Done properly, Dean Baker says, the $700 billion bailout of Wall Street and the big banks shouldnt cost the taxpayers a dime. My view, the progressive economist told the Indy following a speech in Raleigh today, is that [the bailout] is necessary, but if its structured right, were not giving the banks anything. Were keeping the banks functioning, and thats in the public interest.
Bakers picture and comments about the bailout plan are on the front page of The New York Times today. Co-director of the Center for Economic and Policy Research in Washington, D.C., Baker was one of a handful of economists who saw the housing bubble for what it was while it was happeningin the years from 2003 to 2006and who predicted it would burst.
Since Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke proposed their $700 billion rescue plan, Bakers been among the most vociferous opponents of giving them a blank check.
In Raleigh for a luncheon sponsored by N.C. Policy Watch and the N.C. Justice Center, Baker expressed guarded optimism that congressional Democrats are in the process of surrounding the rescue with enough safeguards that it will no longer be blank.
There are several keys to protecting taxpayer dollars:
Buy bank assets only at auctions or by other methods that assure that taxpayers are getting what they pay for; back that up with profit-sharing, so that if taxpayers lose on the assets over time, theyre paid back with capital (stock) in the selling bank.
Limit CEO and executive compensation at participating banks; no rules on what Wall Street can pay, but for banks that want access to the $700 billion, they must agree to limits on their pay.
Banks drawing on the $700 billion must agree to reduce mortgage rates for their underwater customers (those with housing values below what they owe), or at least to offer customers a way to stay in their homes as renters.
Punish Wall Street is Bakers chief maxim for a successful bailout package. Banks should feel the pain, he said, caused by their own carelessness, and they should be made to endure the bulk of the losses theyve incurred, with taxpayer funds used only where necessary to sustain the orderly operation of the financial system.
None of these requirements were in the initial, two-and-a-half page Paulson-Bernanke plan, which did include a carefully drawn proscription against any court or congressional review of anything the Treasury might do with the money.
But Baker said that over the past four days, Connecticut Sen. Chris Dodd, chair of the Senate Banking Committee, and other House and Senate Democratic leaders, have been crafting a solid bill with the right safeguards.
Included in their legislation is an oversight board with authority to monitor what prices the Treasury winds up paying for bank assets and how much theyre finally worth, he said.
Thus, the point of the bailout package, he said, is to help the banks de-leverage and allow them time to address their liquidity problems—not to hand them money with no strings attached.
And because the package shouldnt cost taxpayers in the long run, Baker said, its no reason for the Congress or public to be afraid of spending on a major economic stimulus package in 2009, action that Baker thinks will be critical to help lift the nation out of recession.
Bakers 09 forecast is for a continued slump in housing prices, unemployment to rise over 7 percent (its now at 6.1 percent nationally, 6.9 percent in North Carolina), and an official recession to replace the unofficial one we have now, which has resulted in jobs losses averaging 100,000 a month since January.
The country should take the opportunity presented by the current mess, Baker said, to: 1) rein in excessive executive salaries throughout corporate America (partially a product, he thinks, of Wall Street envy); 2) use the falling dollar, and higher import costs, to increase manufacturing and saving rates, while consumption falls; and 3) fix the health care system, which is unsustainable at costs that are twice those of other industrialized nations with outcomes that are no better than theirs.
The country should begin to emerge from recession in 2010, Baker said. And while the banking crisis will be painful, if managed correctly it will be behind us, he predicted, in three to four years.