Bush Makes the Case for the Mega-Bailout Without Owning Any of Its Causes

By Dr. Duru written for One-Twenty

September 25, 2008


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I rarely take pause to listen to President Bush's speeches, but I made a huge exception Thursday night. President Bush had my full attention as he attempted to make the case for the mega-bailout to save the nation's economy.

I was pleasantly surprised to find that the writers of his script allowed President Bush to offer up an explanation to the American people of how we got into this mess. Unfortunately, Bush's version of history did not completely support the case he was trying to make. Bush did sprinkle plenty of fear around to emphasize the urgency of action (sound familiar?). Most disappointing was that he did not step up as a leader of a troubled people to make this history his own history. In other words, Bush chose only to own the "decisive" solution that has been crafted over a few sleepless nights, and he chose not to own any responsibility for allowing the nation to get into this crisis. Even a cursory reference to some shred of responsibility could have given his case much more credibility. It would have also allowed him to appeal to Americans to make the sacrifices that will be required to get the Mothership repaired. Bush's primary evil-doers in this saga? Short sellers, foreign capital, Fannie Mae, Freddie Mac, and out-dated regulations.

I have pasted President Bush's speech below and put in bold my own "Dr. Duru special" interpretation and commentary. His speech is reprinted in many places: Whitehouse.gov also includes the video. (Side note: The Fast Money gang from CNBC make passionate pleas for all of America to fall in line and just get this bailout done ASAP. The apocalyptic intonations are worth a view or two!)

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THE PRESIDENT: Good evening. This is an extraordinary period for America's economy. Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration. We've seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money.

Times are tough people.

We're in the midst of a serious financial crisis, and the federal government is responding with decisive action. We've boosted confidence in money market mutual funds, and acted to prevent major investors from intentionally driving down stocks for their own personal gain.

Who are these "major investors"? And why did no one inform them that stocks are only supposed to go up? Next time, major investors should only accidentally drive down stocks just for the heck of it. OK. Seriously. Stop the scapegoating of short sellers already. If we are talking about specific illegal activity - like NAKED short-selling - let's call it out.

Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets. Financial assets related to home mortgages have lost value during the housing decline. And the banks holding these assets have restricted credit. As a result, our entire economy is in danger. So I've proposed that the federal government reduce the risk posed by these troubled assets, and supply urgently-needed money so banks and other financial institutions can avoid collapse and resume lending.

Excellent. We need to stay focused on root causes and not symptoms. However, it is still not clear that simply flooding these financial institutions with more money is going to get them to lend again...much less change their ways to make wiser investment decisions in the future.

This rescue effort is not aimed at preserving any individual company or industry -- it is aimed at preserving America's overall economy. It will help American consumers and businesses get credit to meet their daily needs and create jobs. And it will help send a signal to markets around the world that America's financial system is back on track.

Thank goodness we are no longer deluding people that the economy is "fundamentally sound." The first big step to healing is to first admit you have a problem. However, this mega-bailout does indeed preserve a specific industry - the financial industry. The idea is that once the financial industry stabilizes, the benefits will trickle down to everyone else...

I know many Americans have questions tonight: How did we reach this point in our economy? How will the solution I've proposed work? And what does this mean for your financial future? These are good questions, and they deserve clear answers.
First, how did our economy reach this point?

This is where I sat up! Do tell!

Well, most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions -- along with low interest rates -- made it easier for Americans to get credit. These developments allowed more families to borrow money for cars and homes and college tuition -- some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Nice twist! Start describing the problem with a positive. Americans were flooded with money because we are so great. Even better that it appears the problem began BEFORE President Bush was first elected. But we also want to hear what you were doing and thinking as this problem deepened during the entirety of your two terms. And even more convenient that all this excess money came from foreigners. How could we not help ourselves to all this excess liquidity and put it to immediate use? But let's get real - the borrowing binge from consumers went mainly into consumption. Throwing in "college tuition" is a distraction.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit -- combined with the faulty assumption that home values would continue to rise -- led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

I love this straight talk. But it surprisingly does not mention that housing prices spiraled out of control and surpassed any "rational" economic value. In other words, home prices never should have gotten as high as they did as fast as they did. We all know a LOT of agencies were complicit in convincing Americans that the housing bubble was a good thing, including just about anyone involved in or promoting real estate. We were told that we "earned" all that stupendous appreciation, and we deserved to cash it in and spend it.

Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected -- along with mortgage payments they could not afford. As a result, many mortgage holders began to default.

Again, we completely miss the important point that housing prices soared out of control and never should have reached the heights they did as fast as they did. Moreover, many speculators were driving prices up for, yes, their personal gain. =gasp=! Funny how we are reluctant to impede and criminalize price movements that everyone can enjoy - except the last person left holding the bag.

These widespread defaults had effects far beyond the housing market. See, in today's mortgage industry, home loans are often packaged together, and converted into financial products called "mortgage-backed securities." These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

Ah ha - the evil-doers Freddie Mac and Fannie Mae, now affectionately called Frannie or Franron (after Enron). What happened to their regulators and Congressional oversight? Why did so little seem to change after former executives were booted out for questionable accounting several years ago? We are also missing the other agents complicit in this game. For example, ratings agencies ignored the true risks of these securities (toxic paper) and supported them with clean bills of health. Why ask questions about AAA-rated securities? Why do we have these ratings if we still have to do our homework, right? Mucho credit to Bush for even attempting to define "mortgage-backed securities."

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

OK, now things are bit over-simplified here. Bear Stearns and Lehman Brothers almost seem like innocent victims, just brokers trying to cut a deal. Part of the unreliability of these securities came from the constant stream of lies and book-cooking that hid the depth of the problems until it was too late. Confidence has a finite appetite for falsehoods. Given that the vast majority of Americans pay their mortgages on time, it is not clear here how a small number of defaults could create such a huge mess. The missing ingredient is the excessive leverage built on top of these mortgages that meant that small paper losses could generate massive asset destruction. President Bush would have done well to make this connection since he already made reference to the excess liquidity in the economy (partially caused by foreigners).

With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all.

Hmmm...by the day? Try by the week, by the month! If we had been honest with ourselves and listened to the plentiful warnings written by so many skeptics and critics (like Michael J. Panzner and Bill Fleckenstein) who refused to buy into the madness, we would have seen the situation getting more precarious by the year.

I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There's been a widespread loss of confidence. And major sectors of America's financial system are at risk of shutting down.

Good point. I grant you that one. But now you just made it clear that this intervention is indeed targeted at one industry.

The government's top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:
More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

And here is the FEAR part. Good job making this very personal. Unfortunately, we wasted so much time reassuring America that nothing was wrong and that the fundamentals were healthy. I can sympathize with anyone who is slow to absorb this message. How can things be sound one month and on the brink of disaster the next?

Fellow citizens: We must not let this happen. I appreciate the work of leaders from both parties in both houses of Congress to address this problem -- and to make improvements to the proposal my administration sent to them. There is a spirit of cooperation between Democrats and Republicans, and between Congress and this administration. In that spirit, I've invited Senators McCain and Obama to join congressional leaders of both parties at the White House tomorrow to help speed our discussions toward a bipartisan bill.

Encouraging. When we Americans are really pressed to the wall, we can unite around the common good. Now if we could just retain these lessons and be proactive....

I know that an economic rescue package will present a tough vote for many members of Congress. It is difficult to pass a bill that commits so much of the taxpayers' hard-earned money. I also understand the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15th, and are reluctant to pay the cost of excesses on Wall Street. But given the situation we are facing, not passing a bill now would cost these Americans much more later.

Good job avoiding mention of the exact price tag. Saying "$700 billion" might infuriate taxpayers all over again.

Many Americans are asking: How would a rescue plan work?
After much discussion, there is now widespread agreement on the principles such a plan would include. It would remove the risk posed by the troubled assets -- including mortgage-backed securities -- now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses. Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan's implementation. And it should be enacted as soon as possible.

Very interesting! Bush is now owning all these extra provisions that Congress insisted upon. Encouraging. Democracy and the checks and balances of American government can indeed work.

In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday. First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system. In the short term, this will free up banks to resume the flow of credit to American families and businesses. And this will help our economy grow.

D'oh! You said "$700 billion"! I could almost feel the blood boiling across the land again. Now, where exactly is this money? Last I checked our standing deficit is almost 10 TRILLION DOLLARS... Oh yeah, we can just print it and/or borrow more of it. Folks, get ready for Phase 2 of the financial crisis - the government's credit bubble. The profits from selling these distressed assets will NOT make us whole!

Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

Again, this case is weakened without explaining how a small default rate could create such massive asset destruction. Anyway, this deal sounds so good, it sounds too good to be true. But it sure makes the plan easier to swallow, right?

A final question is: What does this mean for your economic future?
The primary steps -- purpose of the steps I have outlined tonight is to safeguard the financial security of American workers and families and small businesses. The federal government also continues to enforce laws and regulations protecting your money. The Treasury Department recently offered government insurance for money market mutual funds. And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000. The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit -- and this will not change.

Have we not learned anything yet? Never say "never." Let's be honest for a change and explain the limits of our institutions so that we can encourage and compel the citizenry to act responsibly. After all, Lehman Brothers and AIG were founded well before the FDIC ever existed and that age did not save them from catastrophic failure. I am also disappointed that we did not get frank talk that this plan still has some unknown chance of failure. This means that wechance of failure means we must prepare the people NOW for sacrifice and leaner times while at the same time encouraging them to remain strong, steadfast, disciplined, and united.

Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we've seen how one company can grow so large that its failure jeopardizes the entire financial system.

Another subtle jab at Frannie. Nice! But does this not beg the question of why the President did nothing to update these laws before now?

Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability. There are other good ideas, and members of Congress should consider them. As they do, they must ensure that efforts to regulate Wall Street do not end up hampering our economy's ability to grow.

This guidance makes sense, but it is vague. I guess it has to be since the President had been a strong proponent of de-regulation until this crisis made him cry "UNCLE!"

In the long run, Americans have good reason to be confident in our economic strength. Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised. It has unleashed the talents and the productivity, and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back.

Go, America, go! So can we stop being scared now?

Our economy is facing a moment of great challenge. But we've overcome tough challenges before -- and we will overcome this one. I know that Americans sometimes get discouraged by the tone in Washington, and the seemingly endless partisan struggles. Yet history has shown that in times of real trial, elected officials rise to the occasion. And together, we will show the world once again what kind of country America is -- a nation that tackles problems head on, where leaders come together to meet great tests, and where people of every background can work hard, develop their talents, and realize their dreams.

So why can't we be civil all the time? Why can't we act like outstanding global citizens all the time?

Thank you for listening. May God bless you.

You're welcome. Glad I took the time on this one. May God help us all....

Be careful out there!


Full disclosure: No related positions. For other disclaimers click here.

DR. DURU®, 2008

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