A Bottom-Up Bailout Rather Than Trickle-Down

Hank Paulson has just about burned through $300 billion, and it’s not clear what the public has got out of it. Perhaps things would be worse without the bailout but they’re certainly no better. Wall Street banks have not significantly stepped up their loans to small businesses, college students, car buyers, or distressed homeowners. Much of the auto industry is on the verge of bankruptcy. And the rate of foreclosures is rising.

What happened to all the money? About a third has gone into dividends the banks are paying their shareholders. Some of the rest into executive salaries and bonuses. Another portion toward acquisitions designed to raise share values. Another chunk for bailing out giant insurer, AIG.

That’s not what taxpayers bargained for. Paulson originally told Congress he’d use the money to buy mortgage-backed securities that were clogging the financial system. He’d create a market for them by holding a kind of reverse auction, buying them from the banks at the lowest prices they’d be willing to sell them for.

But Paulson has abandoned that strategy and is now just handing the money directly to the big banks, and AIG — all of which are using the money for their own purposes. It’s the worst type of trickle-down economics. Taxpayers are sending the money upward, and almost none of it is trickling back down.

The lame-duck Congress should amend the so-called Troubled Asset Relief Program to prohibit banks that are receiving the money from paying dividends, executive bonuses or deferred compensation, or doing acquisitions.

And Congress should save the rest of the $700 billion program for a new administration that will put it to better uses. For example, as FDIC Chair Sheila Bair has suggested, use the money to guarantee payment of mortgages whose terms are eased by lenders. Use it also to restructure automobile companies whose creditors, executives, shareholders, and workers agree to put up money as well. Use it to guarantee loans made to credit-worthy small businesses, college students, car buyers, and others who at this moment cannot get credit — and who therefore cannot keep this economy moving forward.

In other words, use it for a bottom-up bailout, rather than trickle down.

Originally published at Robert Reich’s blog and reproduced here with the author’s permission.

One Response to "A Bottom-Up Bailout Rather Than Trickle-Down"

  1. Marilyn K. Johnston   November 28, 2008 at 9:48 am

    Mr. Reich, you have Obama’s ear. Please read this NYT article below about the mortgage elephant in the room (and, more importantly, how to get it to go quietly). It seems to solve in a very simple way the issue of how to liquidate those mortgages without restructuring them. The solution avoids the violation of constitutionally-protected contract rights which would occur if trustees of securitized loans were mandated to unilaterally modify loan terms. And it also avoids the unworkable task of obtaining the investor-owners’ and the borrowers’ consents to securitized loan modification. If you think this proposed solution to the mortgage problem is as promising as I do, please get it in front of the rest of Obama’s economic team.www.nytimes.com/2008/11/16/business/16gret.html?pagewanted=print.Thank you so very much for your untiring efforts on behalf of the U.S. taxpayer. We need all the help we can get, as we’re sure getting hosed!Marilyn Johnston