Welcome to the bailout sellout!
The Wall Street bailout that Congress passed and the President Bush signed was probably the most oversold scheme of its kind in the history of the American economy. Outside of economics, the only other venture that comes close to being as oversold was the War with Iraq, for which faulty intelligence was used to take America to an unnecessary war that continues to sap the life out of our national budget.
The Iraq War and the Wall Street bailout may share one more thing in common: the need for a "surge". When the war in Iraq became a flop, the Bush administration came up with "the surge" to redeem itself, in hopes of claiming victory by all means. Instinct tells me that the government will propose an economic equivalent of "the surge" to fix the mess that this bailout will make. If a military surge meant thousands of additional soldiers, then what will an economic surge require? You guessed it: billion$ of dollar$ more. Then some hero will emerge, like a congressman, to claim full or partial credit for "the surge strategy" that finally saved Wall Street. Whoopie!
Initially, the bailout may knock some of the panic out of the market. But once traders and other Wall Street players realize that the bailout left the root causes of the recession intact, the market will become skeptical of the bailout package, and thuse resume its sluggish, downward momentum.
Why do we predict that the bailout will fail?
For starters, the sheer size of the bill is reason for much suspicion. The bailout started out as a 3-page proposal from the Treasury Secretary. The bill that Congress passed took those 3 pages, churned them and turned them into a voluminous 450-page document!
How come the bill swelled to that size? One word: Pork! In addition to the initial price tag of $750 billion, lawmakers stuck another $150 billion to the taxpayers, making the bailout $850 billion to start with. Wait till you see the final cost of this animal. One trillion dollars will be a most conservative figure on what the bailout will finally cost American taxpayers.
Though Republican presidential candidate John McCain pretended to bemoan all the earmarks and pork with which his colleagues were stuffing the bailout gravy train, when it came down to taking a stand for the people, Mr. McCain did less than hold his nose to vote Yes for the pork-packed bill. He actually claimed and proclaimed victory for the leadership he provided to make the bailout a reality. Of course, he may come back later to propose and take credit for "the surge" that will clean up the mess -- months or years down the road, if he's still alive.
Democrat Barack Obama was no better than McCain. Though he insisted on including homeowners in the bailout package, he voted Yes, though there was nothing in the bill for the millions of homeowners who may lose their homes because of the troubles in the mortgage sector.
Call it the bailout sellout. Most politicians connected with the bailout sold out their principles. Fiscal conservatives voted for a near government takeover of the market, tantamount to a socialized economy. Liberals voted to cover the nakedness of the wealthy and powerful, with nothing but lip service for concerns of struggling homeowners.
Any wonder why millions of Americans no longer take our politicians seriously? Any wonder why we expect them to lie to us over and again? If McCain and Obama can compromise their principles so easily and quickly on the bailout, why are we to think that either man will do any different on their campaign promises about the economy?
According to Lawrence Officer, professor of economics at the University of Illinois, the crisis on Wall Street was two-fold: a "crisis of credit" coupled with a "crisis of confidence". And the bailout bill fixes neither of those. On the credit crisis, banks remain reluctant to lend; this will continue to dry up credit. On the confidence front, do you really think Wall Street suddenly trusts Washington to hold the remedy to the economy? Thus, after the bill has been signed into law, Wall Street still faces the same "crisis of credit" and a "crisis of confidence". In fact, Professor Officer thinks the bailout may actually make the credit crunch worse. So much for a drive-thru solution to a serious problem.
Another important reason why the bailout is doomed is that it does NOT include a reform of the financial sector/system. For example, the laws governing credit cards need to be reformed NOW. A system that screws the middle class and is so skewed towards lining the pockets of banks cannot continue to be the norm, not if we expect things to change on Wall Street in a way that will benefit Main Street. Just last year (2007), American consumers doled out a whopping $12 billion of their hard-earned money to banks and credit card companies in the form of late fees and finance charges, according to CNN. Actually, it was the lenders picking the pockets of borrowers.
Yet when the question of the need for reform came up during Treasury Secretary Henry Paulson's testimony before Congress, Mr. Paulson basically told lawmakers, "bailout now, reform later". So Congress went along and passed the bailout with no reform strings attached. That means the same bad regulations that paved the way for the credit and confidence crises remain the rules of the Wall Street money game.
You can bet on this: This administration used fear to oversell the war in Iraq. What happened? That war became a disaster, and the administration demanded a surge to control the damage. The same administration has used the same weapon of fear to oversell the bailout. What will happen? You don't need a crystal ball to forecast that doom will be the fate of the Wall Street bailout. And when it fails, expect a million reasons why we need a surge, few more rounds of fixes.
