And it is the Columbia Journalism Review. Elinore Longobardi takes one long cringe at the coverage Paulson has received in recent weeks, much of it straight out of Socialist Realism school of propaganda, right down to portraying Paulson as a man of the Earth and nature-lover.
Longobardi does not make this connection, of course. She also blindly cites the complaint about Paulson’s bailout plan not requiring new bank lending as the kind of criticism Paulson rarely receives. This complaint is even worse than the bailout itself. Look what happened last week.
Just days into the process of injecting $850 billion in federal money into the nation’s financial sector troubling warning signs appeared. Washington officials attempted to micromanage how the money is used by sick institutions while previously healthy operations partake of a deal they cannot refuse.
Both at the White House and at the Treasury Department spokesmen were flogging the notion that banks should immediately turn their government cash into quick and easy credit. This is in response to reports that some banks were looking buy up weaker banks with their new government support cash. That potential use bothered the Stimulus Wing of Washington, which now seems to include everyone inside 495 except for Ron Paul.
“What we’re trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money,” White House press secretary Dana Perino said. Added Anthony Ryan, Treasury’s acting undersecretary for domestic finance, banks “must meet their responsibility to lend, and support the American people and the U.S. economy,”
In other words, in response to a financial crisis brought on by private institutions lending without regard to risk, the Official Government Solution is to tax money out of the private economy, hand it to banks via a government stake in those operations, and insist that the quasi-nationalized institutions resume lending without regard to risk. This is akin to treating a dependency on painkillers with black-tar heroin. Better still, Washington is smacking up previously healthy banks along the way.
In the early days of financial meltdown one of the few voices of reason was BB&T CEO John Allison. The corporate Randian noted that it was perverse to have the government spend billions — now trillions — to treat a subprime mortgage lending problem by buying up all manner of debt from bankers. But faced with the prospect of a quick hit of government cash, even Allison’s BB&T cannot resist. The bank announced it will take $3.1 billion of the offering and look to put it to good use.
A bank with BB&T’s track-record of level-headedness may make the deal work, shake off the temptation to let bureaucrats and politicians drive lending decisions in exchange for more easy money and regulatory smiles. Or it may not. But at the same time dozens, potentially hundreds, of even smaller community banks are eagerly sniffing around for some of what the big boys are playing with.
Case in point, two sound, well-run community banks, Alliance Bank & Trust and Citizen South Bank, tell a local reporter they are looking for ways to “participate” in the federal program despite no obvious need from a capital standpoint. Such banks are not in trouble precisely because they steered clear of the subprime market and exotic instruments. Now along comes Uncle Sam dangling easy cash, a little sample, if only they’d loosen up a little and not be so square. Cue the After School Special slow dissolve and ominous strings.
Yet even that picture does not fully capture the danger the bailout fix has manuvered the U.S. economy into these past few whirlwind weeks. Insurers — somehow emboldened by AIG’s sack of shameless cash, imagine that — point out that in some ways they are indistinguishable from banks, at least regard to some of the products they offer the public. And here comes GMAC to point that it too functions as bank. In fact, the entire automotive sector is ripe for a top to bottom cocktail of government buyouts, bailouts, and guarantees.
Starting with the union-heft behind the manufacturers, the white-collar money men in the auto financing world, and down to the colorful, but very influential in their communites dealer networks, it is easy to imagine a political cross-section broad enough to successfully lobby an auto bailout out of Washington. A key indicator of the likelihood of such a package will be the near-term performance of the mega-dealers, the ones dependent on the most creative finance plays that a tighter credit market will not allow. For example, Sonic Automotive with 169 dealerships, one of biggest operations in the country, just reported a $50 million downside flip in its third-quarter compared to last year.
Done yet? No. Not to be forgotten, credit card debt. Suddenly everyone has remembered that two of the nation’s remaining money-center banks, Citibank and Bank of America, are up to their eye-balls in credit card debt. Much of it was also issued under securitized risk assumptions which essentially held that along as you kept moving the risk around, it really did not exist. Worse, at least compared to the mortgage sector, there is absolutely no collateral behind this debt. Not even upside-down houses or half-finished condos. Figure another $100 billion in federal magic money to clear up the worst consumer debt black-holes, if and when it comes down next year.
In sum, the great American wealth creation machine runs the very real risk of nodding out in a dank corner very soon, poisoned by an illusion of salvation while vowing, wishing, lying that the next fix will be the last. In a sick twist, intervention came first, then the addiction.
