance mindset.
What a mucking fess.
The same knuckleheads who brought us this greater than all other financial crises are proposing – no that is not right – are insisting that we once again hand over the keys to the car to them. If, as a society, we accept this rather than standing firm, we truly deserve what we will get.
The Democrats had better listen and follow Obama’s lead, in which I believe he has taken a thoughtful and brave stand. There is a crisis, and it has to be immediately addressed. But, it is not the perpetrators who need to be bailed out or cleansed or whatever the hell you want to call it. We will see whom among us truly has the courage to fight for the future.
Governance is not domination. If we Americans wanted that we would’ve created another Monarchy or Nazi regime.
It’s one thing to set the rail guards up and put up a speed sign, but to tell people they can’t drive would not only be prejudicial and obviously unconstitutional, it would be contrary to every Democratic value I understand.
We don’t tax to punish!
Right, the bailout is for the mortgages and the people who live in those houses, not for the corporations. You save the paper and try to fix it and then reregulate the system to avoid getting in this mess again (Glass-Steagal redo).
I’m not even sure why anything beyond a mortgage (or box of ‘em) should be touched. Is a CDO essential to save? I’d like to know what else, besides mortgages (paper-wise), might be worth saving.