What Should Uncle Sam Do?
Byline: Robert Reich, Larry Lindsey, Jeremy J. Siegel, John Snow, Robert Rubin, Peter Wallison
NEWSWEEK's Business Roundtable takes stock of the real damage--and offer solutions to the economic crisis.
A Modest Proposal
Robert Reich, secretary of Labor under Bill Clinton, and author of "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life"
Of course Fannie and Freddie are getting bailed out. They're Bear Stearns to the 10th degree--way too big to fail, especially with the rest of the Street in turmoil. And of course taxpayers get stuck with the tab.
What worries me is the complete lack of accountability by Fannie's and Freddie's executives, as well as Wall Street investment bankers also now being insured by taxpayers. We've created the worst form of socialized capitalism--private gains combined with public losses. These executives and bankers are among the best paid in all of corporate America. Their organizations are treated as if they're giant investor-driven private sector entities as long as they're healthy. But when they start to go down the tubes they become public entities with public responsibilities, and the rest of us have to bail them out.
Surely there will be more failures or near failures of financial institutions in the coming months, and American taxpayers will once again be called on to insure their solvency. The important question is what conditions should be applied.
Herewith a modest proposal: when taxpayers insure a giant entity against loss--Freddie, Fannie, Wall Street investment banks, whatever--the entities must agree that (1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the president of the United States, and (2) the government gets 5 percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance). If and when the entities become profitable again, taxpayers are thereby compensated for the risk they've taken on.
The Dangers of Getting Too Cozy
Larry Lindsey, former governor of the Federal Reserve and former economic adviser to President George W. Bush
The recent troubles at Fannie Mae, Freddie Mac and IndyMac show just how messy things can get when the relationship between the government and the market gets too cozy. Fannie and Freddie are private for-profit concerns that operate for the benefit of the shareholders, but with government intervention both in their mission and as a source of bailout money when things go badly. This leads to both the privatization of profits with the socialization of losses and political interference in the processes of profit making and loss mitigation.
The plan advanced by Secretary [Henry] Paulson provides an open-ended source of funding for the government to buy the stock of the companies and to lend them unlimited amounts of money. While it may be a necessary last-ditch effort to save them, the plan leaves existing management and directors in place and asks for no explicit accountability for existing shareholders and other investors. Unfortunately, this appears to be related to the enormous political power Fannie and Freddie have developed through decades of political contributions and management by politically connected individuals like Frank Raines [Clinton's OMB director and former chief of Fannie Mae] and Jim Johnson [until recently an Obama adviser. Johnson was also chairman of the Goldman Sachs board's compensation committee while Paulson was its CEO].
The immediate cause of the failure of IndyMac was, according to its regulator, the release of a letter questioning the solvency of the institution by Sen. Chuck Schumer of New York. This also highlights the problems of politics and the market getting too close. While the senator was clearly within his rights to write …
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: What Should Uncle Sam Do?. Contributors: Not available. Magazine title: Newsweek. Volume: 152. Issue: 04 Publication date: July 28, 2008. Page number: 36. © 2009 Newsweek, Inc. All rights reserved. Any reuse, distribution or alteration without express written permission of Newsweek is prohibited. For permission: www.newsweek.com. COPYRIGHT 2008 Gale Group.
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