700 BILLION DOLLAR BAILOUT!

I cannot fathom how we could possibly see giving the Treasury unilateral power to control our financial markets as a plausible solution to this crisis.

The plan contains three sections that are particularly concerning to me, an average Joe, who does not spend more money than I have available and is held accountable for my actions. See Sections 6, 7 & 8 below:

Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Wow! Authority to spend up to $700 billion at a time. Now that's a pretty nice credit limit on Daddy's credit card! Hey if the spending spree turns out to have been a bad decision after a night of too much bourbon, no worries, a get out of jail free clause has been written into the bill covering any fraud, ineptness, or just plain bad decisions not even being eligible for legal review.

I have already written about my suspicions of Secretary Paulson's motives on Bob's Blog. See http://bob4bristol.blogspot.com/2008/07/ron-paul-asking-right-questions.html . I don't see Secretary Paulson, former CEO of Goldman Sachs, as being forthright with his statements to the American people. I do not believe that he has the collective interests of most Americans in mind based on the corporate bailouts packages he has devised to save his reckless financial friends at the expense of the American taxpayers.

The REAL SOLUTION contains the following:

• Tightened regulatory oversight of sketchy lending practices and "exotic" loan products.
• Prosecution of the players that fraudulently abused the system.
• Hold homeowners that took out the loans accountable by making them own up to their financial responsibilities. For homeowners with interest-only loans, negative equity positions, and artificially-low ARMs that are readjusting, deals could be worked out that phase in a graduated increase in interest rates to a fixed, market-rate mortgage with a 30 or 40 year duration. This loan could contain pre-payment incentives to help reduce long term interest-rate exposure to lending institutions.

Washington are you listening?

The Fed and the Treasury - Bad Parenting?

Well the best way I can relate the actions of the Fed and the Treasury last night is to relate it to a parent disciplining a child that has misbehaved.

First comes the harsh sentence.

Parent: Johnny, you're grounded for six months!
Fed/Treasury: AIG, we're not going to bail you out no matter what!

Parent: We'll don't do it again. I guess you can go to the movies with your friends this weekend. Do you need money?.
Fed/Treasury: Okay, how about $85 billion dollars to tie you over for awhile. Will that be enough?

Just like the inconsistent parent and the naughty child the inconsistent federal officials and the naughty businesses will continue with the undesirable behavior.

Bear, Fannie, Freddie, and now AIG. It's time to come clean. Lay it all out for all to see and figure out exactly how we're all going to take care of it.

One thing's for certain. The rock star CEOs, CFOs, senior management teams and their congressmen and senator puppets should be sent packing. I want to see some blood with some of these characters going to prison. That would be a good start!

No Where to Go But Down

We are in a real quandry. With the Federal Funds rate currently at 2% there is not much opportunity left to move it down. Yet with housing values continuing to drop monthly there is no room to move it up. Given the inverse relationship of higher interest rates to lower home prices the move up would add fuel to the fire at this time. However, moving the rates up is exactly what we need to do.

As I wrote in back in January on this blog, http://newenglandopinion.blogspot.com/2008/01/imminent-probability-of-recession.html, a transparent, plan of Fed funds rates is needed to stimulate investment and build stability. If the Fed were to announce that they were taking down the Fed funds rate to encourage business investment for solid business loans and potential homeowners with solid credit then we might see a softening of the downward spiral. The rate should be set for a specific time period with the announcement that 1/4 quarterly adjustments upward would follow until the rate met the risk-adjusted 10-year average rate of inflation.

Back in July, I wrote a piece titled "The Fed should start moving the Fed Funds Rate up to 5%." At the time oil was peaking at $147 a barrel so some of the conditions have changed but longterm I still believe this is the only way to truly build wealth in our US economy. The following is reprint of this piece:

Attention Federal Reserve: It's time to start moving the Fed Funds Rate up to 5%. That should translate into an 8% Prime rate.

Here's the rationale:

Real companies with real products and real earnings do not need cheap money they can borrow in order to stay in business. Companies like General Electric, United Technologies, Exxon, Kellogg, Walmart, McDonalds, etc. have traditionally done just fine with higher costs of capital.

Savers, like myself, are sick of our substantially less than the real rate of inflation returns that we have been stuck with as money has been passed out like candy by the banks to sketchy businesses, borrowers, and profiteers. I think worthy financial institutions will agree that this scam has not added longterm value to their organizations as witnessed by the 70% decline in the value of financials and the "sitting-on-the-edge-of-ruin" financial condition of some of our largest and oldest financial institutions like Citibank, Bank of America, Bear Stearns (RIP), etc.

Other important reasons for higher rates:

The higher rates will attract greater foreign investment in our country's banks.

The higher rates will increase the value of our dollar against other currencies.

The higher rates will slow down the level of imports reducing the trade deficit

The higher rates will significantly reduce the speculative price inceases in crude reducing the cost to consumers.

The higher rates will fend off inflationary pressures.

The higher rates translated to higher yields on savings instruments and bonds will encourage greater saving rates by consumers.

The higher rates and resulting yields will improve the supplemental income of retired Americans.

Mr. Bernanke are you listening or are you too busy playing with your academic models and other toys you are unwilling to share?

I still feel strongly that higher rates is the proper solution for a strong economy. Time will tell.