THE WISDOM FUND: News & Views
February 7, 2009 (rev Feb 13)
The Wisdom Fund

A Four-Point Plan for Bailing Out America

by Enver Masud

As I read news reports about the "Stimulus Bill," I have this uneasy feeling that we're seeing more of what got us here in the first place. What else should one expect from the folks that got us here to begin with?

The "Stimulus Bill" appears to be little different from other spending bills except that it is bigger, and cobbled together in the same way as other bills.

We're in the situation we're in because our government created a system that is poorly regulated. It doesn't take long for a systems engineer to see that its negative feedback loop is seriously deficient, and without this a system is inherently unstable.

To correct it, we need to think outside the box, and put forth a clear plan that addresses the central issues, and sends a clear message to the public and markets so that they can begin to salvage their lives and organizations.

Leaving aside problems such as spending beyond our means, wasteful spending, governmental policies, etc., the immediate problems are: home foreclosures, job losses, and banks not lending

Ultimately these are management problem requiring a multi-disciplinary approach to finding solutions that are efficient and effective.

Using structured decision analysis, and with access to the right people one could put together a plan that is much better than what is being reported. In the meantime, here's a starting point for discussion:

ONE, NATIONALIZE THE BANKS: Reinstate the separation between commercial and investment banks. For a limited time, suspend the mark to market rule. Give commercial banks the option to remain independent, sell out, or be declared insolvent and nationalized. Have the remaining commercial banks contribute amounts sufficient to keep the FDIC solvent. Homeowners facing foreclosure could go to nationalized banks for loans they can afford, and banks could take an equity position in the home to make up for any shortfall. Investment banks would compete in the "free market."

TWO, GIVE THE BULK OF THE "STIMULUS" TO THE STATES: States, being closer to the problems than Washington, can better decide how to spend the "stimulus" than Washington. Set strict guidelines for spending the stimulus, and establish measures of performance. Set up a Federal Business Administration (FBA) similar to the Federal Home Administration (FHA) to make loans to businesses through channels similar to those used by the FHA.

THREE, CUT MILITARY SPENDING 10% PER YEAR FOR 5 YEARS: Former Defense Secretary McNamara, and Lawrence J. Korb, an Assistant Secretary of Defense in the Reagan administration, in their 1989 testimony before the Senate Budget Committee, said "U.S. military spending could safely be cut in half over the next five years". Our reported military spending is about equal to that of the rest of the world combined. Military spending hidden among other budget items is estimated to be equal to that which is identified in the budget. Get out of Afghanistan and Iraq in 2009. Forget about war with Iran.

FOUR, EXTEND JOBLESS BENEFITS: Cuts in military spending will cause more to lose jobs. However, extending jobless benefits would provide time and funds for retraining. Those accepting jobless benefits could be required to provide some hours of work free to organizations interested in utilizing their skills. This may lead to regular employment with these organizations.

Much more needs to be done to fix the system. Do that in the normal course of business apart from the "Stimulus Bill."

Businesses that are "too big to be allowed to fail," should be broken up before taxpayers are asked to bail them out. The "free market" exists in textbooks, and for the little guy.

We also need to work with the international community to develop a financial regulatory system consistent with the globalized economy we live in. The one we've been peddling to the world has failed.

In a recent article, former U.S. senator James Abourezk wrote: "As a nation, we are out of money, bereft of ideas, and incapable of curbing the moral and financial corruption in Washington, D.C."

It may already be too late to avert a disaster, and the window for minimizing its impact is rapidly closing.

President Obama, the one person who may have been able to sell the needed changes in policy, seems to be going down the path carved out by President Bush.

"The reasonable man adapts himself to the world," said George Bernard Shaw. "The unreasonable man adapts the world to himself. Therefore, all progress is made by unreasonable men."



A letter to President Obama regarding the 'stimulus' from Enver Masud

"I believe that banking institutions are more dangerous to our liberties than standing armies." -- Thomas Jefferson, 3rd president of US (1743 - 1826)

William K. Black, "The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry," University of Texas Press (April 1, 2005)

William Greider, "Paulson Bailout Plan a Historic Swindle," Nation, September 19, 2008

Richard C. Cook, "A Bailout for the People: Dividend Economics and the Basic Income Guarantee," wordpress.com, February 3, 2009

"Nationalized Banks Are 'Only Answer,' Economist Stiglitz Says," Deutsche Welle, February 6, 2009

Raymond J. Lawrence, "A Country Awash in Money But Going Broke," counterpunch.org, February 6, 2009

Paul Craig Roberts, "Ship of Fools," vdare.com, February 6, 2009

Alan Beattie and Krishna Guha, "US unveils $2,000bn bank clean-up," Financial Times, February 10, 2009

"In the Tanks: A Debate on the Financial Rescue Plan With Andres Martinez," Washington Post, February 10, 2009

[The math is compelling: if we do not make reductions approximating 25 percent of the military budget starting fairly soon, it will be impossible to continue to fund an adequate level of domestic activity even with a repeal of Bush's tax cuts for the very wealthy.--Barney Frank, "Cut the Military Budget," Nation, February 11, 2009]

Kevin G. Hall, "Will the stimulus actually stimulate? Economists say no," McClatchy Newspapers, February 12, 2009

Michael Hudson, "Obama's Awful Financial Recovery Plan," counterpunch.org, February 12, 2009

VIDEO: "House of Cards," CNBC, February 13, 2009

Matthew Richardson and Nouriel Roubini, "Nationalize the Banks! We're all Swedes Now," Washington Post, February 15, 2009

VIDEO: "Inside the Meltdown," PBS Frontline, February 17, 2009

[So we got cheated, to put it bluntly. What we don't know is that - whether we will continue to get cheated. And that's really at the core of much of what we're talking about. Are we going to continue to get cheated?

Now, why that's so important is, one way of thinking about this - end of the speech, he starts talking about a need of reforms in Social Security, put it - you know, there's a deficit in Social Security. Well, a few years ago, when President Bush came to the American people and said there was a hole in Social Security, the size of the hole was $560 billion approximately. That meant that if we spent that amount of money, we would have guaranteed the - put on sound financial basis our Social Security system. We wouldn't have to talk about all these issues. We would have provided security for retirement for hundreds of millions of Americans over the next seventy-five years. That's less money than we spent in the bailouts of the banks, for which we have not been able to see any outcome.--"Nobel Prize-Winning Economist Joseph Stiglitz: Obama Has Confused Saving the Banks with Saving the Bankers," democracynow.org, February 25, 2009]

[Geithner's and his boss's main objective is to "keep the banks in private hands" regardless of the cost to the taxpayer.--Mike Whitney, "It's Time to Break Up the Big Banks," counterpunch.org, February 26, 2009]

[Greider . . . outlines the full substance of the predicament we find ourselves in as exhibited by the financial collapse: a culmination of our decaying democracy, the negative effects of globalism, the dominance of militarism in our financial policy, the destruction of the middle class, and the threat of global climate change.--William Greider, "Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country," Rodale Books, March 17, 2009]

[When the U.S. payments deficit pumps dollars into foreign economies, these banks are being given little option except to buy U.S. Treasury bills and bonds - which the Treasury spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers - China, Japan and Arab OPEC oil producers. Yet these governments are forced to recycle dollar inflows in a way that funds U.S. military policies in which they have no say in formulating, and which threaten them more and more belligerently. That is why China and Russia took the lead in forming the Shanghai Cooperation Organization (SCO) a few years ago.--Michael Hudson, " Financing the Empire: Does US Face G20 Mutiny?," counterpunch.org, March 30, 2009]

Mark Pittman and Bob Ivry, "Financial Rescue Nears GDP as Pledges Top $12.8 Trillion," bloomberg.com, March 31, 2009

[In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.--"AIG: Before Credit Default Swaps, There Was Reinsurance," The Institutional Risk Analyst, April 2, 2009]

[Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.--VIDEO: "William K. Black: CSI Bailout," pbs.org, April 3, 2009]

[Krugman's suggestion that the government could take over the banking system is deeply impractical, Obama aides say.--Evan Thomas, "Obama's Nobel Headache," Newsweek, April 6, 2009]

[Debtor countries must borrow a trillion from the IMF not to revive their own faltering economies, not to pursue counter - cyclical policies to restore market demand (that is only for creditor nations), but to pass on the IMF "aid" to the poisonous banks that have made the irresponsible toxic loans.--Michael Hudson, "The IMF Rules the World," counterpunch.org, April 6, 2009]

Louis Uchitelle, "Economy Falling Years Behind Full Speed," New York Times, April 7, 2009

Ambrose Evans-Pritchard, "The G20 moves the world a step closer to a global currency," Telegraph, April 7, 2009

["The Democrats have replaced the Republicans as the big benefactors to the financial community," said Kevin Phillips, author of "Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism."--Daniel Trotta, "Author who predicted crisis sees inflation ahead," Reuters, April 8, 2009]

Mike Whitney, "The Decade of Darkness," counterpunch.org, April 9, 2009

[The committee agrees with the vast majority of reputable economists who think the banks should be taken over (liquidated) and the bad assets put up for auction. This is the committee's number one recommendation.--Mike Whitney, "Elizabeth Warren's Devasting Report to Congress," counterpunch.org, April 10, 2009]

[Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.--Paul Krugman, "The big inflation scare," mercurynews.com, May 29, 2009]

[But two things must be achieved: first, the core financial institutions must become credibly solvent; and, second, no profit-seeking private institution can remain too big to fail.--Martin Wolf, "Is America the new Russia?," Financial Times, April 14, 2009]

[The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government - a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we're running out of time.--Simon Johnson, "The Quiet Coup," Atlantic, May 2009]

Michael Hudson, "How the Financial Reform Plan Protects the Status Quo," counterpunch.org, June 22, 2009

David Lindorff, "The Recession Isn't Over, By a Long Shot," counterpunch.org, August 4, 2009

Paul Craig Roberts, "Tent City America: The Expiring Economy," counterpunch.org, August 6, 2009

Mike Whitney, "Economy on a Scaffold," counterpunch.org, August 7, 2009

Chris Adams, "Where did that bank bailout go? Watchdogs aren't entirely sure," McClatchy Newspapers, August 9, 2009

Ellen Brown, "The Secret of China's Economy: The Government Owns The Banks Rather Than The Reverse," opednews.com, August 17, 2009

John Dunbar, "Subprime players get tax money to fix subprime mess," publicintegrity.org, August 25, 2009

David Walker, "Comeback America: Turning the Country Around and Restoring Fiscal Responsibility," Random House (January 12, 2010)

Jeffrey D. Sachs, "How to Tame the Budget Deficit," time.com, February 4, 2010

[If Obama were really serious about restoring America's economic health, he would demand military spending be slashed, quickly end the Iraq and Afghan wars, and break up the nation's five giant Frankenbanks that now control 40% of all deposits.--Eric Margolis, "Spending America Into Ruin," lewrockwell.com, February 9, 2010]

Simon Johnson and James Kwak, "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown," Pantheon (March 30, 2010)

Will Hutton, "Now we know the truth. The financial meltdown wasn't a mistake - it was a con," The Observer, April 18, 2010

[The central problem is that neither the Senate nor House bills would chop down big banks to a more manageable and less threatening size. The bills also donŐt eliminate the prospect of future bailouts of interconnected and powerful companies.--Gretchen Morgenson, "Do You Have Any Reforms in Size XL?," New York Times, April 23, 2010]

[ . . . the magnitude of the nation's fiscal crisis has inevitably evoked warnings that our insolvency threatens our national security. One part of dealing with this situation will entail reducing the projected level of defense spending by several hundreds of billions of dollars over the next decade.--Lawrence Korb and Christopher Preble, "Cut Defense Spending," nationalinterest.org, June 16, 2010]

CHART: Kevin G. Hall, "What's this big finance-regulation overhaul really do?," mcclatchydc.com, July 15, 2010

Peter Grier, "President Obama signed a sweeping financial reform bill into law Wednesday giving the federal government new powers to regulate Wall Street," csmonitor.com, July 21, 2010

"Global Plans to Replace the Dollar," projectcensored.org, October 10, 2010

[What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost?--Michael Hudson, "Why the U.S. has Launched a New Financial World War -- And How the the Rest of the World Will Fight Back," counterpunch.org, October 11, 2010]

[The new Financial Stability Oversight Council (FSOC) probably didn't expect to have its authority called on quite so soon, but Rep. Alan Grayson (D-Florida) has just put the Kanjorski amendment to the test. It provides federal regulators with new powers to pre-emptively break up large financial institutions that - for any reason - pose a threat to US financial or economic stability.--Ellen Brown, "ForeclosureGate: Time to Break Up the Too-Big-to-Fail Banks?," truth-out.org, October 18, 2010]

Kathy Chu, "Islamic banks grow as recession impact muted," usatoday.com, October 18, 2010

Bethany McLean and Joe Nocera, "All the Devils Are Here: The Hidden History of the Financial Crisis," Portfolio Hardcover (November 16, 2010)

[Not a single Canadian bank failed during the Great Depression, and not a single one failed during the recent U.S. crisis now dubbed the Great Recession. Fewer than 1 percent of all Canadian mortgages are in arrears.--Kevin G. Hall, "Few foreclosures, no bank failures: Canada offers lessons," McClatchy Newspapers, January 11, 2011]

[ . . . the Fed came up with $12.3 trillion in nearly interest-free credit to bail the banks out of a credit crunch they created.--Ellen Brown, "The Fed Has Spoken: No Bailout for Main Street," truth-out.org, January 14, 2011]

[Paul added that he agreed with Nader on a host of issues, such as cutting the US military's budget, ending undeclared US wars overseas, restoring civil liberties and civil rights by dumping from the Patriot Act, and withdrawing from the NAFTA and World Trade Organization agreements.--Nathan Diebenow, "Ron Paul, Ralph Nader agree on 'progressive-libertarian alliance'," Raw Story, January 22, 2011

Dale Kasler, "Phil Angelides: Financial crisis 'didn't need to happen'," mcclatchydc.com, January 28, 2011

[Most unique is the crash's aftermath. This time around the bad debts have not been wiped off the books. . . .

Altogether, the post-2008 crash saw some $13 trillion in such obligations transferred onto the government's balance sheet from high finance, euphemized as "the private sector" as if it were the core economy itself, rather than its calcifying shell. Instead of losing on their bad bets, bad loans, toxic mortgages and outright fraudulent claims, the financial institutions cleaned up, at public expense. They collected enough to create a new century's power elite to lord it over "taxpayers" in industry, agriculture and commerce who will be charged to pay off this debt.--Michael Hudson, "Bachmann vs. the Bailouts: When Only 'Crazies' See the Bank Giveaway for What It Was," counterpunch.org, June 17, 2011]

Jeffrey H. Anderson, "Obama's Economists: 'Stimulus' Has Cost $278,000 per Job," weeklystandard.com, July 3, 2011

[Goldman Sachs and the Royal Bank of Scotland became the Mubaraks and Ben Alis of the US and the UK--Robert Fisk, "Bankers are the dictators of the West," Indepedent, December 10, 2011]

Ellen Brown, "Public-Sector Banks: From Black Sheep to Global Leaders," truth-out.org, March 9, 2012

[While we quake in our boots from fear of "Muslim terrorists," it is financial deregulation that is destroying us, with help from jobs offshoring.--Paul Craig Roberts, "Recovery or Collapse? Bet on Collapse," paulcraigroberts.org, May 20, 2012]

[The US government should simply cancel the $230 trillion in derivative bets, declaring them null and void.--Paul Craig Roberts, " Collapse At Hand," foreignpolicyjournal.com, June 7, 2012]

Simon Johnson, "Global Crisis Orientation," baselinescenario.com

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