David Cay Johnston writes that the administration has scared the markets and some key legislative leaders — but it has not laid out a coherent, specific and compelling need for its enormous $700 billion bailout proposal. He poses several tough, key questions that remain unanswered.
By David Cay Johnston
In covering the proposed $700 billion bailout of Wall Street, don’t repeat the failed lapdog practices that so damaged our reputations in the rush to war in Iraq and the adoption of the Patriot Act. Don’t assume that Congress must act instantly, as so many news stories state as if it was an immutable fact. Don’t assume there is a case just because officials say there is.
The coverage of Treasury Secretary Henry Paulson’s plan focuses on the edges — on the details. The focus should be on the premise. And reporters should be skeptical of what gullible Congressional leaders, most of them up before the voters in a few weeks, say after being given a closed-door meeting on supposed horrors.
The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear?)
Ask this question: Are the credit markets really about to seize up?
If they are, then lots of business owners should be eager to tell how their banks are calling in their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.
If the problem is toxic mortgages, then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why would taxpayers be bailing out banks that are continuing to sell these toxic loans?
How does the proposal help the Joe and Mary Sixpack who can afford their current monthly payment, but not the increased interest rate that has been or soon will take effect? Every day, bankers work out loans with customers — so why are taxpayers being asked to act when banks are largely on strike, refusing to negotiate revised deals with many loan customers?
How about interviewing small landlords who were drawn into these toxic loans? Are banks negotiating with them? If not, it means more foreclosures and more renters who had nothing to do with this being evicted. Ask why banks are refusing to negotiate with small landlords (landlords I spoke to said they are).
What steps are being taken to take back bonuses, fees and other compensation from the folks who got rich selling toxic mortgages and illiquid investments that Secretary Paulson claims are threatening the whole system?
How will adding $700 billion to the national debt ease strains on the credit markets?
As of now we are, as a group, behaving just as we did the last two times the administration sought to rush through a hastily thought out, ill-conceived plan. Why in the world are we being so gullible and naive? Whatever happened to the core value of journalism: Check it out?
The questioning on the Sunday talk shows was all softball. ABC, CBS, NBC and Fox, shame on your anchors and roundtable regulars for engaging in lightweight faux journalism. This passivity, superficiality and gullibility was at its worst Monday night on NBC in the banter between anchor Brian Williams and a CNBC correspondent with its utter lack of skepticism.
Here are some more questions to ask:
Q. Do we need a bailout of American and foreign banks? Show us in detail the reasons for this, and the numbers. Make the case.
Q. Is there a market solution to this? If so, why impose a government solution? If not, what does that tell us about our entire economic theory?
Q. Is there a less expensive solution?
Q. How do we know this will not just be a down-payment on a much bigger bailout?
Q. Is there a solution that provides direct help to those who took out these loans, rather than those who sold them?
Q. If AIG and others are too big to fail, what does that tell us about government anti-trust policy and regulatory policy and inaction?
Q. Why have both Goldman Sachs and Morgan Stanley made clear that they want in on this deal? Get skeptical and ask the basic questions: Who benefits, how much and what makes this plan so attractive that Goldman and MS want to participate? Ditto for GE. That they and others want to be included should prompt a great deal of skeptical questioning.
Q. How does banning short selling of the stocks of 900 companies help the markets? (The markets are heavily biased toward the sell side, so why constrain the shorts, who often turn out to be right about stocks whose share prices have been artificially inflated.)
Q. How does banning short selling of this growing list of companies show a commitment to “free markets,” a stated goal of this and a long lost of previous administrations?
Q. During this short selling ban, why are there no parallel controls on insiders getting out of their positions?
Let’s do our job. Let’s be skeptical and ask the core questions, not the detailed ones around the edges.
David Cay Johnston is a former tax policy reporter for the New York Times. He is author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) and Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — and Cheat Everybody Else.