Bailout Bunk: We've Been Had

Wednesday, November 12, 2008 11:07 AM

By: Edward I. Koch

The I more think about it, the more I believe we were had when the federal government proposed that $700 billion bailout to primarily deal with the liquidity crisis.

At the time, nobody seemed to know what to do. When Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke jointly proposed the bailout in an attempt to avoid a repeat of the Great Depression, nearly everyone threw up their hands and concluded there was no alternative.

At first, some members of Congress — both Republicans and Democrats — balked at the huge bailout package. They said at the very least there should be some minimal safeguards since the legislation was drawn to give the secretary of the Treasury what appeared to be total power to determine how the bailout would be structured.

These concerns were addressed to some extent in the revised bailout bill which, among other things, staggered the bailout payments and provided for some congressional lending oversight for half of the $700 billion rescue package. Congress apparently assured that having waited and then passing the legislation on the second time it was presented to the House, it was in fact improved and would prevent our being ripped off by Wall Street for a second time.

We were told over and over by the experts in the news media and government that the real problem was in fact liquidity — banks were just not willing to lend, even to creditworthy applicants. I decided to write a letter to both Treasury Secretary Paulson and Federal Reserve Chairman Bernanke stating my concerns about the use of the federal guarantees and loans.

The letters follow:

October 9, 2008

Henry M. Paulson, Jr.
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20551

Ben S. Bernanke
Chairman
Federal Reserve System
20th & Constitution Avenue, N.W.
Washington, D.C. 20220

Gentlemen:

As you have pointed out, the meltdown occurring in the United States is taking place in large part because of a lack of available liquidity, meaning that lenders — commercial banks in the lead — are not lending to applicants seeking to borrow in order to purchase housing, cars and other big ticket items that the economy relies on to flourish, as well as denying loans to small businesses and local governments seeking to borrow to pay their bills with municipal bond markets largely closed to them.

One of the purposes of the $700 billion recently made available as a result of legislation enacted by the Congress is to give additional liquidity to commercial banking institutions so that they can once again perform their leading raison d’etre — lending money.

The major reason for lack of liquidity — availability of loans — is fear, as you have stated, fear that the money will not be repaid either by individuals, governments or institutions, e.g., other banks.

Again, as you have stated, another reason offered by the banks for not lending monies is that much of their assets are now labeled “toxic.â€