Friday, September 26, 2008

LENDERS HOARD THEIR CASH--ASK FOR YOURS

Away from Wall Street, Economists Question Basis of Paulson's Plan
By Neil Irwin and Cecilia Kang Washington Post Staff Writers Friday, September 26, 2008; A01
The Bush administration's pitch for a sweeping bailout of the financial system has centered on two simple premises: that the economy could suffer a crippling downturn if action is not taken very quickly and that this action should consist of the government buying troubled mortgage securities from banks and other institutions.
But many of the nation's top economists disagree with one or both of those ideas, even as many top political leaders have swung behind them.

. . . almost 200 academic economists -- who aren't paid by the institutions that could directly benefit from the plan but who also may not have recent practical experience in the markets -- have signed a petition organized by a University of Chicago professor objecting to the plan on the grounds that it could create perverse incentives, that it is too vague and that its long-run effects are unclear.
. . . yesterday, the interest rate at which banks lend to each other rose steeply, as it has every day this week, suggesting that lenders are hoarding cash. History shows that when this happens, a broad economic crisis can follow, for instance, the Great Depression and Japan's decade-long recession in the 1990s.
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So, I got way in over my head and, instead of going through bankruptcy or selling off my remaining assets--good and bad--I want my rich uncle to take only the bad ones off my hands, so I can get back to the tables at Vegas.
Trembling in my room at the casino, I'm threatening to hold my breath until Uncle Sam bails me out.
There is enormous lobbyist money behind this one, along with the spectre of the Treasury Secretary drawing long faces before the Congress, missing an occasional line in the pitch and rasing the fears of the Great Depression pumpkin rising out of the pumpkin-patch.
Enough has been done-perhaps too much. The rest can be left to those famous and constantly-trotted-out 'forces of the markets' that are supposed to self-regulate. Don't kid yourself that there won't be pain enough to spread around.
As hedge-funds collapse, they trumpeted the lack of regulation on the fact that only the rich were involved in that dice-game and the rich could take care of themselves. Turns out that among the rich are massive pension-trust funds belonging to teachers, public employees and the like. The ongoing hedge-fund mess accurately fits RICO legislation.
(Wikipedia) Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $25,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity." RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.
Finding two applicable crimes would be the problem. There have been so many violations that boiling it down to a couple would be the real test.
RICO or relief? A bailout or bail?
The real question is--are there lawyers enough for the task at hand?