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Why Paulson’s Plan is a Fraud
- Text size
Paul Craig Roberts
Countgerpunch
October 4, 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.”
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.
- A d v e r t i s e m e n t
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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October 4th, 2008 at 9:35 am
Now that the BAILOUT BILL has been agreed to we can sit back and wait for the After burner to kick in and I certainly will not be shocked when the problem is still lerking in the halls of COngress in 2012. The bailout is just a shot in the arm for the Banks of our Federal Reserve. It simple gives more lerverage for banks to totally smash the working class of this country. Thousands of Americans are currently facing the nightmare of foreclousure, loss of jobs to overseas low labor and the rapid increasing cost of health care.
We sit back and blame one party when in fact it is both parites that have allowed this out of control spending to put us in the pits fo financial hell.
Our President has now placed the Military at the Border of Mexico and once again RIPPED the COnstitution to shreads. Congress allowed it both Demo and GOP. So who is to blame? We the RePUBLIC for allowing theose in office to remain in office. We have allowed our Government to take complete control of our rights and spoon feed us what we can and cannot do.
You do not need a big nose to smell bad balonie
October 4th, 2008 at 9:38 am
Assuming there is a valid financial crisis and not a “manufactured” crisis….
Reason is ask that is no one ever prodcued any hard eveidence with facts and figures and no one ever required such supporting evidence..
Without ever making sure there actually was a problem by positively identifying a source where the problem began.. You certainly cannot resolve the issue.. The old “Where there is smoke there is fire” theory..
Well in this situation we had smoke.. but no one actually went to see where it was originating…
Without identifying the REAL problem.. how can you assure some or someone be assured it is resolved..
Paulson is loyal to his prior livelyhood.. Wall Street. His type do not know any other way…
He used GVT to bail out the banks.. Another 1929 on a bigger scale.. Imagine the books that will be coming out in about 5 years from this mess.. mocking the stupidity of the people of the United States.
October 4th, 2008 at 9:47 am
Everybody Google Wanta Settlement. Why isn’t this a main issue today?
October 4th, 2008 at 9:57 am
I agree. The bankers have merely lent the money to Joe public who then could not pay off his loan. The banks may have been disguising Florida swamp land as beach front property but it it the buyer who took the bate with a promise to re-pay with interest that defaulted on the loan.
October 4th, 2008 at 10:17 am
the republic has been raped ! !
October 4th, 2008 at 10:21 am
There are $500 trillion in derivatives.
The amount of mortgages with problems is relatively small by comparison. I know that because I work in one of the companies in the news.
The derivative problem is too big to fix. It can only collapse, and we can only hope that a lot of rich people put their money into derivatives trying to squeeze out more profits.
We need a lot of new faces in Congress.
October 4th, 2008 at 10:25 am
I rarely watch TV.. but radio ads for all kinds of “car deals” have cropped up lately.. and I have no way of validating if people are responding… I talked to a friend in Texas.. same story where he lives in the Corpus Christi area…
But some of these ads are WAAAAAAAAYYYYY out there.. and people are stupid enough to buy in?
Example:
(paraphrasing the ads)
Starts out … “We know times are hard with the present situation here ast (Pick a name) auto dealer and we want to help YOU out”…
“we can help pay for your old care.. put you in a HIGH MILAGE care saving you gas and get you LOW PAYMENTS within an hour of coming on the lot ..”for most people”…”
“Payments will not be due for FOUR YEARS.. Come on in.. “we are here to help you”….
Talking about a scam.. ANYTHING To make a buck…
The sad thing is.. some will buy into thiese offers.. default on loans, which the dealers will NOT be responsible for.. and Guess who is on “the hook”.. in case you mouth has began healing from yesterday…
October 4th, 2008 at 10:32 am
Had enough?
http://www.youtube.com/watch?v=Jd1pXszGbwA
October 4th, 2008 at 10:41 am
How do you spell “4th Riech” ?
October 4th, 2008 at 10:46 am
This is exactly what I have been blogging about and spreading on public forums. I am glad I now have someone like Mr. Roberts I can refer people back to to back me up. I am not the smartest cookie in the jar, but I do use some common sense on most subjects. Common Sense is not common in 90% of American. Until people start thinking for themselves and get away from the Matrxist TV, the American people will be enslaved in their own stupidity.
I research everyday, read blogs, go to work full time, got to college full time, catch the news highlights on talk radio, listen to the Alex Jones podcast, Listen to the Lew Rockwell podcast, raise five kids, and still find enough time to get aggrevated, like Alex, about people complainging and not acting. I am meeting with people this week to organize a group to come up with ideas on how we can fix our situation here in our State. Until you people understand that, posting comments, ONLY, you change nothing. It might make you feel good to release your frustration on here, but until you get out and take action, your accomplishing absolutely nothing.
October 4th, 2008 at 10:56 am
All right. Looking at things logically in the “war” for our minds, it seems that we are not growing fast enough in equivalent to “them” coming out with all these laws, rules, regulations, threats, and upscaled brutality. There are still so many people to “wake up”, but I see there is one thing that will get the people to muster together to the point of believing people like this group who bravely met and had their “down with the regime” conference.
Most people say here and some have even called into Alex Jones’ radio show to say that they are having such a hard time getting others to believe the “truth” stories. Yes, many have “awakened”, but percentage-wise, it is small. There is only one thing that will snap all the nation’s people to finally “get it”, where people who are like this brave group and those handing out “truth” DVD’s or flyers, will be able to be listened to almost immediately. That one thing might happen in the next 40 days or maybe an additional 75 days or so. It was said here by others and has been spoken about for years, starting from the Clinton era before he left office.
The only thing that will snap the entire country into “awakefulness” or realization of the “truth”, is to have Marshal Law to stop either the presidential election somehow or to stop the transfer of power over to the president elect. All other Constitutional laws have been broken by this regime and the people have accepted it, but it seems that they want to have the Constitutional election. So what we need is to have that Marshal Law which seems to be the only thing that the people are saying that they will accept for stopping an election by the Constitution.
If the election or transition of power is done, then I would tend to believe that we really are in trouble because no one would transfer power, which technically is the same thing as giving oneself up to the authorities for crimes committed, unless that person(s) was assured of a safe haven and if a safe haven is available, that means that whomever is taking over the power position would be condoning all crimes committed and therefore would be just as bad as this regime. That allowance of the transfer of power would then obviously be done for a facade, to help fool the people, making it look like “CHANGE” actually is happening, when it would not be.
MARSHAL LAW (or the stoppage of the presidential CHANGEover) IS OUR SAVIOR that will gather the people together in one fell swoop that is not happening now,
Rhonda
October 4th, 2008 at 11:31 am
This was NOT a bailout , it was a PAYOFF , hush money for banks both foreign and domestic , especially the foreign ones .
The banks were not about to fall on their collective swords into the pile of toxic waste and let the administration off the hook . Fraudulent AAA credit ratings , complete dismantling of regulation , etc , ect ….. This was extortion at it’s finest , crooks vs crooks . The banks basically saying to the administration “You let us fail , your coming along for the ride” , only difference being , many bushites would have ended up in jail.
That would have screwed the Neocons plans big time , they certainly can’t do their evil deeds , martial law , continuity of government , NWO , etc ….. from a jail cell can they ?
Buckle up my friends , this is going to be one wild ride !
NS
October 4th, 2008 at 11:54 am
Governments dont want to focus on household debt because in order to get into debt, you need credit. And in order for the economy to remain the way it is, we need credit.
Without credit, many jobs will go, we will have much higher unemployment as a result and fall into a major recession/ depression.
I agree however, that credit is wrong. Especially the way it is given out in the first place.
When credit analysts review applications, they will check the persons credit file, see what other outstanding credit they have and base their decission on what limit to give on this and the persons income. But when these banks come to work out payment plans for customers who are struggling they ask for every little bit of income and expenditure to see what the customer can actually afford to pay back. And under US banking regulations, if they cant pay back 0.8% of the balance each month to pay off in 10 years, then they simply allow the debt to charge off, and sell it on.
This is wrong! Credit given out in this way is just asking for trouble. Why dont they ask for Income & Expenditures before credit is approved? Then we wouldnt be in this mess we are in now.
Banks are quite happy to dish it out, but when they cant get it back they demand bale outs from the government! Get real! If you do a proper job in the first place then I wouldnt have to be writing this now! Its your own fault for not realising customers cant afford credit, so dont pass the buck onto the rest of us! Declare yourselves bankrupt like us citezens would have to do!
October 4th, 2008 at 12:02 pm
Dr. Paul Craig Roberts in an understatement about the passed bailout bill;
“a mistake”
This 700.000 billion dollar bailout is in the words of Paul Craig Roberts;
“only from one set of books to an other”
Banks –> Treasury.
“they are bailing out their buddies”
“Only 5 Major Banks remain now for the Monopoly Man”
JP Morgan Chase, Bank of America, Goldman Sachs, Morgan Stanley and now Citigroup
“If the foreigners are not gonna lend the money they have to print it!” says Dr. Paul Craig Roberts.
Or in the words of Congressman from California Daniel Hamburg;
“Who’s gonna Pay the Piper?”
Bob Chapman “Derivative Death-Star on its way!”
http://www.theinternationalfor.....ll_Implode
October 4th, 2008 at 12:44 pm
http://es.youtube.com/watch?v=Bw32XCw_AvM
October 4th, 2008 at 12:52 pm
Total Slaughter,
Can they also do this to humans?
http://www.tcc-group.eu/NL_index.htm
October 4th, 2008 at 1:03 pm
I bet you Paulson isn’t even out of bed yet,..from last nights party. His cheeks probably hurt from laughing so hard.. cheers mate! You boys rule. We’re worms. Enjoy that $700,000,000,000 on us!
Way to go baby,..rob’n from the poor and giving to the rich. Can’t wait to see the childrens stories taught in school in the next 10yrs..
Ok Kid’s!! Today in class we’re gonna read “Pay up bitch” by Paulson and Bush ,..and the kids will all scream,..YEAAAAAH!!!
October 4th, 2008 at 1:15 pm
Pretty accurate photo of Sarah Palin:
http://shutterline.com/countryfirst.html
October 4th, 2008 at 1:22 pm
This video up on youtube gives websites to get more information about the feds: http://www.youtube.com/watch?v=z0LHxDEIOxE
October 4th, 2008 at 1:23 pm
And the hardcore Neonazicons that I work with are orgasmic over the deal.
Jason
October 4th, 2008 at 1:23 pm
Yeah…when it comes down to it, the people won’t fight with honor….they will loot and steal and destroy everything….that’s the problem that i have. Instead of using that energy on something positive, the people will act just like the animals in the wild. Look at all the riots that happened in the u.s., and look at how much was done in vein.
It seems like anytime there is a need for an uprising, all that happens is people start stealing and setting shit on fire. Why, do you always destroy someone else’s work? Why do people involved in rioting always wind up looting? Why is the energy placed on free stuff from local businesses?
This, i will never understand, when it’s time for heads to role, we turn on each other. We are all in this together. No man is an island. The shit you see on TV is for ENTERTAINMENT PURPOSES ONLY. Now i know they confuse you by mixing real life with television….but, anything on television should never be taken seriously. It is for ENTERTAINMENT PURPOSES ONLY!
All the lying, deceiving, back biting, standard of life type of shit you see on the tube is ALL WRITTEN. The people you see on TV….get this….ARE CHARACTERS.
In other words, stop acting like them…..THEY ARE FICTIONAL….ENTERTAINMENT PURPOSES ONLY! NOT TO BE TAKEN LITERALLY, OR SERIOUSLY, THEY ARE CHARACTERS.
In layman’s terms, THEY GET PAID TO LIE AND DECEIVE YOU….YES, all your favorite “stars” are sell outs!!!! All your little “crushes” are working for them. Those heartthrobs that you see on TV are pawns….and you know what a pawn is for.
Have you seen that big add about sending it to 5 people. It starts off with Lianardo Dicarprio saying..don’t vote…followed by ALL THE STARS. A couple of minutes after the switch it and say, if you don’t care about this and that…don’t vote. I mean….just about ALL THE MOVIE STARS ARE IN IT.
Now, i know they “think” it’s for a good cause, but question….is voting really for your benefit? Or is it just another way to collect your energy, wishes, desires. Kinda like the dollar – a talisman.
When you vote for someone, you give them your AUTHORITY….does anyone understand that? You give them the right to do what they want when they want. You give them a YES for everything….Once you vote…you get NO MORE VOTES!
How come, they don’t let the people vote if they want to go to war? Because you already gave them permission when you voted them into office. Or why don’t they let us decide, by voting, on whether or not “we” want to give them the money? Because you already gave them your approval. They don’t need you to approve anything else….you gave your authority to make all and any major decision regarding your life.
Did you know, that when you elect a president, he hires 5,000 people. The president hires 5,000 people that are just like him. They share the same goals, interests, mindsets.
So, when you go to that dog and pony show of an election, understand that you are voting for 5,001 people, not just a president. Now, ask yourself, does your vote really matter?
October 4th, 2008 at 1:23 pm
Remember, the fact that the we have the bailout bill does not mean that it will be acted upon immediately. It is up to the People to choose new Congress and the President that will properly oversight the execution of the bill.
October 4th, 2008 at 1:50 pm
It’s probably long gone in the bowels of swiss banks by now.
October 4th, 2008 at 2:02 pm
This bailout is the third axion of stripping the middle class of their equity. The first part was free trade and import debit, second part encouraging outsourcing overseas and importing slave labor.
It’s that simple, the re-distribution of wealth of the middle class and developing a 2 tier system of haves and have-nots.
October 4th, 2008 at 2:02 pm
I think Paul Roberts article is way off base. How can you pay off defaulting home owner and reward people who made a choice of purchasing a home they could not afford, less than 10 percent of home owners. Would that no create an unfair equity amoung the people who are paying for their homes one time? Lets present a case one family chooses to purchase a new home three times the price of their old home expecting the housing bubble to continue to increase home values they really only expect to keep it for two years, and then sell, they don’t want to pay capital gains taxes. They used a subprime mortagage to keep the payments very low with nothing down. Now Paul Roberts wants to pay off the loan and give this person a free home. The other family looked wisely and said home values can’t keep climbing like this and kept his old home a small home but he almost has it paid off. It goes up in value on the tax roles for the duration of the bubble and now it is losing some value, but at least he manages to keep up with the payments and pays if off. He has a home now worth 100,000. The other ill reponsible person gets his home paid off by tax payers and he gets to keep his home its worth 300,000 thousand, tell me is this equitible? Under the constitution does it not say equal treatment under the law? So should the tax payers pay the responsible person a 200,000 thousand dollar payment to provide for equal treatment under the law or should the government reward the ill responsible person and tell the other guy you lose?
October 4th, 2008 at 7:12 pm
The bailout may give us a breather but I have heard no politician talk about is free trade with fixed exchange rates or that the value of a currency is agricultural, mining and manufacturing production. I don’t believe any financial black magic can overcome the trade imbalance caused by manipulated exchange rates and imports financed by deficit spending and credit from the countries with which we have the trade deficits. The dollar’s being the reserve currency has only permitted us to break all the rules of deficit spending because as long as global trade increases, increasing the money in circulation causes little inflation. It does however destroy American manufacturing especially traditional manufacturing such as furniture, shoes, textile, cooking ware, electronics, etc. Once we cease to manufacture we become a third world economy and once manufacturing is lost it is hard to regain. That is where we are now. If the undervalued currencies were revalued to the point where trade deficits were eliminated by causing the goods we now import to become so expensive that we could not afford them; after years of struggle U.S. manufacturing would be reborn. If these currencies are not revalued the meltdown will continue until we cannot buy so many imported goods and we reach some point of equilibrium. One way or another we cannot import more than we export ad infinitum even with credit default swaps, derivatives, Ameros, a compliant Fed and all the financial shenanigans they or we might pull out of their or our hat. It just cannot be done.
October 4th, 2008 at 7:18 pm
Effective strategy to clean congress
http://www.tenurecorrupts.com
October 4th, 2008 at 9:00 pm
who’s 401k didn’t lose money, the investment banks and brokerage houses lost money too 3-4 trillon came off of stocks. 140 billion would pay off (entirely) every default and 90 day past due mortage, obviously this is way beyond that. Notice how bernake, paulson, bush all said “bad mortages” on day one, then it was changed to “bad securities” in these securities are stocks that lost 30-100 percent of thier value. WE ARE BAILING OUT JP MORGAN, CHASE, CITI ect. “401ks” THAT GOT CRUSHED JUST LIKE OURS!!!! Another point, they can always print money like they did on monday to ease credit they just wanted to charge it to the taxpayer instead of the New York Federal Reserve (which is owed by J P Morgan Chase Citi Merily Lynch etc.)
October 4th, 2008 at 10:40 pm
Hey, at least there will be plenty of government housing during the coming depression.
Congress isn’t being panicked. They understand EXACTLY what they’re doing. This isn’t a gross miscalculation, it’s intentional. China stood to lose trillions of dollars if our debt based society collasped, and the politicians can’t have that. They need China. After they’ve sold everything of value in America (You know, like Budweiser, public held lands, and the Gulf Coast Oil Fields), taxed the People into the dirt, and sent this country into an unrecoverable tailspin, they’re going to need some where to go as refugees when the American People revolt.
Psychological egoism at work. It’s beautiful, in a sh*tty-for-the-rest-of-us kinda way.
October 4th, 2008 at 11:04 pm
#32 / Veritas144. I know you are trying to be a point of light for the lost with your statements regarding the Ark of the Covenant, but you are wrong. There is no need for an Ark, God now resides in man via the Holy Spirit. Your theology is rooted in false doctrine, the Bible teaches nothing of the Ark becoming a source of power for anyone, especially those that reject Jesus Christ. Jesus Christ Himself will return and defeat the nations of the world (Not a group of men carrying the Ark which Gods Glory has long since left and replaced with the appearence of his Son and the gift of His Spirit since Pentecost. Sorry to correct you in public, but I must defend the truth.
October 4th, 2008 at 11:25 pm
Dear Mr. Jones,
I was skeptical at first coming across your website and radio show several months ago. I thought it was bogus with your fear mongering diatribes along with the uber paranoia.
But I was dead wrong.
The $700 billion-dollar bailout bill has tyranny written over it. I mean, seriously, a handful of financial institutions coincidently became ‘bankrupt’ within the same year plus the last year of the Bush presidency? Come on people! Wake the fuck up!
The taxpayers of this country have allowed Congress and a president to approve a law that will ultimately transform us into slaves working for the dollar. Already the 40-hour work week is becoming non-existent. I am recent college graduate, 23 years of age, and discover more and more of my friends and peers have to work seven days a week just to make ends meet!
But what startles me is that hardly any of them take the time and learn what their government is doing to them. We are truly an apathetic generation–the 18-25 demographic that is. Sure we may on occasions sport the red Guevera t-shirt to impress the artsy crowd but have no idea what he stood for in history. My generation chooses to wear a veil and only rely on pundits and technology on various media outlets to tell them how think. It is disturbing that my age range has the highest percentage of college enrollment in american history.
How can we, as in true patriots who demand equality and emanicipation from unfair debt, raise awareness? I know your movement Mr. Jones is growing but there is a good majority left still choosing to be ignorant and continually be shafted by corporate america.
I say this: Is it possible for us, as in american citizens and taxpayers, to demand an audit for these “bankrupt” financial institutions under the provisions of the Freedom of Information Act? Aren’t we allowed to see these-now-government-acquired businesses financial records? Hell, we are supplying nearly THREE-FOURTHS OF TRILLION DOLLARS to these fascists!
Keep the movement strong fellow patriots. I am not scared for that I have the powers of the United States Consitutions to support me from doing my duty as an involved citizen: perserving democracy. I will not let a corporate reigme turn this country in a fascist state.
Contact me if you want to start a movement!
Irate 23 Year-Old American in Missouri
October 4th, 2008 at 11:40 pm
The bailout has very little to do with mortgages. It has to do with covering the asses of the corrupt bankers , corrupt politicians, and corrupt executive branch and as we see now most of the legislative branch is corrupted. We also know that the majority of the judiciary is corrupt too (from Gore Vs. Bush in 2000). This money, in part, will be used to destroy more accounting records, just like 9-11, with government sponsored terrorism. If you have a job near any records of the federal reserve bank of NY I advise you to get a new job. More info:
http://solari.com/archive/housing_bill/
October 5th, 2008 at 1:09 am
http://ca.youtube.com/watch?v=a5Nl7_NK0jU
October 5th, 2008 at 4:19 am
I’m surprised Paul Craig Roberts says the origin of the problem is the defaulting homeowners. The “origin” of the problem is being able to leverage these mortgages as securities worth many times the value of the assets, and Wall Street calling shit mortgage packages (that they knew were shit) as AAA and AA rated. If all of these defaulted mortgages were paid off, it would still not be enough to cover these securities. Truth be told, the real “origin” is the Federal Reserve. They basically gave away money to the banks for years, all the while knowing the trouble it would cause. Three years ago, when I bought my house, banks were trying to give me 125% of the home value, interest only (adjustable to 14% after 2 years) with no money down!!! Did anybody REALLY think this was a good way of doing business?
October 5th, 2008 at 12:25 pm
I was just at game 3 LA Dodger playoffs last night. 56,000 jammed packed, all delusional and brain washed. They all worship these ball players, drunk, all trying to out do each other. I’ve never seen such racism…some drunk guy came up to me gesturing like he was shooting a gun at me. I can hear racial slurs all around the park. The one highlight of the game, for me, is when they showed LA’s mayor on the big screen, and everyone booed. That was cool. Sorry for the off topic.
October 5th, 2008 at 12:54 pm
http://ca.youtube.com/watch?v=JjRXb6juOa0