Anybody who has read Ayn Rand’s book “Atlas Shrugged” understands just what was proposed by Treasury Secretary Paulson last week. In “Atlas Shrugged,” some businesses treat the U.S. Treasury as their own personal piggy bank. The U.S. government ignores real economic problems and creates new ones while striving vainly to restore “confidence” as the economy goes downhill. Eventually, there is a total economic collapse.
Fortunately, on Monday, Congress defeated Treasury Secretary Paulson’s plan that would have given $700 billion of U.S. taxpayer money to the banking and securities industries. We have the 228 U.S. House of Representatives members who were not corrupted by political contributions from banks and security firms to thank for this vote. The other 205 House members had received much higher campaign contributions from banks and security firms (an average of $232,877 compared to $150,982).
On Wednesday, the Senate rewrote the bill, adding an additional $110 billion in loot for other industries, including tax credits for energy development, changes in the regulations governing payments on forest service land, regulation of the disbursement of money in the Exxon Valdez settlement, exemption of children’s wooden arrows from excise tax and modified expensing rules for film production, just to name a few. The additional pork, together with a full court press by lobbyists, helped the 451-page Senate bill gain support.
Today, the House will vote on the Senate bill, most likely after adding additional pork on its own. They may even add in some billions to be given back to taxpayers, hoping that taxpayers will think that owing over $800 billion paid to looters is a good deal if they get to spend some of it themselves.
The bailout bill authorizes the secretary of the treasury to “restore liquidity and stability to the U.S. financial system and to ensure the economic well-being of Americans.” It assumes that liquidity is absent when it really is not. Where is the study that established the absence of liquidity? How many businesses have failed because they were unable to finance inventories? How many firms were unable to finance payrolls? As for individuals, there are millions who have credit cards. As for mortgage applications, there are still advertisements offering 30-year mortgages at less than 6 percent. Even auto loans (no federal government subsidies yet) are still offered at reasonable rates. The Bankrate.com average stands at roughly 7 percent. With inflation running at about 4 percent, this is a very reasonable interest rate. Claims that credit is “drying up” are all based on anecdotal evidence.
It is hard to avoid the conclusion that this bailout is designed only to take the financial sector off the hook for all of the bad mortgages and derivatives they financed. Why should banks and hedge funds be rescued when they cannot pay their debts? They have an inventory of sub-prime mortgages due to their own lack of good lending practices. Their top managers have been looting their own companies through excess salaries, huge bonuses and share buybacks (to produce artificial income on managers’ stock options in order to take advantage of the low 15 percent capital gains tax rate). We are a profit and loss economy; there is no such thing as the profits-only economy that the bailouts are trying to create for the sector most responsible for the sub-prime mess.
The Senate bill would establish an Office of Financial Stability within the Treasury Department to implement the bailout in consultation with the Board of Governors of the Federal Reserve System, the FDIC, the comptroller of the currency, the director of the Office of Thrift Supervision and the secretary of housing and urban development. The term “consultation” means what, a phone call?
One has to laugh that the bailout claims to establish provisions “to prevent unjust enrichment by participants of the program.” All of the participants of the program would be unjustly enriched. In fact, their past misbehavior would be rewarded. And the act would call upon the secretary of the treasury to establish a program to guarantee troubled assets of financial institutions to be financed by “risk-based premiums” to cover anticipated claims. What does “troubled assets” include, the derivatives created by the investment banks based on sub-prime mortgages? This is not spelled out. Why not?
The bailout would require the treasury secretary to take into account the interests of taxpayers, the impact on the national debt, the effect on the stability of financial markets, preserving homeownership, the needs of all financial institutions regardless of size or other characteristics, the needs of local communities and the long-term viability of an institution in determining whether to directly purchase assets from it. The secretary would manage the troubled assets that are acquired, including the ability to determine the terms and conditions associated with the disposition of troubled assets. Talk about an invitation for corruption!
Moreover, the proposed $810 billion giveaway would actually make America’s real economic problems worse, because the money would be indirectly borrowed from foreign governments. (With Americans not saving and private foreigners not lending to America, any additional federal budget deficit is indirectly borrowed from foreign governments.) The money involved would be paid for by the U.S. taxpayer who would not only pay interest on these loans, but would also pay for them with U.S. manufacturing jobs!
Foreign governments have been buying dollars in the currency markets in order to keep their own currencies at an artificially low price and lending those dollars to the United States to earn interest. As a result of these currency manipulations and loans, the Chinese currency, for example, is about 40 percent lower than it should be, making Chinese labor 40 percent cheaper than it would otherwise be. And the artificially low Chinese currency makes American products cost 40 percent more in China, plus an additional 15 percent duty added by the Chinese Value-Added Tax in accordance with WTO rules, plus the additional 25 percent tariff that the Chinese charge on most American manufactured goods, including vehicles and mining machinery in accordance with WTO rules. Is it any wonder that the Chinese people, whose economy is growing by about 10 percent per year, hardly buy our products at all, given that our products usually cost 80 percent more in China than they would cost if the playing field were level?
It is possible to look down the road and see exactly where Paulson’s plan leads. The United States would borrow more and more from foreign governments in order to finance increasing giveaways from our national treasury. In return, these countries would get our remaining home appliance, automobile, motorcycle, mining equipment, high-tech and aircraft production industries. Eventually, the ever-increasing U.S. government borrowing would cause the U.S. government’s credit rating to collapse. The only way to prevent the complete collapse of the United States government would be either to repudiate or to inflate away its debt. The United States would be left impoverished, while the anti-democratic communist government of China would come to dominate the world.
Whether or not Congress rejects Paulson’s destructive plan, it still faces the problem that the economy is stagnating and that unemployment is increasing. A new set of giveaways will work no better than did the last set; this year’s $150 billion stimulus package may actually have increased unemployment! What we gain in temporary spending from giveaways is lost in long-term manufacturing job loss because of borrowing from foreign governments.
Congress needs to enact a plan that addresses the root cause of the current crisis: over-borrowing from foreigners to finance consumption. There are two good plans to do so that have already been written into bill form and could be immediately passed by Congress: 1) the FairTax, and 2) Warren Buffett’s Import Certificates Plan, which has been put into bill form as the Balanced Trade Restoration Act.