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Bailout – 7

As Congress ponders possible reconsideration of the Paulson bailout package, local housing experts say it would have limited impact on the growing foreclosure crisis (more here).

Meanwhile, Chicago Jobs With Justice has called a rally tomorrow at the Federal Reserve Bank, 230 S. LaSalle, to demand that any legislative action include requiring that Wall Street be held responsible for paying for any bailout, to avoid cuts to other programs; an economic recovery plan that includes job creation; and real foreclosure and bankruptcy reform that protects homeowners and consumers (Wednesday, October 1, at 12 noon).

[UPDATE]  The weakness of the financial sector is not the main problem facing the economy, writes economist Dean Baker. “We would still be facing a recession even if all our banks were flush with cash. Hence the hype about the urgency of the bailout was an invention.”

“The main cause of the economy’s weakness is not insolvent banks and lack of credit; it’s the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble’s partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero.

“With much of this equity now eliminated by the collapse of the bubble, many families can no longer sustain their levels of consumption. The main reason that banks won’t lend to these families is that they no longer have home equity to serve as collateral. It wouldn’t matter how much money the banks had, they are not going to make mortgage loans to people who have no equity.

“And house prices are not going to come back….We are not going to get the price of $200,000 homes in central California back up to $500,000.

“The main problem in recovering from the recession will be finding ways to boost demand other than household consumption. In the longer run, this will mean reducing imports and increasing exports. In the short run, we will have to rely on government stimulus to help spur growth and reduce unemployment. The Democratic demands for stimulus were not extraneous to the legitimate goal of a bank bailout bill. Fiscal stimulus must be central to any serious effort to boost the economy.

“The weakness of the banks contributes to the downturn, but they are not the core of the problem. We would still be facing a recession even if all our banks were flush with cash. Hence the hype about the urgency of the bailout was an invention. It would be good to get our banks in order, but it also would be good to send $100 billion to state and local governments to support infrastructure projects and other spending.

“How do we go about getting the banks in order? Almost every economist I know rejects the Paulson approach and argues instead for directly injecting capital into the banks. The taxpayers give them the money and then we own some, or all, of the bank. (That’s what Warren Buffet did with Goldman Sachs.)

“This isn’t about begging for a sliver of equity as a concession for a $700 billion bailout, this is about constructing a bank rescue the way that business people would do it. We have an interest in a well-operating financial system. There is zero public interest in giving away taxpayer dollars to the Wall Street banks and their executives.

“If Secretary Paulson constructed a package that was centered around buying direct equity stakes in the banks, he could quickly garner large majority support in both houses. Better yet, Congress could just construct its own package centered on buying equity stakes and send it to President Bush. If he balks, we can just threaten him with stories about the Great Depression.”

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Category: economy, foreclosures, jobs

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