Geithner's Mad Tea Party
By Robert Romano
ALG Editor's Note: The madness only crescendoes. Just this morning, the Administration released brand new plans to request broad powers for the Treasury Secretary to seize insurers, investment firms, and hedge funds, as reported by the Washington Post.
“The table was a large one, but the three were all crowded together at one corner of it: ‘No room! No room!' they cried out when they saw Alice coming. ‘There's plenty of room!' said Alice indignantly, and she sat down in a large arm-chair at one end of the table.
“‘Have some wine,' the March Hare said in an encouraging tone.
“Alice looked all round the table, but there was nothing on it but tea. ‘I don't see any wine,' she remarked.
“‘There isn't any,' said the March Hare.
“‘Then it wasn't very civil of you to offer it,' said Alice angrily.”—“A Mad Tea Party,” from Alice's Adventures in Wonderland by Lewis Carroll.
Let the madness ensue.
Yesterday, Treasury Secretary Timothy Geithner further extended the Obama Administration's $3.325 trillion financial “stability” plan. But like the non-existent wine offered to Alice at the Hatter's tea party, stability for the financial system is turning out to be a sorry, empty promise offered by none other than willful madmen.
As does the ever-growing price tag of the bailout represent yet another breach of the American people's trust. The Administration should take a cue from Alice and say what it means, and mean what it says—instead of taking as it pleases, and pleasing itself while taking.
Just one short month ago, the charge for taxpayers Mr. Geithner's plan was announced to be an astronomical $2.75 trillion—up to $1.1 trillion for a public-private partnership to purchase “toxic” assets, $1 trillion for consumer and business lending, $600 billion to purchase Fannie Mae and Freddie (GSE) mortgage-backed securities and other GSE debt, and $50 billion for the President's mortgage refinancing and foreclosure “prevention” plan.
As if that was not enough, every time the Mad Hatters at the Treasury, the Federal Reserve, or the White House stepped up to the microphone, the debt owed by taxpayers soared—so far by more than 17 percent or by some $575 billion to a current total of $3.325 trillion.
Unfortunately, it turns out the bureaucrats in Washington really wanted $75 billion and not $50 billion for refinancing and foreclosure “prevention.” And then last week the Federal Reserve last week devoted $850 billion for GSE mortgage-backed securities and agency debt—$250 billion more than the $600 billion originally stated—plus $300 billion to purchase two-to-ten year treasuries that was never even contemplated under the original plan.
Before the party is all over, these will be some of the many amendments arbitrarily made to the plan—without any vote by Congress, as required by the Constitution—as this theatre of the absurd plays out on the national stage.
Unfortunately, obfuscation and understatement have served the new Administration well, as Congress has nary a care to raise objection to this unprecedented spending, lending, borrowing, and printing spree that is going out the backdoor of government. Nor does it possess the political will to rein in this executive branch that has effectively taken away the power of the purse.
All of which means it will fail to even alert the American people to what has now become the greatest redistribution of wealth ever perpetrated in human history. The madness only crescendoes. Just this morning, the Administration released brand new plans to request broad powers for the Treasury Secretary to seize insurers, investment firms, and hedge funds, as reported by the Washington Post.
Said White House Press Secretary Robert Gibbs, “We need resolution authority to go in and be able to change contracts, be able to change the business model, unwind what doesn't work… This is the exact type of authority that will allow us to deal with the problems in AIG… that will address the systemic risk without having to put [a failing firm] in bankruptcy.”
It gets worse. For example, yesterday, the Treasury Secretary released his “white sheet” on the up to $1.1 trillion public-private investment fund. It will utilize up to $100 billion of TARP funds to leverage up to $1 trillion for the purchases of “toxic” assets. It proposes auctions with participating private investors to purchase assets while reducing “the likelihood that the government will overpay for these assets”.
But this is a lie on its face. If these “assets” could be sold by the firms and institutions holding them, they would have already done so. Which means they are either worth nothing or at least significantly less than what they were purchased for. And if they were sold at true market prices, it would likely make the institutions holding them insolvent.
Which means, for one, that these institutions are insolvent. But rather than deal with that reality, the Treasury chooses the fantasy of Wonderland, where the losers are actually winners, and failure bears no consequence.
Because, by definition, the plan is not to reduce risk to taxpayers, but to dump risk on them by forcing them to pay whatever difference is derived from the sale of “toxic” assets to the seller—whether through TARP funds, FDIC assurances, Federal Reserve loans, or the like. One way or another, taxpayers will most certainly overpay for these assets—in order to enable the institutions to stay afloat that sell the discounted assets to billionaires and millionaires for cents on the dollar.
By promising the government's very participation, promise to pay for, and guarantee via FDIC, so-called legacy loans and securities, Mr. Geithner is essentially agreeing to pay more for the assets than can currently be valued through traditional market forces. It's a subsidy dressed up as a “market-based” solution.
Meanwhile, this government-contrived process is wholly unnecessary to help the housing market to recover. U.S. home resales jumped unexpectedly in February—not because of any government-initiated program—but because, as reported by Bloomberg, “record foreclosures brought bargain hunters into the market to take advantage of lower prices.”
Bear in mind, these are foreclosures that were allowed to occur. That despite trillions of dollars spent by government to “prevent” foreclosures and all other types of market failures, that these particular failures occurred anyway—over 2 million in 2008. And the homes now being resold are not going to those who were foreclosed on, who are still out of a house, but by “bargain hunters.”
This is what would—and should—happen to the current insolvent institutions holding the currently worthless mortgage-backed securities. They would—and should—fail, and whatever profitable assets that lie underneath that are worth purchasing would be picked up for big discounts.
Instead, Mr. Geithner wants to prevent these failed enterprises from failing by simply passing off the costs to future taxpayers, who will eventually have to pay off this mountain of debt they are hopelessly being shackled to.
This is just like the mad tea party of Wonderland, substituting Mr. Geithner and the big banks for the Mad Hatter and Alice, the March Hare, and the Dormouse for future generations of taxpayers:
“‘I want a clean cup,' interrupted the Hatter: ‘let's all move one place on.'
“He moved on as he spoke, and the Dormouse followed him: the March Hare moved into the Dormouse's place, and Alice rather unwillingly took the place of the March Hare. The Hatter was the only one who got any advantage from the change: and Alice was a good deal worse off than before, as the March Hare had just upset the milk-jug into his plate.”
Like the Hatter, the only ones getting any advantage out of Mr. Geithner's plan will be the current holders and future investors of the currently “toxic” assets. Once filtered through the public-private partnership, all of the good assets will be bought for cents on the dollar by favored investors—with taxpayers covering the difference on behalf of the now-off-the-hook sellers.
And like Alice, the American taxpayers will be a good deal worse off, for they will then be the proud owners all of the bad assets that they will have purchased for far more than they are worth. And there will be no recompense.
Mad tea parties such as these only exist in Washington. And Wonderland. Instead, perhaps taxpayers ought to have a few tea parties of their own—of the Boston variety.
Robert Romano is the Senior Editor of ALG News Bureau.