Bailout: Chump Change

Sums it up pretty well.

Jail, Not Bail. If You Agree . . .

please contact your reps and favored media outlets.

Everyone knows bad mortgages are not the main problem -- they represent only a small percent of the total wealth that's being sucked out of our economy (see this gummint report; and several sources concur that the actual losses likely to result from bad mortgages alone won't be more than 5 - 10% of the total, if that).

The big losses are in the credit derivatives (if you're not sure what these are, see Financial Sense or MoneyMatters).

I don't mind bailing out poor people who got mortgages they shouldn't have gotten; I do mind bailing out their lenders, who should have known better (that would be McCain's plan, which might ultimately benefit some borrowers but would more directly benefit the lenders by taking the bad loans off their hands).

And I don't even mind bailing out any lenders who did not help create the mess and who bought derivatives in a reasonable effort to insure themselves against losses in mortgage-backed securities they actually owned.

But I DO mind very MUCH bailing out people who bought or sold derivatives NOT to hedge against losses for securities they actually owned but simply as a "bet." These people were engaging in naked speculation, and it is not only morally wrong to require the rest of us to bail them out, it is a huge mistake to shield them from their losses, as a matter of practical policy.

These are the people who lobbied for the deregulation that enabled them to create a mess so monstrous that their best defense now is to claim they don't understand their own creation.

(And note that there's been not just de-reg, but de-funding and de-staffing of oversight; see. e.g., here: "Mr. Lynn Turner, Chief Accountant of the [SEC] testified that the SEC Office of Risk Management, which had oversight responsibility for the Credit Default Swap market . . . was cut in [Bush] Administration ‘budget cuts’ from a staff of [over] one hundred down to one person.")

I've worked hard since I was 16, stayed out of debt, saved, invested conservatively, and I've just watched 25% of my life's savings be vaporized at a point in life when it's doubtful I'll ever be able to recover the loss -- and I'm supposed to bail out the guys that caused this?

I suspect a lot of these people deserve jail, not bail.

But what might make me just as happy would be if each of them were sentenced to work at a minimum-wage job and to have to actually live on it for a year or few. Or maybe even just at the mean average annual wages of U.S. workers.

So much for the rant.

The practical lesson I hope you're taking away from this experience is that we MUST re-regulate. It is not realistic to expect the foxes to guard the henhouse; nor is it realistic to expect consumers or even "sophisticated" investors to guard against sophisticated financial schemes. There is nothing patronizing about this; it's simply a fact: I and I suspect most other citizens simply do not have the expertise or even the time to investigate my depositary bank's claimed assets, let alone my other investments, the way a financial professional might -- any more than I have the expertise or time to evaluate scientific research on new drugs, or to capture and try criminals. This is the kind of stuff government is for.

The problem is not too much gummint; it's who owns it.

The problem is not that us Uhmericans are over-taxed; it's that we and our gummint's coffers are being looted (e.g., and this is just a trivial e.g., per ABC News, less than one week after the gummint committed $85 billion to bailing out AIG, the company spent $440,000 on a retreat for its execs, including $150,000 for meals and $23,000 in spa charges -- but hey, looting's stressful).

Moreover, forking over all the bail-out money we can print will do nothing to restore confidence in U.S. markets, either at home or abroad, so long as the same players are free to engage in the same schemes.

Only re-regulation can restore such confidence. We MUST restore Glass-Steagall, transparency, and accountability.

Forgive me for adding, please see my closely-related post from April Fool's day earlier this year, if you haven't already, here. As I mentioned,

Others reviewing the details of the plan are even more concerned. Mike Whitney writes that, though the proposals are being billed "as a 'massive shakeup of US financial market regulation,' . . . [we should not] be deceived. [They] are neither 'timely' nor 'thoughtful' . . . . In fact, it's all just more of the same free market 'we can police ourselves' mumbo-jumbo that got us into this mess in the first place. The real objective of Paulson's so-called reforms is to decapitate the SEC and increase the powers of the Federal Reserve. . . . "

"If Paulson's plan is approved in its present form, Congress will have even less control over the financial system than it does now, and the same group of self-serving banking mandarins who created the biggest equity bubble in history will be able to administer the markets however they choose without the annoyance of government supervision. That's exactly what Treasury Secretary and his pals at the Fed want; unlimited power with no accountability." More here; see also The New York Times.

I'm hearing darn little from our congresscritters on re-regulation. It's time to start letting them know we'll settle for nothing less.

Here's a little video: