When Politicians Diddle Taxpayers Get Screwed

There is nothing that scares me more during this economic downturn than the tinkering by politicians with the nation’s financial system. Rep. Barney Frank and Sen. Chris Dodd covered up the Fannie Mae and Freddie Mac scandals until it was too late. Sen. Barack Obama advisors, Frank Raines and Jim Johnson, were the principles in the fraud by these two mortgage giants. And Pres. George Bush, pre-occupied with the war on terror, took his eye off the ball and let these fast buck artists get away with what every man, woman and child should know — you don’t loan money to people who can’t afford to pay it back, and you certainly don’t go out an entice them into borrowing even more. (We expect our presidents to be able to multi-task; that means Pres. Bush should be able to maintain our national security AND our economic security simultaneously.)

I don’t know of any two presidential candidates in recent memory who know less about the economy, and are more willing to “float” ideas for political gain without regard to the real economic impact, than John McCain and Barack Obama.

It wasn’t merely enough to saddle taxpayers with a $700 Billion bailout of the crooks on Wall Street. Now McCain has proposed another $350 Billion to “write down” the balance due on mortgages to the current “value” of the underlying property. Obama can, and does, top that with a myriad of handouts including a tax “reduction” to the twenty-five percent of Americans who don’t pay any taxes currently — we used to call that welfare. And as the election draws closer you can count on each of these two economic morons to continue to offer to spend more of your money to ensure the loyalty of additional voters to their cause.

But there are some basic questions you ought to be asking the politicians, particularly those running for the United States Senate and Congress:

1. Why didn’t we simply insure the payment of the “bad” loans instead of purchasing good loans and bad loans alike? This is like basic family economics. If you have a relative whose credit is poor and you are feeling compelled to assist, you can do one of two things. You can either loan the relative the money yourself and thus be deprived of the use of that money, or you can “guarantee” the loan, preserve your own nest egg and face only the “possibility” of making payments or portions of payments during rough patches for the relative.

In this instance, the government could have simply guaranteed the payment of these loans over the remainder of their lives. Some would be short lived because people would move, some would face only sporadic payments during rough patches and some would be a full default in which case you would only be faced with the difference between the value of the underlying property and the balance of the loan.

2. Is purchasing these loans the only way to pump money back into the financial institutions so that they can re-engage in their primary role — lending money? Quite frankly I’m not sure that I want someone so careless with other people’s money to be given another chance to screw up again. But you can achieve much of the same by simply changing the accounting rules so that under collateralized loans that are now “insured” by the government are removed as charges against the banks financial statement. In doing so the bank would be able to 1) issue new stock to raise capital, 2) borrow more money from the federal reserve and/or correspondent banks to provide new funds to loan, or 3) fold their tents and go quietly into the night — not a bad idea for a number of them.

3. Do we really need more regulation of the financial institutions? Quite frankly it is government regulation that lies at the heart of this problem. The Congress demanded that more loans be given to “economically depressed populations” — that’s bureaucratic double talk for people who can’t afford to pay for such loans. Absent that mandate, coupled with the greed of the Wall Street financiers in finding a way to profit from a foolish investment, we would probably have not entered the world of subprime and no-equity mortgages. We would not have had the corresponding increase in demand for housing which artificially escalated prices annually by double digit margins.

If there is actually a need for more regulation it is for more economically sound regulation and less political interference. Any such change in the regulatory environment should be accompanied by more certain prosecution of those in the private sector who violate those regulation and those in the government sector who interfere with such regulations.

4. Are the huge salaries and bonuses for senior executives necessary? I continue to be stunned by the “lions” of Wall Street who say if you remove the avaricious salaries and the outlandish bonuses for the men and women who ran these institutions into the ground that you will not be able to attract others of “their caliber.” I think that would be a good thing. I served as an officer in one of America’s largest corporations. I was paid a healthy salary and a generous bonus but the bonuses were tied to real economic performance — the kind that led to long term stable growth. It was only after the merger with Qwest that we saw the kind of games that Wall Street greed can foster and we also saw the kind of economic calamity that eventually befalls those companies who allow it to be practiced.

I won’t begrudge anyone the right to make as much money as possible. However, when you are risking someone else’s money for your reward there should be some new rules to the game. Salaries of the top ten officers of every publicly traded company should be submitted to a vote annually at the shareholders meeting. Bonuses for every officer should be “earned” based on targets for the current year but paid in stock that is non-redeemable for five years — such a requirement would ensure that targets are based upon long term strategic and economically sustainable goals rather than quarterly performance.

Each of these questions and proposals are things you would do with your own finances. But then we are always more responsible when we are dealing with our own money instead of “other people’s money (OPM).

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Posted by at 06:00 | Posted in Measure 37 | 8 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    The solution to this whole fiasco can be found in one word:


  • Rupert in Springfield

    Given that it was foolish government policies that got us into this fix, it would be odd to think that government would act any more wisely to get us out of it. But there is one thing that people might not have considered.

    Given the government lust for getting the power to spend a trillion dollars more for an emergency, has been matched with virtually zero haste in using that money for this so called emergency that now appears to be self correcting, where does that leave us?

    Ill tell you where. Paulson looks like he will get together a plan to disburse $200B sometime around December. Dodd and Frank will be sure to tie it up in committee “oversight” to make sure there is a tidy little slush fund remaining for next year. That’s going to leave Obama, who at this point looks like a shoe in, with an $800B play time fund. And who do you think is going to get all that money?

    Maybe now it is a little more clear why a Democratic congress couldn’t wait to give a president they detest an additional $1T spending authority. The emergency is now quite clear.

    For the record, my offer to contribute to a bulk purchase of pitchforks and torches still remains.

    Have a nice day!

  • Gienie

    What exactly does that mean… “more economically sound regulation”?

    Any regulation at all is dangerous. Government needs to get out. Everytime they butt in it gets worse.

    Politicians are the “government”… which ironically enough opperates to benefit itself…

    So what does that mean… economically sound regulation?

    I seriously do not understand the idea behind that.

  • John in Oregon

    In another thread I made the following comments

    “Consider what has happened in the last ten days. Ten days ago, delayed by partisan political advantage, the bailout bill finally passed. And nothing happened.”

    *O* “Early last week commercial paper was added to the “solution”. Nothing happened.”
    *O* “Mid week a coordinated worldwide interest rate cut. Nothing happened.”
    *O* “At the end of the week the Government began buying interest in banks to inject liquidity. Nothing is happening.”

    “Might not it be time for the Government to stop spending money it doesn’t have?”

    I would like to expand on that post here.

    I have a lot of experience working with complex systems. Complex systems are ones in which there are many different interdependent variables and many different results. Changing any one thing will change many of the results.

    While adjusting such a system one hopes that a change will give more of the desired result and less of the one doesn’t want. Its a ballet of small adjustments hoping to get to the goal. As much an art as it is a science.

    One thing I have learned, more than once, is when an adjustment doesn’t do what you want, indeed, when an adjustment doesn’t seem to do anything at all the best thing to do is stop immediately. Its probably the wrong thing to do.

    Every time I didn’t stop. Every time “I just knew” the change I was making was the right one and so I made even more change I got the same result. Suddenly everything changed and the system became something much different.

    It was only because I kept a detailed record of what I did that I was able to unwind the mistake I made. And repairing the damage often took more time than fixing the problem.

    As I said its an art. Not a science. I can’t point to data that this, that, or the other needs adjustment. Its just intuitive.

    Currently the FED, Treasury, the financial power people are furiously pumping in more and more money. And nothing they do makes anything change. I see that as a huge red flag to stop and rethink the problem.

    If they don’t stop, then we all must hope I am wrong. Because if the financial system does lurch then we may not be able to unwind the damage.

  • Anonymous

    I think I’ll just leave the country, if I can find a place to go that isn’t as bad. That shouldn’t be too hard though. Our country is a shame, sham, and joke and Obama isn’t going to help it.

    • Gienie

      I don’t think our country is a shame. I’m not ashamed of it anyway. And those who are should leave in my opinion!

      Anon, what’s the hold up?? Why not just leave now?

  • Steve Plunk

    Larry’s point number 4 is one that has bothered me for a long while. Why do these people make so much money? Are they worth it? Can’t others do it for less? Of course we can’t legislate (maybe Obama will try) salaries but how might we put some common sense back into CEO compensation?

    I’m a firm believer that while we have concentrated on CEOs and corporate malfeasance we have ignored the those truly responsible, the members of the board of directors. These are the people who hire the CEOs and insist upon paying them outlandish salaries with even more outlandish golden parachutes if they fail to deliver. These are people who are supposed to review audits and look out for the shareholders interests. These people are the only link shareholders have to the corporation other than the money they invested. Board members review and approve corporate policy, goals, and internal controls that should assure profitability and the corporation as a going concern. In all high profile cases of corporate failure there is a board of directors that has failed it’s stockholders and society.

    Think Enron and the name Ken Lay comes to mind. Who served on the Enron board of directors? Anyone? Tyco lost it’s CEO to prison but the board that was charged with overseeing the stockholders interests where are they? Can we expect anyone of the board of AIG to feel the consequences of having to bailed out by taxpayers? Doubtful.

    For too long we have ignored what is really gross negligence by corporate boards of directors. It’s time to start naming names and publicly shaming these who have failed us all.

  • dean

    “Sen. Barack Obama advisors, Frank Raines and Jim Johnson, were the principles in the fraud by these two mortgage giants.”

    Raines was never an advisor to Obama. Johnson did serve on his VP search committee for a short time.

    The $700 B, or however much it turns out to be, is a purchase of assets or stock. It amounts to a temporary socialization of the banking industry. Desperate times call for desperate measures.

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