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.

8 Responses to "A Bottom-Up Bailout Rather Than Trickle-Down"

  1. Guest   November 19, 2008 at 9:49 am

    Surely it would be cheaper to give everyone in the US $100,000 to do what they like with it. Why do no financial “experts” never have common sense.

    • Guest   November 19, 2008 at 12:27 pm

      There are about 300 million people. Surely it would not be cheaper…

    • Chad   November 19, 2008 at 1:26 pm

      Double negative. No…never… Also a terrible idea.

  2. Anonymous   November 19, 2008 at 2:05 pm

    Spare me. This is an insulting, purely politcal analysis. “What the public has got out of it” is that the worldwide financial system continues to operate, albeit at a tepid pace, and the American public has escaped the even harsher scenario that would have resulted if the markets had completely frozen up. Most businesses are still able to get current financing to keep operations going which is more important, although less headline-producing, than the areas that have been hardest hit, namely mortgage lending and home construction.

  3. Guest   November 19, 2008 at 8:35 pm

    I don’t know what you mean by “the worldwide financial system continues to operate”? Let’s see today the markets hit a 5 year low. Autos aren’t selling because the banks aren’t lending. My ubderstanding is that even reorg under Ch 11 isn’t available because there’s no financing! And “most” business are NOT able to get financing they need. What planet are you on?If you have some great idea to kick start our economy, let’s hear it. Otherwise, it gets a little boring to hear the problem reinterated over and over.We KNOW what the problem is, how about your solution?

  4. shinseiji   November 19, 2008 at 8:49 pm

    The continued “operation” of the worldwide financial system is precisely the problem. Substantial parts of the profit sucking financial Ponzi racket needs to be shut down, so that capital can be reallocated to productive uses.

  5. Raymond Ng   November 19, 2008 at 10:01 pm

    I don’t know what is Henry Paulson still thinking. I totally support the fact that the TARP program should go to bank and key financial institutions only to improve their liquidity and get the credit flowing again. Somehow, we still allow short selling. So the TARP program is no different than a government open ATM machine that some big time gamblers can just come in whenever they want and withdraw whatever they want by short selling. In a financial crisis like this with wave of bad news everyday, the chance that someone make profit by short selling is better than going to a casino to play roulette by placing one bet only and the house will give you money as long as the result is not double zero. Look, the government and the taxpayers are the TARP recipients’ shareholder. The current stock value of many TARP recipients are way worse than before they received the TARP. The market has been so volatile lately and don’t tell me that regular investors have caused a big part of it. As long as the TARP program is in place, I suggest the government should ban short selling across the board indefinitely until the market showing sign of stabilizing. Otherwise, it will be a real waste of money.

  6. Anonymous   November 22, 2008 at 10:19 am

    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. That’s a good start. Also prohibit them from short-selling, buying or selling futures contracts and other non-productive gambling activities.Now that we are funding these banks (the TARP payment to Citi is 20% more than their market cap. That is we could have just BOUGHT the Citi for less than we gave them) … there is absolutely no reason that they should be allowed to play super-trader. Get back to making and holding loans. That’s what we chartered you for to start with.We need investigations into the big banks, and the Fed. And Obama needs to pick a new Treasury secretary who isn’t part of the NY criminal banking conspiracy.