This article first appeared in the St. Louis Beacon: November 12, 2008 - On Wednesday, U.S. Treasury Secretary Henry Paulson announced that the government has changed how it will spend the $700 billion emergency economic "bailout" fund approved by Congress on Oct. 3. Instead of buying so-called toxic mortgages, it is now considering helping consumer credit markets.
This shift worries two local financial analysts who are concerned that it will increase government's control over the economy -- and fail to stabilize the mortgage crisis.
Paulson said the Troubled Asset Relief Program (TARP) will not be used to buy so-called "toxic" mortgages -- a plan that had been at the heart of the original request to Congress. Paulson said the government will continue using $250 billion to buy stock in banks in an effort to encourage lending -- and is now considering helping consumer credit markets that support student loans, auto loans and credit card debt.
"I'm flabbergasted,'' said Juli Niemann, executive vice president of Clayton-based Smith, Moore and Co., after watching Paulson's announcement. She said the turnaround regarding the purchase of bad bank assets is an indication that he didn't have a plan when he pressed Congress for emergency funding.
"It was just, 'Give me $700 billion, or I shoot this economy. I want it here and I want it now,' '' Niemann said. "It became very apparent from the get-go there was no plan in place, no thoughtful deliberations. It's just, 'We need it right now.' ''
Niemann pointed to the reaction of the stock market, which continued its decline after Paulson's announcement. The market closed at 8,282 on Wednesday, down 411.
"The market is shocked -- just shocked,'' Niemann said.
Niemann said the original plan to purchase bad mortgages was at least an attempt to tackle the troubled housing market, an anchor of the U.S. economy.
"He's backing away from trying to stabilize the housing market and purchase troubled mortgage assets. And now? The money is going to Bank of Whatever-I- Feel-Like-Right-Now and the Insurance Company of Whatever and anybody who wants to call themselves a bank,'' Niemann said.
"Now, it's just a bailout program. It's not purchasing troubled assets, per se. The original thinking was that they were going to purchase these troubled assets, these bundled packages of mortgages and thus restore liquidity to the banks. The banks won't have the mortgages on their balance sheet; they'll have cash from the government, and that means they can go out and lend again. That was the original intention. That's not what's happened,'' she said.
Niemann said TARP is in danger of becoming a relief program for any institution with a credit arm that can call itself a bank.
"We're also talking about insurance companies -- it's not just the bottomless pit of AIG but Prudential and Hartford and everybody else,'' Niemann said. "It's hit the colossal silly season. The American taxpayer is bailing out everybody.''
During his remarks, Paulson pointed out that he was given a wide authority to act in the nation's best interests, and the purchasing of troubled assets was found to be "not the most effective way" to use the bailout funds.
"I will never apologize for changing the approach when the facts change,'' Paulson said.
Chuck Butler, president of EverBank World Markets, based in St. Louis, said the Paulson announcement was a stunner to him.
"But it's less madness than it was,'' said Butler, who found it interesting that Paulson has acknowledged that buying mortgages isn't the most effective way for the government to use the bailout funding.
"In the beginning, I said the government should not be involved in this at all,'' Butler said. "This is good to see we're not going down that path. However, now we're going to concentrate on credit card receivables and auto loans and student loans. And, again, it's the government stepping in to something that, in my opinion, it shouldn't be involved with.''
Butler said he took Paulson's change of heart on buying bad mortgage bonds as a sign that the treasury secretary believes the U.S. could be seeing some easing up on pressures in the housing market. Butler also disagrees with Paulson's continued plans to inject money into U.S. banks.
"The government is going to have some ownership of banks, and then the government can start directing who those banks can make loans to and you can almost hear some senator calling up his local bank and telling them they need to make a loan to so-and-so and so-and-so. And if the bank balks, the government says, 'We'll just pull out our funding,'' Butler said. "The banks absolutely love it now, but they won't love it down the road when the government is directing them how to do their business.''
Butler, who writes a newsletter on world currencies and economies at www.dailypfennig.com, said he recently devoted an issue to how the bailout was reminiscent of socialism.
"That in a nutshell is probably the biggest problem with the whole bail-out program. The government is stepping in to what were free markets, and they're taking control,'' Butler said. "And that is almost like the first step of socialism, in my opinion."
Niemann pointed out that such intervention is no longer surprising.
"The last two years we've seen very clearly, it's been socialism for the rich and capitalism for the rest of the economy,'' Niemann said.
The analysts say that people need to consider the future effects of the bailout in both increased tax burden and rising inflation.
Economist William Emmons of the Federal Reserve Bank of St. Louis said Paulson's announcement, while surprising, was an indication that the treasury secretary and administration have recognized that the initial plan might not have been as effective as was first thought
"This is a work in progress, and it is encouraging that they're being innovative and willing to try new things,'' Emmons said.
Niemann said all the bailout efforts will be for naught unless the housing market stabilizes.
"I don't care how much money you pour into AIG or anybody else, it's going to be a bottomless pit unless you stabilize the housing market. As long as the housing market continues to go down, all those quote 'bad assets' are going down, as well. All this bad debt becomes worse debt,'' Niemann said.
Niemann said that lenders are just now beginning to do what they should have been doing at the outset of the housing crisis: renegotiate loan terms with troubled borrowers to lower interest rates, stretch out payments and reduce principal to reflect current housing prices.
Niemann believes Paulson's about-face on buying bad assets looks impulsive and amounts to "throwing a stink bomb into the White House'' with just two months left until a new president takes office. The bottom line, she said, is Congress wrote a blank check to people who said "trust us."
"The government, the Fed and Treasury have instilled a huge crisis where there was none -- a panic where there was none,'' Niemann said. "Earlier this fall, actually the economy was starting to slow down, but it was not in a plunge. What was a decline in August turned into full scale rout and panic, thank you to the government -- and let's be very specific -- to Paulson.''