The Wall Street bailout and you

By Darrell Williams
Guest Contributor

Make no mistake, this is historic.  I’m talking high school textbook historic.  I’m talking “where were you when this happened” historic. 

Regardless of its details, the $700 billion (and possibly up to one trillion dollar) bailout of Wall Street excess being negotiated as you read this will be eclipsed only by the election of Barack Obama on November 4th.  In a plot line dripping with irony, President Obama may indeed be known as “the janitor” charged with cleaning up the mess after the eight-year frat party known as the Bush presidency.

And, baby, what a mess it is! 

Treasury Secretary Paulson is basically asking for blank check authority to purchase the troubled assets of teetering financial institutions.  These assets are primarily in the form of securities backed by sub-prime mortgages, the kind of mortgages that homeowners can no longer afford to make payments on for various reasons. Because no one can connect any particular mortgage security to any particular set of mortgages, no one can effectively calculate a value for the securities and thus no private sector investor is interested in buying them. 

So, in order to keep America from falling into an economic depression, taxpayers have to do what investors won’t: buy securities the value of which may be calculated best by a wet finger in the wind.  Secretary Paulson asserts that the tough times likely to result from both the debacle itself and the bailout will not be as apocryphal as the global financial meltdown and economic depression that would likely occur if we did nothing. 

The tough times might be summed up in one word: recession, which is basically a contraction of economic activity usually resulting in higher unemployment, business financial losses and declining stock prices.  Economic activity is driven in part by the availability and low cost of credit.  If credit is unavailable or too expensive, companies can’t or don’t build inventory, or build plants, or purchase big ticket capital goods.  If companies aren’t building new plants or building inventory, then companies aren’t hiring employees. 

What makes credit more expensive?  Demand of course. The cost of credit goes up the more people, companies and governments demand credit.  It doesn’t take a rocket scientist to understand that in order to finance this bailout, the government is about to start demanding more credit than it ever has before.  Total US federal debt is already $9.7 trillion. (Yes, that’s with a “T”.)  Add to this the cost of the Fannie Mae/Freddie Mac bailouts which analysts put at about $200 billion.  As stated, the Wall Street bailout is targeted at $700 billion.  This year’s federal budget deficit is over $400 billion.  Analysts peg the 2009 budget deficit at nearly $550 billion.  The cost of war in Iraq and Afghanistan is $580 billion and climbing.  Add up these and some other minor initiatives (at least by comparison) and we are looking at total federal debt north of $12 trillion. 

Compare this to the $5.7 billion of national debt when President Clinton left office.  The public and private sectors will compete for available credit dollars which generally leads to higher interest rates.  For us, that means higher costs for student loans, car notes, mortgages and other consumer credit – assuming there is someone out there still willing to lend after all of this washes through.

Unfortunately, the pain does not end there.  Secretary Paulson is demanding this authorization without oversight.  The Treasury Department would be the sole arbiter of what your tax dollar (well, the debt dollar that you will eventually pay off with your tax dollar) is used for.  If Paulson gets what he wants, there will be no oversight, no supervision, no pre-established procedure, no veto power, no check or balance.  The Treasury department will be able to buy whatever it wants, at whatever price it wants, whenever it wants, from whomever it wants, using whatever financial institutions it wants to use in executing the purchases.

So, who is to say if the Treasury Department overpays for assets that Wall Street can’t put a value on?

Who is to say if the Treasury Department is buying the best of the worst of the assets or the worst of the worst of the assets? 

Needless to say, the Treasury Department won’t be using any firms that employ anyone you or I know.  Under the Paulson plan, it is quite conceivable that you as a taxpayer pay an investment banker to manage assets that that very same investment banker is selling to you the taxpayer.  Now before you reach for the extra strength Hate-O-Rade, understand that this isn’t a done deal. 

There is bi-partisan push back on Paulson’s proposal and the end product is likely going to be less of a carte blanche for the Executive Branch.  More important, however, is the impact of this bailout on our collective future, both near and long term. 

As you know, Senator Obama is promising tax relief for everyone making less than $250,000.  He is also pushing for extensive health care reform, investment in infrastructure and greater support for education. The timing of these laudable efforts is now very much in question as the next president will have a lot of cleaning up to do. 

For instance, take that $12 trillion number discussed above, multiply it by about 4, and you get the size of our looming Social Security, Medicare and Medicaid obligations.  Frankly, that’s as good as it gets.  I expect Senator Obama’s opponent to maintain many of the policy prescriptions that got us where we are today (maintaining the Bush tax cuts, military spending to support belligerent foreign policy). 

As I said, these are historic times and the stakes are high, with competing demands, interests and ideologies (including those that got us into this mess in the first place).  We are here in part because 8 million African-Americans are not registered to vote.  Of us who are registered, enough of us stayed home to help put and keep a particular ideology in power, an ideology that is in my opinion indifferent if not hostile to the interests of African Americans not rich enough to live off of capital gains and dividends. 

This is the ideology that will stay in power if change does not occur on November 4th.  The choice is ours as will be the blame if we do not act.

Darrell A. Williams is Managing Member of DuSable Capital LLC, a financial investment and advisory practice targeting growth-oriented companies and the organizations (private equity funds, business development groups, etc.) that support them.

Comments

[Trade Meme]

Great post. Thanks for the info.

[This Week In Blackness]

Great article. Explains things pretty clearly. This is NOT a good time.