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Statement of Harvey Rosenfield*

The Great Bailout of 08: Protecting Americans

September 24, 2008

A few hours from now and a few miles away, lobbyists and members of Congress will crowd into a hearing room to listen to Treasury Secretary Paulson and Fed Chairman Bernanke tell us that unless the American people come up with $700 billion right now, our financial system will collapse and we will enter another Great Depression (even though no one is using the “D-word,” that’s the unstated threat.)

There will be two kinds of people represented in that room: the Wall Street speculators whose greed-driven schemes have jeopardized the economic stability and integrity of our nation, and the public officials who should have and could have done something to prevent the unfolding catastrophe. We’ll be outside, along with the rest of America.

Anybody who claims to know anything about finance knows that over the last six years our system became a house of cards, based on the endless over-leveraging of each dollar through the use of financial instruments so complex and illusory that it turns out no one even knows their value – the infamous credit default swaps that were nearly $1 trillion in 2001 and now amount to $62 trillion, far in excess of the value of our real economy; collateral debt obligations; special investment vehicles, etc.

Indeed, those of us who fought against the results of electricity deregulation in California witnessed back in 2001 what is happening today, on a small scale of course. That was a $70 billion economic meltdown that our state has never recovered from. During the 2001 meltdown, we saw how Wall Street rating agencies and investment banks joined to demand that California bailout its bankrupt utility companies by paying what we now know to be obscene prices for electricity that were artificially manipulated by…Wall Street traders.

So what can we expect from Washington this afternoon? The Bush Administration’s worship of the free market brought us to this grave moment and our elected officials all knew what was going on but so long as wealth was flowing, took no action.  These are the same people who changed the bankruptcy laws just a few years ago to make it virtually impossible for consumers to declare bankruptcy (a law that should be amended as part of any bailout bill to allow courts to revise the terms of a loan in order to avoid foreclosure).

Americans are not as stupid as people in this town seem to think. They will not tolerate a face saving fig leaf worked out between the Administration and Congress so that Congress can race home to run for reelection and pretend they won something for the taxpayers in exchange for $700 billion.

The politicians need to listen to the American people now. Americans work hard and play by the rules, trying to make a comfortable life for their families. They didn’t do anything wrong, yet now they are being asked to bailout those who broke or manipulated the rules in pursuit of wealth.

I believe Americans will be willing to put their money behind the nation’s economy, but they want a square deal. Not a heads we win, tails you lose proposition brought to us by Wall Street with a gun to our head. Not a three-page scheme with no explanations and no answers – Americans have to wade through hundreds of pages of legal documents just to get a home loan. Now we’re going to loan Wall Street $700 billion with no paperwork?

Haste now will be catastrophic for America. I was a young advocate just out of law school working for Public Citizen back in the late 1970s when Congress panicked in the face of the Gulf states’ oil embargo and passed $20 billion in federal subsidies for “synthetic fuels” and a $37 billion publicly-financed, privately-owned natural gas pipeline from Alaska. Both were boondoggles whose only beneficiaries were banks and energy companies, not Americans.

There is no need for haste. The short-term actions undertaken by the Fed and the Treasury last week have made billions of dollars available to financial institutions, addressing the immediate liquidity crisis. There is no reason for the Congress to join the panic and pass an ill-conceived and poorly understood proposal. Congress should ignore – and law enforcement should speedily prosecute – any such efforts. Indeed, access to the Fed’s overnight window and other resources should be made contingent upon each firm’s agreement to maintain stable operations in the marketplace.

It will take time to figure out how best to save our economy, and what it will really cost. But the quid pro quo for Americans must be real and tangible – not more financial schemes. While the debate in Washington is about whether Wall Street executives will be allowed to keep their bonuses and severance packages, I can assure you that across the rest of the country, Americans are wondering why these individuals have not already been hauled off to jail.

If there is to be a taxpayer bailout, one of the most concrete actions Congress can take now is to cap mortgage and credit card interest rates. Since at least March, banks have been accessing taxpayer money through the Federal Reserve at low rates – the discount rate is presently 2.25%. Yet Americans will attest that the interest rates on their mortgages and credit cards remain high and are climbing higher, and there is little doubt that in the aftermath of this debacle, banks will attempt to raise the cost of consumer credit still further. Consumers should not have to pay interest rates of 7%-25% to borrow their own money from the bailed out banks. Congress should include floating caps on consumer credit in the bailout legislation – say, the fed discount rate plus three points. Since consumer spending has been the core of the U.S. economy, lower interest rates will also speed the economy’s recovery.

This is one of several proposals we offer today to make sure that taxpayers interests are protected in the days and weeks ahead.

*Rosenfield is the founder of Consumer Watchdog, a nationally-recognized non-profit, non-partisan citizen organization based in California. He wrote, and led the voter revolt to pass, Proposition 103, the 1988 ballot initiative that imposed stringent regulation on the insurance industry. A recent study concluded that it has saved Californians $63 billion on their auto insurance alone since it’s passage. Last week, Rosenfield began a blog on the financial mess at www.honestanswers.org. More at www.consumerwatchdog.org and www.harveyrosenfield.com.

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