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Monday, December 22, 2008

The Bailout Nightmare Continues

Today was met with two simultaneous pieces of news that should tell everyone just how bad this bailout will be. First, the banks are being coy and secretive with how they are using the bailout money they have been given.

It's something any bank would demand to know before handing out a loan: Where's the money going?

But after receiving billions in aid from U.S. taxpayers, the nation's largest banks say they can't track exactly how they're spending the money or they simply refuse to discuss it.

"We've lent some of it. We've not lent some of it. We've not given any accounting of, 'Here's how we're doing it,'" said Thomas Kelly, a spokesman for JPMorgan Chase, which received $25 billion in emergency bailout money. "We have not disclosed that to the public. We're declining to."

The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what's the plan for the rest?

Now, while this is shocking and disturbing, it is unfortunately not surprising. The bailout was put together at hyper speed at the barrel of a financial gun. The federal government was mostly concerned with getting the money to the financial industry as quickly as possible. They had little concern with things like oversight. The Democratic Congress cared nearly as little about oversight as the President and his staff. Neither Barack Obama or John McCain gave anything more than lip service to oversight and transparency. While politicians assured us that this wasn't merely a blank check, the reality is that no one in charge of watching the money formulated anything near a plan to watch the money. As such, banks were given $350 billion and they have done with it as they pleased.

The other disturbing news is that real estate developers are now demanding a bailout themselves.

With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

This, too, is disturbing but not surprising. That's because a bailout is also a pandora's box. If financials are too vital to fail, then all any industry needs to show in order to get a bailout is that they too are too vital to fail. That's a nebulous concept and so proving it really requires giving a good enough sob story.

We saw this with the automakers. Their CEO's lamented the failure of an industry that was the "fabric of our society" that "provided millions of jobs for hard working Americans". This is a game that just about any industry can play. Without real estate developers there will be no homes. That industry affects mortgage brokers, realtors, appraisers, banks, title companies, not to mention that it provides homes for millions. By the logic of the auto bailout, it is illogical not to give developers the same bailout.

The economy is very circular. Lot's of companies affect many other companies. Lot's of industries affect many other industries. The failure of any industry has a ripple effect. The automakers are not special in that distinction. Now that we have used that logic to bail them out, this opens the door to any industry with enough suppliers, retailers, and customers to use the very same ripple effect argument to get their own bailout.

The worst part of all of this is that it was all foreseeable. It was all a concern to everyone that opposed the bailout. Proponents of the bailout continued to assure everyone that our concerns were overblown and that the bailout was necessary. Now, none of the proponents of this bailout can actually point to one single bit of evidence that shows that it has done one solitary thing to stimulate the economy. It has become a monster for corruption and waste, and now we have a pandora's box that will likely never close. This will only get worse, and it was all foreseeable.

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