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Morici Analysis of Bailout Legislation |
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Written by LNC
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Monday, 29 September 2008 |
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Key Flaws in the Bailout Legislation
On compensation, which is central to reforming the banks, and equity participation, which is essential for insulating the taxpayers from loss, the legislation is not what is being advertized by the Administration and the Speaker.
The bailout hardly restricts executive compensation. Those provisions are vague, except for golden parachutes, and really only apply to banks the government would take over.
For banks and securities companies that sell bad assets to the Treasury through the normal auction process, restrictions on compensation really only apply to golden parachutes for the top five officers--compensation that only applies if the banks fail and the CEO is pushed out. Restrictions on compensation do not apply to work performed by incumbent employees until a bank goes bust.
Hence the banks will be free to continue to pay excecutives through bonus systems that encourage reckless decisions as and get banks in further trouble. Only after banks get in trouble again, can the government get involved in compensation and management practices.
The same flaws apply to government warrants (equity positions in the banks).
If the government buys $100 billion of toxic paper from Citigroup, for example, and Citigroup recovers for now, the government will be able to do little to alter its management practices or participate in the benefits of its recovery. Only if Citigroup fails, after the bankers have been paid again, will the government be able to get involved in its business practices or get an equity stake--only when the bank is near worthless.
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In the news
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Here is another piece written by Dr. McMillion of MBG Information Services.
Even during year of recession, the US is producing almost $2 billion each day LESS than it is spending and is forced to borrow and sell assets abroad to make up the difference
The Dept. of Commerce’ BEA reported today on the most complete accounting of US commercial relations with the world – the Current Account -- for 2008-Q3. Despite the US recession that started one year ago, today’s report shows that during the 91 days of Q3 the US suffered another -$174.1 billion in global losses bringing total Current Account losses for the first three calendar quarters of 2008 to -$530,675 billion.
http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm
That is, despite the US recession that began in December 2007, through the first 274 days of 2008 the US produced goods and services worth -$1.94 billion LESS each day than it spent and was forced to borrow and sell assets abroad to offset the difference. Economists expect that when a country’s economy is growing slower than the world economy – and certainly when it is in recession – that country’s current accounts will be in surplus as it imports less and exports more.
Since 2001 the US has grown slower than the world economy every year and yet the US has accumulated current account deficits (production shortages/net foreign borrowing) totaling -$4.8 Trillion.
Any economic rescue plan that ignores this constant hemorrhage of production and wealth is doomed to tragic failure. |
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