What's Missing From The Bailout

Sustainability and....

...not enough accountability.

by

Conrad Lawrence

There is some accountability in Obama's bailout plan, which is very similar to most European bailout plans. However, there is no sustainability built into either plan. Both plans bail out the banks, but since it does nothing for those who are floundering and only hopes and prays that the banks will find others not considered risks to make loans to, there is no sustainability. (More below)

The Original Design

Sustainability means making sure that the money flows in the way it was originally designed in order to make for a working economy: from the bottom up! That’s why banks make loans. The way cash flow was originally meant flow is from the depositors and loan payers up into the banks coffers. Inject money at the top, right into the bank’s coffers, and there is no assurance that money given to the banks will flow in any direction. After all, who will be left for the banks to loan to?

Currently over 100 million households in the U.S. are overextended. That's “households”, not people, which means generally two or more people per household. That accounts for approximately 200 million people. Considering that there are only 260 million people in the U.S., including children too young to take out loans, elderly past the loan securing age, and those too risky to loan to, who would be left over to take out loans promised by the current bailout; loans that are the base premise of the bailout.

What is needed for sustainability is for a plan that will insure that those currently holding debt can continue to pay their debt. Considering that the banks made those loans based on the premise that as long as debtors could pay, the banks would remain solvent, then insuring that debtors can pay would have the same effect of bailing out the banks as the current plan The difference is that instead of trickle down (injecting money at the top and let it trickle down through new loans) you would have a bottom up flow of cash. If the whole point of injecting money is to get people move cash via loans, why not just inject in at that level?

This can be done.

For a detailed explanation how, see the sidebar article Alternative Bailout. Not only can it be done, but it would re-employ some of the 103,000 people from the financial sector who lost their jobs. What could be better, cash flow at the level of eventual goal and more jobs! (See Alternative Bailout --->)

Do the banks truly need immediate rescue?

Chase reported an 84% loss in profits for 3rd Qtr 2008. Scary? They would like you to think that means they are operating in the red, but they aren't. It's true, they only made $14.7 billion in profits last quarter. Boo hoo! To put that into perspective, that more than 4 thousand times the total assets of the State of Illinois. Banks like Chase possess assets so immense that they can withstand an 84% decrease and still make money. Shareholders of Chase are gasping at this, but they are not floundering. Makes one wonder if banks like WaMu and Wachovia were really going under. Or, if their assets simply dipped enough that they became ripe for absorption. In other words, the banks have found that this crisis has given them the opportunity for the mergers that the Treasury Department and SEC denied throughout the nineties and the new millennium for fear of reducing competition. Considering that WaMu still had over $300 billion in assets when Chase took over, what criteria determined that it was in fact collapsing? It just wasn't showing the returns investors wanted?

Sustainability requires not only a change from the top down, trickle down paradigm, but a shift in realizing that as long as we try to maintain a credit based economy, we will always be at risk. According to World Banks Pacific region Vice President, Jim Adams, this is why China's economy is not as adversely effected by the Global Financial Crisis. China's banks and business are less dependent upon credit and more dependent on goods and manufacturing.

Gone in a Poof

Many people who are not rich are fearful to face the fact that we need to move away from our economy being solely based on investments and back to a product/service based economy is because their retirements are tied up in investments. Have no fear. Relax and let the market settle. It will come back, if people don't panic. I am one of those people. Four weeks ago, I was in a position to make more money in retirement than I do now by my salary. Since then, that's gone. Pfft! But, I am not going to panic, not going to liquidate my stocks and take a massive loss. No. I plan on sitting on it and pray that someone finally comes up with a bottom up cash flow sensibility to rebuild the value of my investments.

Case in Point.

I love my dad dearly though he is the epitome of the trickle down economic benefactor. Actually he’s a hybrid of Richard Nixon and Bob Dole. He is wealthy by virtue of investments, ten times more wealthy than his salary and pension could make him. I asked him how all this effected him. His answer was that it didn't really. His dividends still come, he still pays the bills, lives very comfortably and as long as he doesn't try to sell his stock, he won't take a loss. The only impact is that if his stocks never regain their value, his heirs (including me) will take a hit. Being skeptical of the credit economy, I sort have been expecting this for over a decade.

So why not give the money to those floundering in their loan payments. After all, many of them are victims of predatory lending designed to put money in the loan pool by sharks who stood to make more lucrative gains from mortgage based securities. These are lenders who actively sought to make loans they should have to puff up the pool. And these are the people that will get the money from the bailout.

We need a plan that not only helps those who need the help most, and injects cash flow where cash should flow, but assures sustainability