By Thom Hartmann
For Grover “Drown Government In The Bathtub” Norquist, this bailout deal will work out very well. At a proposed cost of $4,780 per taxpayer, it’ll further the David Stockman strategy of so indebting us that the next president won’t have the luxury of even thinking of new social spending (expanding health care, social security, education, infrastructure, etc.); taxes will even have to be raised just to pay for the bailout. It’ll debase our currency, driving up commodity prices and interest rates, which will benefit the Investor Class while further impoverishing the pesky Middle Class, rendering them less prone to protest (because they’re so busy working trying to pay off their debt). It’ll create stagflation for at least the next half decade, which can be blamed on Democrats who currently control Congress and, should Obama be elected, be blamed on him.
In the United Kingdom, for example, whenever you buy or sell a share of stock(or a credit swap or a derivative, or any other activity of that sort) you paya small tax on the transaction. We did the same thing here in the US from1914 to 1966 (and, before that, we did it to finance the Spanish American Warand the Civil War).
For us, this Securities Turnover Excise Tax (STET) was a revenue source. For example, if we were to instate a .25 percent STET (tax) on everystock, swap, derivative, or other trade today, it would produce – in its firstyear – around $150 billion in revenue. Wall Street would be generatingthe money to fund its own bailout. (For comparison, as best I candetermine, the UK’s STET is .25 percent, and Taiwan just dropped theirs from.60 to .30 percent.)
But there are other benefits.
As John Maynard Keynes pointed out in his seminal economics tome, The General Theory of Employment, Interest,and Money in 1936, such a securities transaction tax would have the effectof “mitigating the predominance of speculation over enterprise.”
In other words, it would tamp down toxic speculation, while encouraging healthyinvestment. The reason is pretty straightforward: When there’s no cost totrading, there’s no cost to gambling. The current system is like going toa casino where the house never takes anything; a gambler’s paradise. Without costs to the transaction, people of large means are encourage tospeculate – to, for example, buy a million shares of a particular stock over aday or two purely with the goal of driving up the stock’s price (becauseeverybody else sees all the buying activity and thinks they should jump ontothe bandwagon) so three days down the road they can sell all their stock at aprofit and get out before it collapses as the result of their sale. (Weironically call the outcome of this “market volatility.”)
Investment, on the other hand, is what happens when people buy stock becausethey believe the company has an underlying value. They’re expecting thevalue will increase over time because the company has a good product or serviceand good management. Investment stabilizes markets, makes stock pricesreflect real company values, and helps small investors securely build valueover time.
Historically, from the founding of our country until the last century, mostpeople invested rather than speculated. When rules limiting speculationwere cut during the first big Republican deregulation binge during theadministrations of Warren Harding, Calvin Coolidge, and Herbert Hoover(1921-1933), it created a speculative fever that led directly to the housingbubble of the early 20s (which started in Florida, where property values weregoing up as much as 70 percent per year, and then spread nationwide, only toburst nationally starting in 1927 as housing values began to collapse), thenthe falling housing market popped the stock market bubble and produced thegreat stock market crash of 1929. That speculation aggregated enormouswealth in a very few hands, crashed the housing and stock markets, and producedthe Republican Great Depression of 1930-1942.
Franklin D. Roosevelt, as part of the New Deal, put into place a series ofrules to discourage speculation and promote investment, including maintaining –and doubling – the Securities Transaction Excise Tax. Other countriesfollowed our lead, and the UK, France, Japan, Germany, Italy, Greece,Australia, France, China, Chile, Malaysia, India, Austria, and Belgium have allhad or have STETs.
Perhaps the most important benefit of immediately re-instituting a STET in theUSA, however, isn’t that it would raise enough money to bail out the banks andbillionaires (and after that crisis is covered, could pay for a national healthcare system), or that it would encourage investment and calm down markets.Those are all strong benefits, and absent the current Republican Administrationbailout proposal would stand-alone strongly.
But the Republican Bush Administration is currently suggesting that we borrow$700 billion (or more) from China and Saudi Arabia and other countries andinvestors, add that to our national debt, and repay it with interest (makingthe actual cost over the next 20 years over $1.4 trillion). This is whatRepublican Herbert Hoover tried in 1931 when he first created the ReconstructionFinance Corporation (later totally reinvented by FDR) to bail out the banks in1931. Hoover’s RFC bailed out the bankers, paid off huge salaries in thebanking and investment world, bought him a few months (maybe that’s the realgoal of the Bush/McCain Republicans now – just hold things together until afterthe elections), but ultimately led to the failure within two years of virtuallyall the banks in the United States. The bailout failed.
Similarly, in 1998 the Japanese banks were facing a serious crisis of liquidityas the result of a bursting housing bubble in that country. The Japanesegovernment used public funds to re-float a number of large banks that year, andit similarly failed. In one example out of dozens, in 1998 135 billionYen were given from public tax funds to Ashikaga Financial Group, but thecompany limped along for a few years and in November of 2003 collapsed again,requiring a second infusion of a trillion yen from public coffers. And,as the BBC reported in a 30 November 2003 article (“Japan Bank Bail-Out ‘AOne-Off’”): “But experts warn that Ashikaga could be just the tip of theiceberg.” Professor of Finance at Tokyo University Takehisa Hayashi said,“It will come as no surprise if we see another Ashikaga case in the near future.”And they did.
Japan continues to limp along, as a result of bailing out banks rather thanfixing structural problems. (At least the Japanese had enough savings touse their own money, instead of debt, to bail out their banks.)
So bailouts don’t work, and never have. And they also have the sideeffects of damaging a nation’s credit, sucking up its taxpayers resources, and(when done with debt) weakening its currency.
So let’s go back to what we know works. After Hoover’s 1931 bailout of thebanks failed, FDR did a cold reboot of the entire system, putting into placestrong rules to prevent speculative abuse. And he doubled the STET tax,both producing revenue that more than funded the Securities and ExchangeCommission and further prevented a repeat of the speculative bubble of the1920s that led directly to the Republican Great Depression.
We’ve done it before. We financed the Spanish American War and partiallyfinanced the Civil War, WWI, and WWII with STETs. We stabilized our stockmarket with a STET from the mid-30s to 1966, and other nations are doing ittoday. It’s time to do it again, this time using the STET so tax WallStreet can pay for its own bailout.
Press Release
Release Date: September 26, 2008
For release at 2:00 a.m. EDT
Central banks have been employing coordinated measures designed to address the pressures in global money markets. Most recently, central banks have acted together to inject dollars into the overnight markets. Using their reciprocal currency arrangements (swap lines) with the Federal Reserve, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank today are announcing the introduction of operations to provide U.S. dollar liquidity with a one-week maturity. These operations are designed to address funding pressures over quarter end. Central banks continue to work together closely and are prepared to take further steps as needed to address the ongoing pressures in funding markets.
Federal Reserve Actions
To assist in the expansion of these operations, the Federal Open Market Committee has authorized a $10 billion increase in its temporary swap facility with the ECB and a $3 billion increase in its facility with the Swiss National Bank. These expanded facilities will now support the provision of U.S. dollar liquidity in amounts of up to $120 billion by the ECB and up to $30 billion by the Swiss National Bank.
In sum, these changes represent a $13 billion addition to the $277 billion previously authorized temporary reciprocal currency arrangements with other central banks. In addition to the swap lines with ECB and the Swiss National Bank, temporary swap lines previously have been authorized with: the Bank of Japan ($60 billion), the Bank of England ($40 billion), the Reserve Bank of Australia ($10 billion), the Bank of Canada ($10 billion), the Bank of Sweden ($10 billion), the National Bank of Denmark ($5 billion), and the Bank of Norway ($5 billion).
These arrangements have been authorized through January 30, 2009.
Information on Related Actions Being Taken by Other Central Banks
Information on the actions that will be taken by the other central banks is available at the following websites:
Bank of England 
European Central Bank
Swiss National Bank
Related Federal Reserve Announcements
September 18, 2008
Coordinated measures with Bank of Canada, Bank of England, ECB, Bank of Japan, and Swiss National Bank
September 24, 2008
Arrangements with Reserve Bank of Australia, Danmarks Nationalbank, Norges Bank, and Sveriges Riksbank
| March 2008 Number 318 |
| JEL classification: G24, G28 |
| Authors: Adam B. Ashcraft and Til Schuermann In this paper, we provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. We discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. We continue with a complete picture of the subprime borrower and the subprime loan, discussing both predatory borrowing and predatory lending. We present the key structural features of a typical subprime securitization, document how rating agencies assign credit ratings to mortgage-backed securities, and outline how these agencies monitor the performance of mortgage pools over time. Throughout the paper, we draw upon the example of a mortgage pool securitized by New Century Financial during 2006. | |
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