Regulating Banks

This American Life (my favorite radio show) produced a recent episode on the current economic meltdown, called The Watchmen. They explore who was supposed to be regulating the Wall Street companies before they collapsed and required trillions in taxpayer bailouts.

We all know now that mortgages were being handed out like handbills at a political rally or maybe more like credit card enticements we get in our daily mail - regardless of anybody's ability to pay them off. It turns out many jobless people were given a mortgage while the bank execs and jr. execs were swimming in bonus millions – soon to be joined by creative insurance companies like AIG. But who was watching the store for us depositors and taxpayers and regular people who work far from the financial sector doing little jobs like teaching, construction, nursing, and firefighting?

They trace down three regulating bodies that could have put an early stop to the whole thing, but didn't. One was the Office of Thrift Supervision. One was Congress which has committees overseeing the banks. One was the ratings agencies like Moody's and Standard & Poor's. ("Poor" must be some kind of joke for that firm.)

The Office of Thrift Supervision is funded according to the number of banks and holding companies that it regulates. When banks close OTS'ers lose their jobs. Congress members depend dearly on the campaign contributions from the banks they regulate. The ratings companies, it turns out, are also paid by the issuers of stocks and bonds that they rate. What's wrong with this picture?

Who's Really Buying Us a Bailout Now?

I wish the bailout terminology were more accurate for those of us non-economists who are trying to keep things straight. How can it be a "taxpayer bailout" when:

Whether you look backward or forward a couple of years, we are getting tax CUTS not tax hikes.

It would just make more sense if - at least periodically - they reminded us that this bailout is being brought to you by foreign creditors who are buying a trillion or so in new treasury bills.

At some point, it will be us taxpayers who pay back the loans to these creditors like China and at that point, we will owe them a chunk of interest in addition to the 1 - or is it 2 - trillion we've just borrowed over the past couple of months. Will these creditors ever get tired of buying our treasury bonds? Will they ever get surly and start breaking legs if we don't stay on a payback schedule?

Bailout Schmailout

I spoke to a friend of mine who is an economics professor at Stanford. He said that he crunched some numbers and that the $700 billion dollar bailout would come to a $9,000 bill to every household in the US. He said that the Savings and Loan "bailout" was structured as a loan to the banks and that the loans got repaid eventually with interest so we taxpayers did not end up losing money. He said his expertise is in employer/labor economics but in talking with his colleagues at Stanford, there was consensus that the "bailout" currently on the table was the wrong approach. He said that we have a good system for bankruptcy and we ought to let the banks declare bankruptcy and then work their way through the process. If that doesn't work, then there's time down the line for some kind of bailout.

Can't say I understand it very well. But I was very happy to sign a petition put out by Credo, my phone service, and write emails to Congress with their points - more a reflection of my outrage at the high-rollers than my knowledge of how to orchestrate the financial steps.

"1. If the taxpayers are shouldering the risk, the taxpayers should reap any eventual benefits. We accomplish this by giving the government an equity stake in every company we bail out proportionate to the amount we give them.
2. If we're paying (more than) our fair share, the CEOs and executives should have to, too. All of the fat cats who got us into this mess should relinquish their stock options and salaries until they start showing us, their investors, that they can once again be profitable. Future salaries should be linked to profitability.
3. No more campaign contributions from Wall Street executives and PACs. Taxpayer dollars should be used to get our nation out of a crisis. They cannot be used to fund giant, powerful lobby operations that will be used to strong arm Congress into making bad policy.
4. Better regulations start right now. Wall Street can't expect to take thousands of dollars out of your paycheck without agreeing to increased transparency and more stringent oversight - the kind that might have helped avoid this mess to begin with.
5. Bankruptcy judges get broader leeway to help homeowners. Why should we lose our homes so the CEOs can keep theirs?"