Communion Of Dreams

Wait, did I say “trillions?”
November 10, 2008, 9:12 am
Filed under: Emergency, Failure, General Musings, Government, Politics, Predictions, Preparedness, Society

Why, yes I did!

OK, this is basically S&L Crisis, Part II: Revenge of the Greedoids. You, and me, and every other US taxpayer are now on the hook for trillions of dollars of bailout money. Why? Deregulation and unwise real estate lending.

That was Sept. 7. And someone in the comments at UTI called me on it, saying that I was grossly overstating the case.


$2 Trillion

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank’s purchase of Fannie Mae and Freddie Mac bonds.

OK, I’m not just posting this because I want to say “I told you so.” Rather, take a look at this opening passage from a long piece in today’s Washington Post:

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration’s request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

“Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. “They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks.”

OK, it’s a long piece, so let me summarize: This provision of the tax law limited tax shelters which would arise during a merger of large banks. For over two decades conservative economists and lobbyists for the banks wanted to repeal this law, which would make mergers more attractive (and thereby push consolidation of the banking/financial industry). But Congress – even a number of Republican stalwarts such as Sen. Chuck Grassley of Iowa – refused to budge on this. So, under cover of the financial crisis, Sec. Paulson just got rid of it by fiat – had it murdered quietly in the night. The result was to make a number of the mergers which occurred in September and October more likely, because the tax liabilities for the resulting larger banks would be much smaller.

This may have actually been a good move in terms of helping to save the financial industry, but it was very bad governance. And that gets me to the point of this post: when I said that the US taxpayer was on the hook for trillions of dollars of our tax money, I was saying so because I understood all too well the prevailing attitude of the Bush administration: “Ignore the law. Trust us, we know what is best. And yes, you will pay for it, whether you like it or not.”

When we have seen the actions and behaviour of the Bush administration in action for almost 8 years, it was fairly easy to conclude that they would use the panic in the financial markets to do just whatever the hell they wanted, and that the initial sums being talked about were likely just the tip of the spear about to skewer the American taxpayer. As I said, these actions may actually have been the right ones – when you come across a car crash, you don’t worry about breaking into someone’s vehicle, you just get the people away from the burning car. But given the ineptitude and crass violation of law demonstrated by the current administration, it was also fairly easy to predict that even if they got through the crisis there would be all kinds of extraneous extra-legal stuff happening to further their own goals and please their friends.

Damn, sometimes I just hate being right.

Jim Downey

(Cross posted to UTI.)

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[…] under: Emergency, Failure, Government, Politics, Predictions, Preparedness, Society Forget what I said two weeks ago – we’re now up to $7.7 Trillion: Nov. 24 (Bloomberg) — The U.S. government is prepared […]

Pingback by Your share: $24,000. « Communion Of Dreams

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