The Power of the People

Congratulations to the American people! We just showed what “the power of the people” can do. Whether or not it turns out to be the right decision, we let our elected representatives know that we were strongly opposed to the Paulson bailout plan. They heard us and in numbers large enough to defeat it, they followed our demands when they voted. These representatives are all up for reelection this year and that gave us a lot of leverage – actually that leverage is always there if we would but use it. The House members, because they come up for reelection every two years, are more susceptible to pressure from their constituents than Senators who only come up every six years.

Now that we are on a roll, let us continue to use our power to assure that whatever plan is finally passed will be in the best interests of we the people. Toward that end, we should insist that opinions other than those of George Bush, Dick Cheney, and Henry Paulson be considered in structuring the plan.

Joseph Stiglitz, most cited economist in the world, as of June 2008, stated on 60 Minutes Sunday that he does not agree with the Henry Paulson bailout plan. Stiglitz predicted two years ago that we could not sustain the financial market as it was going and warned about an impending market meltdown. Paulson, on the other hand, in July 2007 said that the market impact of the U.S. sub-prime mortgage fallout was largely contained and that the global economy was as strong as it has been in decades. (REUTERS/Rick Wilking)

So why is it that we are spending all our time tweaking Paulson’s plan instead seeking advice from economists like Joseph Stiglitz? In a recent article, Stiglitz pointed out:

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return.

The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Stiglitz went on to say:

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again. There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

Assurances from this administration that they care about protecting the taxpayer understandably fall on deaf ears. Their record of gutting consumer protections for the past eight years proves otherwise. That means we need to keep the pressure on our representatives to make sure they are not rushed into a bailout package that leaves us on the hook for Wall Street’s years of golden harvests.

We cannot just ignore what is happening on Wall Street, but that does not mean we have to rush into a bailout that primarily benefits them while offering taxpayers nothing but crumbs. We have shown what the power of the people can do, now let’s keep doing it until we get the best deal possible.