government takes over the banks. The futility of waiting for terrified, trembling bankers to make new loans will become more and more apparent until government takeover is the only remedy.
And who can shed the sneaking suspicion that Obama has always wanted it that way?
OBAMA’S SOLUTION
For now, Obama vehemently denies wanting to nationalize the banks. Instead, he, his Treasury Department, and the Federal Reserve have trotted out one scheme after another to rekindle lending, all to no avail. In the meantime, when you read between the lines of federal regulatory policy, it is evident that Obama not only wants to take over the banks, but is stacking the deck so that the financial institutions fall into his grasp.
But Obama can’t come out and admit that he wants nationalization, so his latest plan is to lend money to hedge funds and other investors on very favorable terms if they agree to use the money to buy securities based on auto loans, credit card debt, and other consumer financing. These loans would go to banks, but also to nonbank lenders that regularly dole out funds for college costs, cars, and mortgage loans.
In other words, the hedge funds will tell the banks and other credit institutions just what Fannie Mae told the mortgage lenders that started thewhole financial crisis in the first place: “Go ahead, lend money, even if you have doubts about whether the loans will ever be repaid. Don’t worry. As soon as you make the loan, we’ll buy it with the money the Fed is lending us. That way, even if the borrower defaults, it won’t be your problem.”
This sleight-of-hand finance is just like the dodgy practices that got us into this fix. And, perhaps for that reason, the new program, called TALF (Term Asset-Backed Securities Loan Facility), is off to what the Wall Street Journal charitably describes as “a slow start.” As the Journal has reported, though the government is preparing to make loans up to $200 billion (and possibly to expand it to $1 trillion) so far only three deals, worth a combined $5 billion, have been cut up. 112
Michael Ferolli, a J.P. Morgan economist, says that to call the new plan “stillborn would be too harsh, but it [TALF] is off to a rough start.” 113 The Journal reports that “a month ago, bankers say, they thought they would be selling at least ten deals in the first round of the program. Most of these have been put on hold.” 114
What’s the problem? When the Fed is making buyout money available to hedge funds, the threat of making bad loans wouldn’t seem to be much of a risk. So what’s the reason for the holdup?
It’s the administration’s own policies.
As the Journal says, “one reason for the slow start: the outcry over bonuses paid by AIG, the troubled insurer that received federal money. Some investors are concerned that they too could be exposed to a political storm should they take too much money from the taxpayer-funded program.” 115
When these investors see the names and bonuses of executives at AIG being published and their homes deluged with angry protestors, their reaction is to steer clear from taking tax money in any form. So every time Obama lets loose with a new volley of populist rhetoric, condemning corporate bonuses at the same firms that are receiving federal help, he shoots himself—or, rather, us—in the foot. The more he protests and condemns the bonuses and threatens to tax them away, the more he deters the very partners he needs to get the economy rolling again.
The deterrent effect of shifting federal policies, political posturing, and changing—and punitive—tax legislation is huge. Investors don’t know what the rules are since they keep shifting. They’re perpetually worried that a business-as-usual decision, easy in more normal times, will land them onthe front page of newspapers throughout the country. It’s like the situation Voltaire described in Candide , where the Romanian army officers shoot every tenth soldier
And who can shed the sneaking suspicion that Obama has always wanted it that way?
OBAMA’S SOLUTION
For now, Obama vehemently denies wanting to nationalize the banks. Instead, he, his Treasury Department, and the Federal Reserve have trotted out one scheme after another to rekindle lending, all to no avail. In the meantime, when you read between the lines of federal regulatory policy, it is evident that Obama not only wants to take over the banks, but is stacking the deck so that the financial institutions fall into his grasp.
But Obama can’t come out and admit that he wants nationalization, so his latest plan is to lend money to hedge funds and other investors on very favorable terms if they agree to use the money to buy securities based on auto loans, credit card debt, and other consumer financing. These loans would go to banks, but also to nonbank lenders that regularly dole out funds for college costs, cars, and mortgage loans.
In other words, the hedge funds will tell the banks and other credit institutions just what Fannie Mae told the mortgage lenders that started thewhole financial crisis in the first place: “Go ahead, lend money, even if you have doubts about whether the loans will ever be repaid. Don’t worry. As soon as you make the loan, we’ll buy it with the money the Fed is lending us. That way, even if the borrower defaults, it won’t be your problem.”
This sleight-of-hand finance is just like the dodgy practices that got us into this fix. And, perhaps for that reason, the new program, called TALF (Term Asset-Backed Securities Loan Facility), is off to what the Wall Street Journal charitably describes as “a slow start.” As the Journal has reported, though the government is preparing to make loans up to $200 billion (and possibly to expand it to $1 trillion) so far only three deals, worth a combined $5 billion, have been cut up. 112
Michael Ferolli, a J.P. Morgan economist, says that to call the new plan “stillborn would be too harsh, but it [TALF] is off to a rough start.” 113 The Journal reports that “a month ago, bankers say, they thought they would be selling at least ten deals in the first round of the program. Most of these have been put on hold.” 114
What’s the problem? When the Fed is making buyout money available to hedge funds, the threat of making bad loans wouldn’t seem to be much of a risk. So what’s the reason for the holdup?
It’s the administration’s own policies.
As the Journal says, “one reason for the slow start: the outcry over bonuses paid by AIG, the troubled insurer that received federal money. Some investors are concerned that they too could be exposed to a political storm should they take too much money from the taxpayer-funded program.” 115
When these investors see the names and bonuses of executives at AIG being published and their homes deluged with angry protestors, their reaction is to steer clear from taking tax money in any form. So every time Obama lets loose with a new volley of populist rhetoric, condemning corporate bonuses at the same firms that are receiving federal help, he shoots himself—or, rather, us—in the foot. The more he protests and condemns the bonuses and threatens to tax them away, the more he deters the very partners he needs to get the economy rolling again.
The deterrent effect of shifting federal policies, political posturing, and changing—and punitive—tax legislation is huge. Investors don’t know what the rules are since they keep shifting. They’re perpetually worried that a business-as-usual decision, easy in more normal times, will land them onthe front page of newspapers throughout the country. It’s like the situation Voltaire described in Candide , where the Romanian army officers shoot every tenth soldier
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