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Why Paulson’s Plan is a Fraud
PAUL CRAIG ROBERTS
COUNTERPUNCH
Friday, October 3, 2008
Is the Paulson bailout itself as big a fraud as the leveraged subprime mortgages?
Yesterday, here on CounterPunch, I discussed the bailout as proposed and noted that the proposal cannot succeed if it impairs the US Treasury’s credit standing and/or the combination of mark-to-market and short-selling permits short-sellers to prosper by driving more financial institutions into bankruptcy.
A reader’s comment and an article by Yale professors Jonathan Kopell and William Goetzmann raise precisely this question of the fraudulence of the Paulson package.
As one reader put it,“We have debt at three different levels: personal household debt, financial sector debt and public debt. The first has swamped the second and now the second is being made to swamp the third. The attitude of our leaders is to do nothing about the first level of debt and to pretend that the third level of debt doesn’t matter at all.”
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The argument for the bailout is that the banks will be free of the troubled instruments and can resume lending and that the US Treasury will recover most of the bailout costs, because only a small percentage of the underlying mortgages are bad. Let’s examine this argument.
In actual fact, the Paulson bailout does not address the core problem. It only addresses the problem for the financial institutions that hold the troubled assets. Under the bailout plan, the troubled assets move from the banks’ books to the Treasury’s. But the underlying problem–the continuing diminishment of mortgage and home values–remains and continues to worsen.
The origin of the crisis is at the homeowner level. Homeowners are defaulting on mortgages. Moving the financial instruments onto the Treasury’s books does not stop the rising default rate.
The bailout is focused on the wrong end of the problem. The bailout should be focused on the origin of the problem, the defaulting homeowners. The bailout should indemnify defaulting homeowners and pay off the delinquent mortgages. As Koppell and Goetzmann point out, the financial instruments are troubled because of mortgage defaults. Stopping the problem at its origin would restore the value of the mortgage-based derivatives and put an end to the crisis.
This approach has the further advantage of stopping the slide in housing prices and ending the erosion of local tax bases that result from foreclosures and houses being dumped on the market. What about the moral hazard of bailing out homeowners who over-leveraged themselves? Ask yourself: How does it differ from the moral hazard of bailing out the financial institutions that securitized questionable loans, insured them, and sold them as investment grade securities? Congress should focus the bailout on refinancing the troubled mortgages as the Home Owners’ Loan Corp. did in the 1930s, not on the troubled institutions holding the troubled instruments linked to the mortgages. Congress needs to back off, hold hearings, and talk with Koppell and Goetzmann.Congress must know the facts prior to taking action. The last thing Congress needs to do is to be panicked again into agreeing to a disastrous course.
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16 Responses to “Why Paulson’s Plan is a Fraud”
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October 3rd, 2008 at 10:25 am
too late now.
October 3rd, 2008 at 11:26 am
I am in a state of shock and I knew this was going to happen. They reject the bill with massive fanfare and then, low and behold, just as we are starting to notice that life goes on, it gets passed. Why am I surprised by this ????? I love America, I really do, but we really do deserve what is coming to us to a certain degree. How the hell did they manage to pass this bill without public support. Was it your congressman? Was it yours? Cheated and scammed again. Amazing, just amazing. If I knew it was this easy to fuck over a whole nation, I would have had a go myself.
October 3rd, 2008 at 11:27 am
To bossman,
Just like George Carlin said once: “garbage in, garbage out!”.
What one can expect from bonless chickens we have in, so called,
congress?
October 3rd, 2008 at 12:08 pm
Only a French style revolution will take our country back from the elite. Prepare for the worse and pray for the best.
Peter Bonn Reply:
January 31st, 2009 at 12:30 pm
The problem with the French Revolution is that it was started by the Freemasons Illuminati. Who created the Freemasons? If you are interested in finding out who these really are read the “Protocols of The Elders of Zion” on the http://www.phoenixarchives.com or go to http://www.abundanthope.net or http://www.thetruthseeker.co.uk. You will find that their power started with William III when he had his invasion financed by these “Elders” international bankers of the time, who had the condition for the funding of the war only if England’s Central Bank was owned by them.
King Louis XVI was antagonistic to these “Elders” which they elimminated with the Revolution. After the era of terror who rose to power? Napoleon Bonaparte, a butcher who wished to control the world. Notice how in the XX century the Great War led to World War II and who rose to power? Hitler another butcher and who was a member of the fellowship of the VRILL, another freemason club. Who funded initially Hitler’s war? None other than the international Banker Rothschild. The reason Engalnd went to war with Germany was due to the refusal to pay the interest – later in the development of war – and by the printing of money by Hitler to fund the campaign against Russia. Who funded Stalin’s (another butcher) war against Hitler? Well you know who.
Now, we are in the XXI century, war continues to devastate the world. 9/11 gets orchestrated by Bush [another freemason "Skull & Bones" ] to cause the war in Afghanistan which by the way the aim is to control the trade of narcotics. For the drug trade generates more money than global economies; and Iraq’s war in not just to get to the petroleum but with the aim of invading IRAN. Iran fell under the microscope of the “Elders” when it revealed that did not want to have its oil pegged to the US dollar. Boudless Greed and Power is in their genetic fabric and the rise for another butcher is already in our midst. Pay attention at the conflict between Israel, Palestine and Iran. Didn’t Barack Obama threaten to use all military power to protect Israel, even atomic bombs? Why is it that a nuclear renaissance is being forced upon the world? Why didn’t the robber baron J.P. Morgan (another of the same club) financed the free, unlimited zero point energy of Nikola Tesla? Our world has been held captive since then; dependent on crude-oil and coal as sources of energy. Why is it that only extremelly polluting and highly dangerous types of energy are adopted by world governments?
Any scientist that comes forward with a clean, efficient technology of producing energy is immediately suppressed, intimidated and at times taken out.
Americans, planet Earth is dying, and we do not know it.
October 3rd, 2008 at 12:29 pm
Right.
The PROBLEM has been LONG in the making. The banks are bankrupt, then have been so for many many years. It has been hidden behind the FICTIONAL economy of speculation for the last 30 years.
But the PROBLEM itself is still there. In other words, we will have to “bail out” TRILLIONS of dollars. In other words, GUARANTEED hyperinflation. GUARANTEED.
So many laughed at LaRouche over the years because he kept saying, “its going to collapse” and they claim “he has always said this”. What they don’t understand is that he is a FORECASTER, not a FUTURE predictor.
The difference is that he explains what will happen IF the laws on the books remain on the present course. However, he can’t predict if the laws change at the last second.
When Greenspan came in, he “saved” the system by creating a huge expansion of the derivatives bubble in the 90’s. LaRouche could not predict this.
Then in 2000, he created the real estate bubble to save the system. LaRouche could not predict that either.
The concepts of what he talks about are SPOT ON most of the time. In July of 2007, he said that the system was already destroyed and past the point of no return regardless of changes of law etc. He has never used such language before, and the culmination of everything he has been saying about the economy is coming true.
Some people don’t like him because of his other ideas “beyond” economics, although I think he is brilliant.
http://www.larouchepac.com/
October 3rd, 2008 at 1:23 pm
What we need is a concrete, specific plan of action. We need something to show them we can cross political and ideological lines and unite. They have depended on divide and conquer long enough. There is something called Buy Nothing Day which was organized to protest excess consumerism. We should use this year’s Buy Nothing Day as something the average person can do to express their unhappiness at being taken advantage of. Strikes are good, but too many people are afraid of losing their jobs. Protests and letter writing are ineffective because the puppets in Washington care more about corporate campaign contributions than those who elected them. Anyone who has other ideas should post them. We can NOT just sit by and let this happen!!!
October 3rd, 2008 at 1:50 pm
I for one am voting against the incumbents in my state (ND). They all voted for this garbage and I know many more people who were against it than for it.
October 3rd, 2008 at 1:58 pm
Lyndon LaRouche has been right on every forecast he has ever made. Isn’t it high time that Americans came into his workshop of inspired reason and learned/applied the true laws of Physcial Economy?
October 3rd, 2008 at 3:48 pm
did anyone happen to catch what was on page 180 section 116 and 117?this whole thing was probally more about what was in these two sections than the rest of it!also another part of this is our currency and system as we have come to Know it are going to fail so the real system can be advanced!we shall see!remember look at page 180 of the bailout package section 116 and 117.
October 3rd, 2008 at 3:54 pm
Hegelian theory at work ,PROBLEM = criminal takeover of financial institutions (ie.. threats of depression,martial law etc..) REACTION = American citizen’s flooding emails and phone calls to U.S. Representitives and Congress ,SOLUTION = N.W.O.
The American public will soon be begging for the solution ,they’ll (N.W.O.) have all the answers “we’ll ease your pain” just sign on the dotted line. Financial 911.
October 3rd, 2008 at 5:08 pm
http://ca.youtube.com/watch?v=XbrNSOxwXOM
October 3rd, 2008 at 7:49 pm
Hopefully we’ll go into a depression and abolish the Fed. It will take that much to awaken the American People.
October 3rd, 2008 at 10:00 pm
Shock and awe meant to crawl
bent and fall disseminate us all
great was late farewell to well hello to hell
sweep sweep fleece cheap
leak seek more bl#*p
patriots riot
grounded pilots
I am one
but I am speaking
I am not alone
when I am weeping
I am whole my soul has spoke
keep on fighting
we have awoke
October 3rd, 2008 at 11:50 pm
BuildingSix—Stop with the “because he is a jew” bullsh–! He’s a treasonous bast–d!
Who cares if he is jew, gentile, or muslim; he’s a lying elitist.
We have bank robbers in the White House.
October 4th, 2008 at 3:45 am
want to fix the economy? THEN REPEAL THE FEDERAL RESERVE ACT!!
http://www.myspace.com/repealfederalreserveact
http://www.vampirefreaks.com/1stamendment