Letter to My Senators
September 22nd, 2008I very rarely feel strongly enough to write to my elected officials. For the most part things function relatively smoothly in this democratic nation of ours, even though we might not necessarily agree with specific policies and actions, and even though we (as a nation) have many political and social differences.
I ordinarily see our differences, and the way that they unfold in public discourse and debate, as a strength. However, our economic situation has become so fragile that I believe that there is too much at stake not to take a position and have your voice heard. The potential economic and social consequences are enormous!
For this reason, I am sharing excerpts from a letter I drafted (edited to correct grammatical mistakes and read more smoothly) to my senators last evening. I hope this is the only time I will ever feel compelled to make a political point on this blog.
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Esteemed Senator XXX,
I am writing you because I am deeply concerned about the fragile state of our economy. In no uncertain terms, our financial system is on the brink of collapse, and it is effectively insolvent.
However, rather than rushing this TARP [Troubled Asset Relief Program] through and giving the Fed a blank check for about $700B of taxpayer money, we should make sure that we get this legislation right. In order to do that, any plan that includes putting taxpayer money at risk should be accompanied by a recapitalization of our financial institutions, at the expense of current shareholders. That is, if we are not going to let institutions fail, then they must be held accountable in other ways. This is the only way to address the moral hazard problem. This also provides the best protection for taxpayers since making them effective owners of the banks allows taxpayers to participate in any upside in bank performance. The intention, obviously, would be to re-float the banks back in the public markets once they are in better health, and at a gain for taxpayers.
If a recapitalization of this sort were to occur, this would represent a quasi-nationalization of the banking system. I know that this is not the ideal solution. After all, we live in a “supposed” free market economy, so taxpayers should not own banks, but if we do not address moral hazard, we WILL have accomplished nothing, and we WILL be in this situation again. Also, since banks will need to be recapitalized anyway, I believe that this is the best solution.
PLEASE, PLEASE, PLEASE do not let Paulson and Bernanke fleece the American people and congress by allowing them to scare everyone into signing the blank check. Make sure that check comes with conditions!
For now then, I urge you to please sign no bill UNLESS a recapitalization plan is in place.
Also, I should point out that I am paying very close attention to the deliberations and how my senators comment and vote. The future of our economy is at stake.
Sincerely,
Robert Salomon
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Please, now is not the time for partisan politics. I know that there are those who ideologically oppose any government intervention into private sector in general (and the banking industry in particular). However, as a concerned citizen and a taxpayer, we stand to lose whether the government acts or not. And I believe the consequences of inaction are far greater than the consequences of imperfect action.
For example, let’s assume we allow a complete systemic financial meltdown. The government will have to step in to protect depositors at many (if not all) of our banking institutions. Once all the funds at the agencies that insure those deposits are exhausted (and it will happen quickly given the FDIC balance sheet), taxpayers are on the hook for the rest.
And that is just the monetary cost of financial meltdown. I cannot even begin to estimate the social cost.
We (taxpayers) lose either way. I don’t know about you, but I would rather pick up the costs ex ante, while providing taxpayers some potential to recoup their investment, than to let financial institutions fail only to pick up the pieces and watch our economy come to a grinding halt.
The time has passed to allow institutions to fail just to prove a point to the few idiots who got us into this mess in the first place.
So I ask you to think carefully about the repercussions of allowing our system to fail and ask yourself if you are prepared to live with the consequences.
Allowing a complete meltdown of our economy would be catastrophic not only from a financial perspective, but from a social perspective as well.
This is why we need to get this bailout, although deplorable and disgusting, right.
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September 22nd, 2008 at 11:56 am
You know what the difference is between Paulson, Bernake, et.al., and Hugo Chavez of Venezuala is? In Venezuela, they socialize entire companies. In the U.S. we just socialize a companies’ bad debt. Free Markets? My ass.
September 22nd, 2008 at 4:18 pm
Yes, indeedly — the bailout should have so many strings attached, it’s a ball o’yarn. It’s a buyer’s market. At least some of the buyers are actually trying to attach a few strings:
http://money.cnn.com/2008/09/22/news/economy/bailout_proposal_Monday/index.htm?cnn=yes
But even beyond the terms of the deal, let’s not forget about learning some lessons and restructuring the system overall. It’s like the Iraq fiasco. We’ve let the debate turn to: yes, mistakes were made, but we’re here now, so how do we get out. And with that, those who got us into the mess refuse to revisit how the mess was made, and so other messes may be made again. You can’t learn from history if you refuse to revisit the past. So let’s not rest once we get out of this mess — let’s learn from history and fix the financial system so that, over and over again, we don’t have to socialize losses. As I’ve said in prior posts, you only deserve the big money if you risk the big money — not if you’re running with the biggest of safety nets the whole time. If nothing else, let’s at least make sure those who made this mess don’t get rewarded with big paydays. Only getting $15 million when one was expecting $50 million isn’t sharing in the mess one made. It’s still getting a $15 million reward for screwing up big time.
September 22nd, 2008 at 4:34 pm
John Kenneth Galbraith, the great economist, once explained: “The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”
September 25th, 2008 at 2:04 am
I have been following the news on the subprime since Fall 2007. As an international graduate student, it has been a great education for me seeing how things unravel. I do my best to respect Bernanke because he is a well-known scholar of the Great Depression. But I find it galling that he would, along with Paulson, threaten the Congress into signing a 700B blank check. I see how it would benefit Wall Street. I understand the logic about managerial incentives. I don’t see how the bailout, as proposed by B&P, will benefit the Main Street.
In fact, beyond what you suggested on recapitalization, I also see a need to restructure executive compensation, which many people had suggested.
I also think that new banks should be set up. One reason why a bailout with strings attached may not find volunteers is that some of these banks may stop lending to conserve resources rather than ask for re-capitalization. This of course stalls the economy. This is a great bargaining chip for the incumbent banks. This is why we need new banks. Let investors like Warren Buffet set up new banks. Encourage foreign banks to come in.