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Do we really want to socialize our financial system? [Part 2]

vincent.jpgSeptember 27, 2008
By Vincent Gioia

In Part 1 of this series I said suggestions would be made in Part 2 to deal with our economy if we did not socialize our financial system as proposed by Democrat and former Goldman Sachs head Treasury Secretary Henry Paulson and President Bush. Their proposal has been seized upon with relish by Democrats in congress.

 The mere fact that someone like Senator Harry Reid is promoting this plan should itself raise skepticism in the minds of the rest of us and suggest that the Paulson-Bush proposal is bad for the country.

Newt Gingrich called the plan "stupid" and a "nightmare" that "looks like it had been designed by autocrat Vladimir Putin." According to Gingrich, economic historian Alan Meltzer advocated doing nothing rather than implanting the Paulson Plan. Reporter James Pethokoukis said Gingrich told him Meltzer "apparently joked that this was about the third time he had seen Wall Street scream 'the apocalypse was nigh' only to have the economy keep right on chugging along."

Alan Keyes, former Assistant Secretary of State under Reagan, said the federal government's bailout of mortgage lenders Fannie Mae and Freddie Mac as proposed by the Bush administration would effectively transform our nation into "a socialist society."

Bush defended the plan to buy hundreds of billions in "toxic" mortgage-related assets in the belief that the alternative would be more failures of banks and financial institutions and a breakdown in lending that would hobble the economy. However there are other ways to deal with the financial system to ease the economy if the draconian government takeover is not implemented, and without the invitation to corruption built into the Paulson-Bush plan.

Their plan contemplates getting authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets such as mortgage-backed securities, which are bundles of loans packaged as securities and sold to investors. It involves buying assets, often through "reverse auctions." Banks and financial institutions would price assets and offer them to the government. Paulson and Fed Chairman Bernanke acknowledge that in order to work, the reverse auctions must buy from banks and financial institutions the riskiest "illiquid" assets in order to allow Fannie Mae and Freddie Mac to stay in business but say this would help healthy companies that want to raise capital by the being able to sell higher-quality assets so they can continue to make more loans but this could also be done by guaranteeing the assets without actually buying them with billions of tax payer dollars.

Amazingly they see nothing wrong with giving the Treasury Secretary the sole unlimited power to buy virtually any financial instrument from any institution, as a means to relieve it of bad assets and supposedly pump credit back into the economy. The program that the White House has outlined includes wording that appears to bar any review of Treasury's bailout actions by the courts or other administrative agencies. How insane is it to give one person the authority to spend billions of dollars at his own discretion, and without oversight. Not only that, but government bureaucracy would be expanded because a new Treasury staff would be created to manage the program, "although the administration foresees contracting with private firms to manage its new asset holdings."

Many of America's problems stem from failing to continue the course of government outlined by our country's founders in the constitution. The decline of respect for the constitution had been gradual until the New Deal administration of Franklin Roosevelt but accelerated even further under Lyndon Johnson and his failed "war on poverty." Ironically some Democrat administrations like those of Harry Truman and John Kennedy suspended the slide toward socialism only to see Democrats Jimmy Carter and Bill Clinton resume the downward trend. To the chagrin of conservatives (I say "conservatives" and not Republicans) the two terms of President George Bush, even when accompanied by a Republican congress, added severely to expansion of government and government spending. This last effort in the waning days of the Bush administration will be the epitome of government expansion if the so called "remedy" for the threat to our current financial system is actually implemented.

Instead of leaping into a socialistic morass there are other things we can do.

1. Keep spending within constitutional limits. The intention of the Tenth Amendment was to restrict the size of government, and that should always be reflected in the federal budget and spending. If we did that it would be the two of the greatest economic stimuli we could apply.

2. We should not add to our debt except in the face of an existential threat to our country. As George Washington wrote, "To contract new debts is not the way to pay for old ones." Thomas Jefferson wrote "To preserve [the] independence [of the people], we must not let our rulers load us with perpetual debt."

3. We need a pay-as-you-go government policy. We should not spend more money than we have. In a recent article by Chuck Norris we were reminded that Thomas Jefferson once wrote to Fulwar Skipwith in 1787, "[T]he maxim of buying nothing but what we had money in our pockets to pay for ...[is] a maxim, which, of all others, lays the broadest foundation for happiness."

4. We need to reign in the power of agencies dealing with our financial system, like the Federal Reserve. We were warned by Thomas Jefferson about the problems to be caused by a powerful central bank. Speaking of such a national institution Jefferson said "This institution is one of the most deadly hostility existing, against the principles and form of our Constitution. ... I deem no government safe which is under the vassalage of any self-constituted authorities, or any other authority than that of the nation, or its regular functionaries. ... Ought we then to give further growth to an institution so powerful, so hostile?"

5. We should have a mandate, by constitutional amendment or otherwise, to reduce big government, deficits, budgets, spending, and taxes, and to reform the tax code by providing a Fair Tax or its equivalent.

In addition to the above, we should address the current state of affairs by enacting legislation that would address current issues that haunt our economy, such as our present tax laws, energy dependence and excessive entitlements; and we must seriously reform our budget process.

It would be a great assist to our economy if we would index the Capital Gains Tax to inflation. This can be done by the Treasury Department without action by congress. In the alternative we could suspend the capitol gains tax for a limited period of time until our economy overcomes the present financial situation brought about by sub prime lending.

It is imperative to enact a real energy bill, not the phony bill advanced by Speaker Nancy Pelosi and other Democrats, which will lower the price of gasoline at the pump by allowing more domestic and off shore drilling with incentives to coastal states to not obstruct such drilling. We should also encourage and assist with tax incentives the development of oil shale resources, coal to oil production and nuclear power generation. Although the ban on drilling on the outer continental shelf has been allowed to expire, a Democrat controlled congress and an elected Democrat president will certainly reinstate the ban.

Current enormous entitlement programs, and the still more expected in the next administration if Barack Obama is elected, are a huge strain on our economy and must be curtailed. If entitlements could be brought under control, our economy would grow and add to the ability to overcome the financial system problems we face today.

Lastly, as Republican Congressman Mike Spence has said "Any new expenditure of taxpayer dollars should be paid for with fiscal discipline and reform. If Congress decides to spend $1 trillion on a corporate bailout, it must find budget savings to prevent that cost from being passed along to the American people."

By implementing these recommendations not only would the United States weather the currency liquidity and credit problems brought about by failures in our financial institutions caused by programs forced by previous Democrat administrations on banks to extend credit to un-credit worthy recipients, but the U.S. dollar would recover and again become the currency of choice in the world.
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Related: Part I

Vincent Gioia is a retired patent attorney living in Palm Desert, California. His articles may be read at http://www.vincentgioia.com/ and he may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it. .

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