Monday, September 22, 2008

Demand that the Bailout Legislation Be Rejected

500NoBailout

Demand that the Bailout Legislation Be Rejected
We are witnessing a bankers' coup d’etat. In the name of saving the economy from a crisis created by their own greed and immense profits, Bush and the biggest bankers have taken a country and a people hostage.

“Give us your money and tear up what’s left of your Constitution or we will sink your economy,” is the message from Wall Street and the Bush Administration. “Give us the power and money we demand or you will be left jobless from a new economic depression."

Under the pretext of the banking crisis, the Bush Administration is changing the way this country operates. This is not simply taking trillions of dollars from the people and giving it to the richest bankers to do with as they see fit.

Click here to send your letter to Congress

Congress is poised to vote to give the Executive Branch of government, and specifically the White House’s political appointees in the Treasury Department, the absolute right to take our money and give it to domestic and foreign banks and corporations without any oversight of elected officials, from the courts, or from the people.

The new legislation states: “Decisions by the Secretary [of the Treasury] pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” The Legislation allows the Treasury Department to appoint the same bankers who created the crisis to administer and dictate the use of trillions of our tax dollars.

We will not stand by and let the Bush Administration formalize its vision of a “government of, by and for the richest bankers."

The new system institutionalizes theft on a grand scale. Lehman Brothers bankers will receive $2.5 billion in bonuses after their company went bankrupt last week, but the new dictatorial authority under the White House and Treasury Department has ruled out any relief for the millions of working families who are being foreclosed.

We live in a $15 trillion annual economy. Instead of taking our tax dollars and giving it to the already rich and powerful, these funds should be used provide to decent paying jobs, affordable housing, health care and a good education for our children. There is another way!

Now is the time to hear the voice of the people. A spineless Congress authorized Bush’s illegal war in Iraq and rubber-stamped the Patriot Act. Now they are being herded like sheep again to give the White House and Wall Street dictatorial control over the people’s money.

Click here to send your letter to Congress

A.N.S.W.E.R. Coalition
http://www.answercoalition.org/
info@internationalanswer.org

National Office in Washington DC: 202-544-3389
New York City: 212-694-8720
Los Angeles: 213-251-1025
San Francisco: 415-821-6545
Chicago: 773-463-0311

The Wall Street Model: Unintelligent Design

The Wall Street Model: Unintelligent Design

By PAM MARTENS

Go To Original

Wall Street is collapsing not because of bad mortgage debt or lack of capital or over-leverage. Those are merely symptoms. Wall Street is collapsing because it deserves to collapse; it needs to collapse in order for America to survive. The economist Joseph Schumpeter called it creative destruction, a system where outdated models collapse to make room for new innovation.

Wall Street of the past decade never really had a business model as much as it had a business creed: greed is good; leveraged greed is even better.

The fact that Wall Street is collapsing is a given. How it survived as long as it did under its corrupted model is the question that will be debated in history books for the next generation.

For example, imagine a business model that bases remuneration to brokers on how much money they make for their Wall Street employer and not one dime for how well their customers' portfolios perform. A Wall Street broker receives remuneration that rises from approximately 30 to 50 per cent of the gross commission based on their cumulative trading commissions with zero regard to how well the clients' accounts have done. There is no acknowledged internal mechanism in any of the major Wall Street firms to gauge the overall success of the accounts the broker is managing.

The industry has been irreconcilably incentivized to corruption just as brokers have been socialized to silence. The reason we are seeing a stampede this week into U.S. Treasury securities is that much of this money belonged there in the first place, not in esoteric mortgage backed securities, junk bonds, commodity funds or annuities backed by AIG. Brokers put their clients "safe money" in these unsuitable investments because their Wall Street employer dangled a seductive financial inducement. A broker receives less than $1,000 in gross commissions ("gross" meaning before their firm takes their 50 to 70 per cent cut) on $100,000 of longer dated Treasuries. Putting that same $100,000 in a junk bond or mortgage-backed security or annuity could generate $3,000 or more. In other words, the financial incentive has created an artificial demand. And, as must inevitably happen, the true state of that demand is just now catching up with the true glut of supply.

What would be the incentive for Wall Street firms to offer higher commissions for some products over others? Because on top of their cut of the brokers commissions, they receive origination and syndication fees for the more esoteric investment products. These firms so despised the low-paying Treasuries that they replaced Treasuries with Freddie Mac and Fannie Mae paper in mutual funds bearing the name "U.S. Government Fund." (This misleading practice and the fact that billions of dollars of public money resided in these misnamed funds has certainly played a role in the government's decision to nationalize Freddie Mac and Fannie Mae.)

Then there is the insane model of bringing flim-flam new businesses to market. If we look at the people who are at the helm of today's collapsing Wall Street, they have shifted in their chairs, but they are mostly the same conflicted individuals who brought America the NASDAQ bust that began in March 2000 and evaporated $7 trillion of American wealth. There is no longer any incentive on Wall Street to bring about initial public offerings of only companies that will stand the test of time and create new jobs and new markets to make America strong and globally competitive. There is only an incentive to collect the underwriting fee and cash out quickly on private equity stakes.

Next is the corrupted model of housing a trading desk for the firm inside the same company that is supposed to issue unbiased research to the public. For example, let's say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.

Now, ask yourself this. With the multitude of other ways that Wall Street has to make money, why are they allowed to have their own trading desk while simultaneously issuing conflicted research to the public. After the NASDAQ scandals that revealed Wall Street issuing biased research for personal profit, why weren't proprietary trading desks and public research issuance shut down at these firms. There are plenty of boutique research firms to fill the void. The only conclusion to be drawn is what Europe is calling "regulatory capture" here in the U.S. That's a phrase similar to what Nancy Pelosi was calling "crony capitalism" on Wednesday, September 17 before she decided to join the crony capitalists at a microphone on Thursday, September 18 to promise bipartisanship on the mother of all bailouts to Wall Street.

This unintelligent design business model would have cracked and imploded long ago but for one saving grace: it came with its own unintelligent design justice system called mandatory arbitration. Gloria Steinem once called mandatory arbitration "McJustice." It's really more like Burger King; Wall Street can have it their way. In a system designed by Wall Street's own attorneys, arbitrators do not have to follow the law, or legal precedent, or write a reasoned decision, or pull arbitrators from a large unbiased pool as is done in jury selection. Industry insiders routinely serve over and over again. Had there been ongoing trials in open, public courtrooms, the magnitude of the leverage, worthless securities, and corrupted business model would have been exposed before it brought America to the financial brink.

That Wall Street and its Washington coterie are stilled embraced in regulatory capture and unintelligent design is most keenly evidenced by the recent merger of Merrill Lynch, the brokerage/investment firm, with Bank of America, the commercial bank and ongoing discussions to merge Morgan Stanley, the brokerage/investment firm with a commercial bank. (Memo to Enemy Combatants Against Taxpayers a/k/a Wall Street/Washington: this new model is the failed model of Citigroup. Why do you hate America?)

Make no mistake that what ever the dollar amount announced next week to funnel into an entity to buy bad debts from banks and Wall Street firms, it won't be enough. It's a Band-Aid on a malignant tumor. That tumor is Credit Default Swaps (CDS) with over $60 trillion now owed through secret contracts in an unregulated market created, financed and owned by the unintelligent design masters, Wall Street firms themselves. (See "How Wall Street Blew Itself Up," CounterPunch, January 21, 2008.)

There is no sincere plan by this administration to help America or Americans. There is only a plan to slow the financial collapse until after the November elections by throwing a politically palatable amount of money at it and a plan to continue to blame it on a housing bust.

If we, the American people, allow this to happen, we're enablers to the unintelligent design model. Before one more penny of our taxes are spent on this ruse, we must demand a seat at the table (I think Ralph Nader should occupy that seat) to discuss breaking up Wall Street, crushing this model, innovating a sensible model that serves the individual investor and deserving businesses, and promises our children a future of more than a banana republic.

Grasping at Straws

Grasping at Straws

By Mike Whitney

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On Friday morning, Senator Christopher Dodd, the head of the Senate Banking Committee, was interviewed on ABC's “Good Morning America.” Dodd revealed that just hours earlier at an emergency meeting convened by Secretary of the Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke, lawmakers were told that "We’re literally maybe days away from a complete meltdown of our financial system.” Dodd added somberly, that in his three decades of serving in public office, he had "never heard language like this.”

The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off for or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future.

Most people don't understand what happened on Thursday, but the build-up of bad news on the Lehman default and the $85 billion government takeover of AIG, triggered a run on the money markets and a freeze in interbank lending. The overnight LIBOR rate (London Interbank Offered Rate) more than doubled to 6.44%! Bank of America reported overnight borrowing rates in excess of 6%. Longer-term LIBOR rates also rose sharply. On Wednesday, jittery investors removed their money from money markets and flooded short-term US Treasurys for the assurance of a government guarantee on their savings even though interest rates had turned negative which means that their balance would actually shrink at the date of maturity. This is unprecedented, but it does help to illustrate how raw fear can drive the market.

The TED spread (the TED Spread measures market stress by revealing the reluctance of banks to lend to each other) widened and the credit markets froze in place. Borrowing three-month dollars on the interbank market and the U.S. Treasury's three-month borrowing costs widened five full percentage points. That's huge. The banking system shut down.

What does it mean? It means the Federal Reserve has lost control of the system. The market is driving interest rates now, and the market is terrified. End of story.

When the Fed announced its emergency program to dump $180 billion into the global banking system, short term Libor retreated slightly but long-term rates have remained stubbornly high. The noose continues to tighten. These rates are pinned to 6 million US mortgages which will be resetting in the next few years. That's more bad news for the housing industry.

The entire system is deleveraging with the ferocity of a Force-5 gale touching down in the Gulf, and yet, Henry Paulson has decided that the prudent thing to do is build levies around the system with paper dollars. Naturally, many people who understand the power of market-corrections are skeptical. It won't work. Libor is pushing rates upwards--that's the "true" cost of money. The Fed Funds rate (2 percent) is supported by infusions of paper dollars into the banking system to keep interest rates artificially low. Now the extreme pace of deleveraging has the Fed on the ropes. Trillions of dollars of credit is being sucked into a black hole which is raising the price of money. It's out of Bernanke's control. He needs to step out of the way and let prices fall or the dollar system will vanish in a deflationary vacuum.

The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar. In truth, there is no fix for a deleveraging market anymore than there is a fix for gravity. The belief that massive debts and insolvency can be erased by increasing liquidity just shows a fundamental misunderstanding of economics. That's why Henry Paulson is the worst possible person to be orchestrating the so called rescue project. Paulson comes from a business culture which rewards deception, personal acquisitiveness, and extreme risk-taking. Paulson is to finance capitalism what Rumsfeld is to military strategy. His leadership, and the congress' pathetic abdication of responsibility, assures disaster. Besides, why should the taxpayers be happy that the stocks of Morgan Stanley, Washington Mutual and Goldman Sachs surged on the news that there would be a government bailout yesterday? These banks are essentially bankrupt and their business models are broken. Keeping insolvent banks on life support is not a rescue plan; it's insanity.

No one has any idea of the magnitude of the deleveraging ahead or the size of the debts that will have to be written down. That's because 30 years of deregulation has allowed a parallel financial system to arise in which over $500 trillion dollars in derivatives are traded without any government supervision or accounting. These counterparty transactions are interwoven throughout the entire "regulated" system in a way that poses a clear and present danger to the broader economy. It's a mess. For example, there are an estimated $62 trillion of Credit Default Swaps (CDS) alone, which are basically insurance policies for defaulting bonds. AIG was as heavily involved in CDS as they were in regulated insurance products. So why would AIG sell CDS rather than conventional insurance?

Because, just like the banks, AIG could maximize its profits by minimizing its capital cushion. In other words, it didn't really have the capital to pay off claims when its CDS contracts began to blow up. If it had been properly regulated, then government regulators would have made sure that it was sufficiently capitalized with adequate reserves to pay off claims in a down-market. Now taxpayers will pay for the lawless system which men like "industry rep" Henry Paulson put in place. That's deregulation in a nutshell; a system that allows Wall Street banksters to create credit out of thin air and then run weeping to Congress when their swindles backfire.

Inflating the currency, printing more money, and increasing the deficits won't help. The bad debts have to be accounted for and liquidated. The Paulson strategy is to create another ocean of red ink while refusing to face the underlying problem head-on. This just further exacerbates the consumer-led recession which economists know is already setting in everywhere across the country. Demand is down and consumer spending is off due to falling home equity, job losses, and tighter lending standards at the banks. The broader economy does not need the added downward pressure from higher taxes, bigger deficits, or inflation. Paulson's plan is a band-aid approach to a sucking chest wound. The debts are enormous and the pain will be substantial, but the problem cannot be resolved by crushing the middle class or destroying the currency.

The malfunctioning of the markets and the freeze-over in the banking system are the outcome of a massive credit unwind instigated by trillions of dollars of low interest credit from the Federal Reserve which was magnified many times over via complex derivatives contracts and extreme leveraging by speculative investment bankers. This has generated the biggest equity bubble in history. That bubble is now set for a "hard-landing" which is the predictable result of an unsupervised marketplace where individual players are allowed to create as much credit as they choose.

If Paulson is not removed and his rescue plan scrapped altogether; the dollar will lose its position as the world's reserve currency and the US government will face a historic funding crisis as foreign sources of capital dry up. That will thrust the country into a hyper-inflationary depression.

Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse

Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse

By Joshua Holland

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The immediate cause of our financial meltdown is unchecked, unbridled greed. Mainstream newspapers and the business press are doing a fairly good job of explaining how the lack of regulatory oversight led us into this nightmare.

But you have to dig down one layer to find the cause of that situation. Under cover of the ideological euphemism known as the "free market" and with enormous cash investments over the past four decades, business elites have captured the regulatory organs of powerful democratic states -- nowhere more so than the United States -- and promoted their own narrow economic agendas for short-term gain.

There's an enormous amount of discussion about that in the independent media. But to drill down a layer deeper, to the bedrock of the crisis, you have to go to some deep thinkers who don't get much play in our mainstream economic discourse.

As foreign policy analyst Mark Engler notes in his new book, How to Rule the World, declining returns on traditional investments in manufacturing and industry since the 1970s go a long way toward explaining today's highly speculative economy -- pushing capital into developing countries and into bubble after speculative bubble in search of a better profit margin.

It's important to understand what's going on at all three levels, because we may have come to a fork in the road, a point at which the decisions made now may determine the future of the global economy.

We may or may not also be on the verge of another Great Depression.

The Bush Bailout: Privatizing Gains and Socializing Risk

On Saturday, hoping to stave off that dark possibility, the Bush administration proposed an unprecedented bailout for investors, a scheme that would authorize the Treasury Department to spend as much as $700 billion in tax dollars over the next two years to buy up bad securities, with little Congressional oversight save for a semiannual report on the process.

The move came after the federal government had already sunk a total of $900 billion into America's financial institutions this year, potentially bringing the total value of the Fed's tinkering to $1.6 trillion over three years.

The White House, Congressional leaders and Treasury officials are haggling over the details. Things are moving quickly, with a mammoth intervention that was unspeakable in economic circles a month ago now looking more and more inevitable.

The structure of the proposed bailout may change during those negotiations -- Democrats in Congress are pushing to save more homeowners and tie the package to some sort of limits on CEO pay for institutions that get a lifesaver -- but the deal outlined in the brief document released on Sept. 20 epitomizes the principle of privatizing gains while socializing risk. In other words, we're splitting an oil well with the Big Boys on Wall Street: They get the oil, we get the shaft.

It is, in short, a draft of what could be one of the greatest rip-offs in history. Bush, on the way out of power, is trying to create a publicly financed honeypot for the private sector on a scale never before imagined.

Those who played fast and loose with newer, ever shakier investment instruments in order to squeeze a few more bucks out of the markets' "irrational exuberance" about the housing sector would get a payday that would save their bacon. According to the New York Times, this huge pile of taxpayers' cash may even be available to foreign investors.

Home prices would continue to tank, though, as banks shed their bad loans at discounted prices to the government. Those subsidized assets would then be liquidated -- on the cheap because they're so overvalued -- to resuscitate the financial system. Rick Sharga, a senior officer with RealtyTrac, which monitors the housing market, told Reuters, "We've seen fewer and fewer properties go through the auction process because there's either little equity in them or even negative equity. So there's no incentive for people to buy them at the auctions."

Sharga added that "bank repossessions continue to grow at a pretty rapid clip," but an analyst told me recently that he knew of banks that simply weren't taking possession of foreclosed properties because they didn't want them on their balance sheets.

As those assets are disposed of, the value of all Americans' homes will continue to fall, because sales of comparable properties determine their worth. That would, in turn, leave a greater number of Americans with mortgages worth more than the amount of equity in their homes, and the cycle would continue. Things are already bleak on that front; the rate of U.S. foreclosures increased 75 percent in 2007 and 55 percent in the year ending this June. The Associated Press reported, "More than four million American homeowners with a mortgage, a record nine per cent, were either behind on their payments or in foreclosure at the end of June."

Many more will lose their homes, and all of us will get the tab: higher taxes, swelling deficits, higher interest rates and a moribund economy.

The plan doesn't specify what, if anything, U.S. taxpayers will get in return for their largesse. The government isn't spending more than a trillion dollars to nationalize failed institutions in order to protect stakeholders and liquidate those overvalued assets in an orderly manner. That might make a lot of sense, and it would essentially make Joe and Jane taxpayer owners of something that might rebound in value down the road.

Instead, Bush's proposal would take bad paper off the books of institutions that are ailing but haven't yet gone belly-up, and we wouldn't necessarily get a stake in those institutions; they'd only become "financial agents of the government," according to the draft released Saturday.

As Paul Krugman notes, "historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets."

The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the (Resolution Trust Corporation, founded in the wake of that crisis). The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system -- that is, convince creditors of troubled institutions that everything's OK -- simply by buying assets off these institutions.

Making matters even worse is the fact that it's almost impossible to put a fair market value on this massive pile of bad debt. As Peter Goodman of the New York Times notes, "no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday."

There will be a fight in Washington, and much debate, about which ideological direction the bailout should lean, and the version offered up by the Bush administration is -- no surprise here -- tilted heavily in favor of those at the top of the economic pile.

What's clear is that there is going to be a massive transfer of public wealth to the private sector, and at least the lion's share of that cash, if not all of it, will end up in the hands of an investor class whose recklessness got us into this mess in the first place.

Meltdown

This bailout is a desperate attempt to save the modern economic system from falling under the weight of its deep structural imbalances. As such, it's unlikely to work over the medium and long terms, even if it has the desired immediate effect of propping up creaky markets and restoring their (largely unjustified) sense of security.

The proximate cause of the financial system's meltdown is not all that hard to grasp. The decades-long supremacy of the ideology euphemistically called "free trade" resulted in capital being unmoored from national economies and freed to move around the world with few limitations (under the imperative of government not "intervening" in markets). Unconstrained by borders and investment rules, those dollars, yen, euros and what have you roamed the planet seeking a better rate of return. Investors moved in packs, rushing lemming-like to whatever hot up-and-coming market the Economist was writing about in a given month, and a series of bubbles resulted.

Those bubbles made some people incredibly rich, and hurt others badly.

Of late, real estate was the can't-miss investment, and as enormously overvalued housing bubbles sprang up, notably in the United States, Wall Street's financial whizzes started offering newer and more "creative" investment vehicles, bundling mortgages and selling them off to investors from around the globe.

That was driven by an era of relentless deregulation, both at home and abroad. Here in the United States, the trend of deregulation culminated in 1999 with the death of the Glass-Steagall Act, the New Deal-era legislation that had forced financial institutions to choose between investment banking and commercial lending. Meanwhile, international bodies like the WTO and the IMF were pressuring the governments of all countries to drop their controls on the flow of cash and goods.

Without fear of a regulatory backlash, the banks pushed their new investments hard, and investors gobbled them up with glee. Writing in the Columbia Journalism Review, Dean Starkman cited reports from the business press about loan agents at Ameriquest being ordered to watch "Boiler Room," the film about sleazy financial brokers pushing bad investments on gullible retirees (Ameriquest was a predatory subprime lender that went down last year). Starkman quoted an executive with Morgan Stanley's mortgage unit as saying, "It was unbelievable. We almost couldn't produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce."

In the end, investors were basically buying up paper that had only a distant relationship with anything concrete. The link that had long existed between homeowners and lenders was broken, and debt -- in this case debt tied to housing, but also commercial and consumer debt -- became a hot investment vehicle.

Convinced that the market would continue to grow indefinitely -- or maybe that they'd get bailed out if things headed south -- investors leveraged their assets further and further, in effect buying on margin just like the bad old days before the Crash.

The banks and investment houses worked hard to find new ways to make their own pounds or rubles, creating not only new types of debt-based securities, but also coming up with new forms of insurance to (supposedly) shield investors against the risk those loans represented.

That was all well and good for them, if not for the rest of us, until the housing market started to tank. Despite assurances from the government earlier this year that the disaster had been "contained" to the subprime market, it began to spread. As the Associated Press reported, the tanking real estate market "shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments." Bloomberg reported that 3 million American homeowners are holding prime (or, actually, semi-prime) "alt-A" loans (don't ask) worth about $1 trillion, or $150 billion more than the entire outstanding subprime market.

As those loans -- many of which were taken on investment properties by people expecting a nice, quick turnover -- started to go belly-up, a panic ensued. As the rot spread, banks started going down and investors essentially began a stampede on an already weakened financial sector. It was the modern-day equivalent of a bank run, but on a global scale.

That posed a risk to the mammoth and wholly unregulated market in insurance on bad loans that had grown up around these new kinds of investments. The market in what are known as "credit default swaps" is of unknown size, but it's estimated to be worth as much as $60 trillion, most of it essentially paper backed by too little in the way of hard assets.

The government knew that if that market tanked, it could take down the global economy. That threat was, in large part, the thinking behind the $85 billion dollar bailout of AIG less than a week ago -- AIG was a key player in this huge but hazy market, and it did business with banks around the world.

At that point, a feeling of panic was spreading, and lawmakers in Washington felt that they had to do something, anything, to stop the meltdown. The banking sector's crisis threatens the entire economy, as the capital needed for new investment and expansion has begun to dry up. Jared Bernstein of the Economic Policy Institute told the New York Times that "Wall Street isn't this island to itself" and warned that if the finance sector "gets worse, we're going to be stuck in the doldrums for a very long time, because that directly blocks healthy economic activity."

Global Capitalism's Crises of Poverty and Overproduction

The financial meltdown in the United States is huge, but it isn't unique. Think of the Asian financial crisis, Mexico's "peso crisis" or the dot com crash. All had one thing in common: an investor class that at one time valued thrift, limited risk and steady growth plunged trillions with almost suicidal abandon into one bubble after the next.

All of which begs the question of what it is about our modern economic system that creates this cycle of inflating and bursting bubbles.

The answer, in large part, comes down to a decline in profitability in investments in concrete things, which has sent investors scurrying for abstract financial instruments in search of a fat return.

That shift, in turn, results from a simple aberration: a small fraction of the planet's population is tied to an economic system in which productivity is effectively an end unto itself. It makes tons and tons of widgets, always seeking new widget markets (and sucking up most of the planet's raw materials). At the same time, the powerhouses of the global economy -- the United States, Europe, Japan and the "Asian Tigers" -- have given woefully low priority to economic development in the rest of the world. They've essentially relegated it to NGOs and an underfunded United Nations, and in their own development funding they've prioritized geopolitics -- their "national interests" -- over poverty relief.

That's left much of the rest of the world's population (and this includes people in the wealthiest countries as well as the poorest) with barely enough money to feed their families, much less buy all those widgets. According to the UN, 80 percent of the people on the planet live on $10 dollars a day or less, and they're not going to take many flights on Boeing's shiny new airplane, buy GE's dishwashers or use Nortel's broadband. Over just the past two years, the number of people living on the "edge of emergency" -- in imminent danger of starvation or death from disease epidemics -- has doubled, zooming from 110 million people to 220 million, according to CARE International.

In other words, at the heart of the current crisis, like those that preceded it in recent years, is a massive imbalance inherent in the modern system of capitalism. It is caused by twin crises inherent in the structure of our global economy: a crisis of overproduction in the "core" states with advanced economies, and soul-crushing poverty in much of the "periphery."

In the booming years after World War II, the wealthy countries, led by the United States, did very well manufacturing goods for the entire planet. But as Europe and Japan rose from the ashes, and later, as production in countries like Taiwan, South Korea and Singapore increased, the industrial world simply started making more crap than there were consumers to purchase it.

Capitalism's tendency toward overproduction has been something with which thinkers dating back to Karl Marx have wrestled. If, as one definition holds, capitalism is all about maximizing efficiency, what happens when meaningful production becomes so efficient that the system ends up cranking out more goods than the population needs -- more than it can absorb?

The answer is simple. Since the middle of the last century, investors' returns on real production -- manufacturing -- has been in steady decline. Economist Robert Brenner described it as a "long downturn" in the world's most advanced economies. He noted that the seven leading industrial economies grew by a steady rate of 5 percent or more annually from the end of World War II through the 1960s, but in the 1970s that fell to 3.6 percent, and it has averaged around 3 percent since 1980.

The social critic Walden Bello has arguably been the clearest voice connecting the problem of overproduction to the rush of speculation that has led to today's financial crash. Bello noted that in the 1990s, the heyday of corporate globalization, the "U.S. computer industry's capacity was rising at 40 percent annually, far above projected increases in demand."

The world auto industry was selling just 74% of the 70.1 million cars it built each year. So much investment took place in global telecommunications infrastructure that traffic carried over fiber-optic networks was reported to be only 2.5 percent of capacity. Retailers suffered as well, with giants like K-Mart and Wal-Mart hit with a tremendous surfeit of floor capacity. There was, as economist Gary Shilling put it, an "oversupply of nearly everything."

A report in the Economist, cited by Bello, found that the world of Clinton's "New Economy" was "awash with excess capacity in computer chips, steel, cars, textiles and chemicals," and noted that "the gap between capacity and output was the largest since the Great Depression."

An inevitable result of that imbalance was a massive migration of capital from real, productive industry to the "speculative sector" run by financial giants like AIG and Lehman Brothers. As Bello noted:

So profitable was speculation that in addition to traditional activities like lending and dealing in equities and bonds, the '80s and '90s witnessed the development of ever more sophisticated financial instruments such as futures, swaps and options -- the so-called trade in derivatives, where profits came not from trading assets but from speculation on the expectations of the risk of underlying assets.

Exacerbated by a relentless assault on public interest regulation and economic nationalism under the guise of "free trade," the increasingly speculative tendencies of global investors created fertile ground for the growth of that pile of bad paper to which the Bush administration is reacting with its trademark brand of top-down reverse socialism.

In a nutshell, our modern economic system has become divorced from what an "economy" is supposed to do in human terms. It was anthropologist Karl Polanyi who argued that the term "economics" has both a formal meaning -- a system of exchange of goods and services designed to maximize efficiency -- and a "substantive" one: the survival strategy of humans in their natural environment. It's a concept that transcends conventional economic concepts of supply and demand, markets and states, and it's one that we've ignored for too long.

As the financial sector threatens to fall apart around us, it's important to understand the crisis on all of these levels, or we run the risk of losing sight of the forest for the trees. One has to keep in mind that this is all happening during the era of the $100-plus barrel of oil, with the global economy integrated more than ever before and during a period of deep environmental peril due to global climate change and related problems of drought and desertification.

With the Bush administration pumping more than a trillion dollars into the private sector, Jim Bunning, the junior senator from Kentucky, lamented that the "free market for all intents and purposes is dead in America." As more mainstream economists talk about the possibility of sliding into a full-blown depression, we may well be in the grip of a kind of economic "Grotian Moment." The term, named for the 17th century Dutch legal philosopher Hugo Grotius, describes an event that has such a great impact that it results in fundamental changes to the prevailing system.

Slavoj Zizek wrote that "One of the clearest lessons of the last few decades is that capitalism is indestructible. Marx compared it to a vampire, and one of the salient points of comparison now appears to be that vampires always rise up again after being stabbed to death." That's true; for a generation, we've been constrained from even discussing the fundamental structures of the prevailing system -- its excesses and shortfalls. This may be a moment in which we can do so, and should.

If we are at such a juncture, then we as a society have a serious question to answer: Will we bail out the speculator class so that it can regroup and move on to the next bubble, precipitating the next crisis of capitalism, or will we address the underlying problems of underdevelopment and overproduction in a way that's adequately sustainable in an era of serious environmental peril?

So far, Bush and the Congress appear to have the wrong answer.

MARKETS WERE 500 TRADES FROM A MELTDOWN

ALMOST ARMAGEDDON

MARKETS WERE 500 TRADES FROM A MELTDOWN

By MICHAEL GRAY

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The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.

Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value.

The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.

While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.

Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.

Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund - which touted itself as super safe - fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default - which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.

By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.

Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.

And for good reason. By the close of business on Wednesday, $144.5 billion - a record - had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.

By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.

The banks knew something drastic had to be done. So did Paulson.

The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.

Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.

Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.

By that time, Paulson had announced the plan. It included insurance on money market accounts, a move that started in quiet Thursday morning, when the former Goldman Sachs executive saved the country from a paralyzing

Paulson Bailout Plan a Historic Swindle

Paulson Bailout Plan a Historic Swindle

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Financial-market wise guys, who had been seized with fear, are suddenly drunk with hope. They are rallying explosively because they think they have successfully stampeded Washington into accepting the Wall Street Journal solution to the crisis: dump it all on the taxpayers. That is the meaning of the massive bailout Treasury Secretary Henry Paulson has shopped around Congress. It would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses--many hundreds of billions, maybe much more. What's not to like if you are a financial titan threatened with extinction?

If Wall Street gets away with this, it will represent an historic swindle of the American public--all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics--exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.

Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: "The joyous reception from Congressional Democrats to Paulson's latest massive bailout proposal smells an awful lot like yet another corporatist lovefest between Washington's one-party government and the Sell Side investment banks."

A kindred critic, Josh Rosner of Graham Fisher in New York, defined the sponsors of this stampede to action: "Let us be clear, it is not citizen groups, private investors, equity investors or institutional investors broadly who are calling for this government purchase fund. It is almost exclusively being lobbied for by precisely those institutions that believed they were 'smarter than the rest of us,' institutions who need to get those assets off their balance sheet at an inflated value lest they be at risk of large losses or worse."

Let me be clear. The scandal is not that government is acting. The scandal is that government is not acting forcefully enough--using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Stop the music, so to speak, instead of allowing individual financiers and traders to take opportunistic moves to save themselves at the expense of the system. The step-by-step rescues that the Federal Reserve and Treasury have executed to date have failed utterly to reverse the flight of investors and banks worldwide from lending or buying in doubtful times. There is no obvious reason to assume this bailout proposal will change their minds, though it will certainly feel good to the financial houses that get to dump their bad paper on the government.

A serious intervention in which Washington takes charge would, first, require a new central authority to supervise the financial institutions and compel them to support the government's actions to stabilize the system. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own--cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed.

Only with these conditions, and some others, should the federal government be willing to take ownership--temporarily--of the rotten financial assets that are dragging down funds, banks and brokerages. Paulson and the Federal Reserve are trying to replay the bailout approach used in the 1980s for the savings and loan crisis, but this situation is utterly different. The failed S&Ls held real assets--property, houses, shopping centers--that could be readily resold by the Resolution Trust Corporation at bargain prices. This crisis involves ethereal financial instruments of unknowable value--not just the notorious mortgage securities but various derivative contracts and other esoteric deals that may be virtually worthless.

Despite what the pols in Washington think, the RTC bailout was also a Wall Street scandal. Many of the financial firms that had financed the S&L industry's reckless lending got to buy back the same properties for pennies from the RTC--profiting on the upside, then again on the downside. Guess who picked up the tab? I suspect Wall Street is envisioning a similar bonanza--the chance to harvest new profit from their own fraud and criminal irresponsibility.

If government acts responsibly, it will impose some other conditions on any broad rescue for the bankers. First, take due bills from any financial firms that get to hand off their spoiled assets, that is, a hard contract that repays government from any future profits once the crisis is over. Second, when the politicians get around to reforming financial regulations and dismantling the gimmicks and "too big to fail" institutions, Wall Street firms must be prohibited from exercising their usual manipulations of the political system. Call off their lobbyists, bar them from the bribery disguised as campaign contributions. Any contact or conversations between the assisted bankers and financial houses with government agencies or elected politicians must be promptly reported to the public, just as regulated industries are required to do when they call on government regulars.

More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss--their situation is too dire--but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms.

The government, meanwhile, may have to create another emergency agency, something like the New Deal, that lends directly to the real economy--businesses, solvent banks, buyers and sellers in consumer markets. We don't know how much damage has been done to economic growth or how long the cold spell will last, but I don't trust the bankers in the meantime to provide investment capital and credit. If necessary, Washington has to fill that role, too.

Finally, the crisis is global, obviously, and requires concerted global action. Robert A. Johnson, a veteran of global finance now working with the Campaign for America's Future, suggests that our global trading partners may recognize the need for self-interested cooperation and can negotiate temporary--maybe permanent--reforms to balance the trading system and keep it functioning, while leading nations work to put the global financial system back in business.

The agenda is staggering. The United States is ill equipped to deal with it smartly, not to mention wisely. We have a brain-dead lame duck in the White House. The two presidential candidates are trapped by events, trying to say something relevant without getting blamed for the disaster. The people should make themselves heard in Washington, even if only to share their outrage.

U.S. Treasury to Bail Out Foreign Banks

Foreign banks may get help

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In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department's mortgage bailout, according to the fine print of an administration statement Saturday night.

The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States.

Treasury Secretary Henry Paulson confirmed the change on ABC's "This Week," telling George Stephanopoulos that coverage of foreign-based banks is "a distinction without a difference to the American people."

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said.

"That's a distinction without a difference to the American people. The key here is protecting the system. ... We have a global financial system, and we are talking very aggressively with other countries around the world and encouraging them to do similar things, and I believe a number of them will. But, remember, this is about protecting the American people and protecting the taxpayers. and the American people don't care who owns the financial institution. If the financial institution in this country has problems, it'll have the same impact whether it's the U.S. or foreign."

The legislative outline that went to Capitol Hill at 1:30 a.m. Saturday had said that an eligible financial institution had to have "its headquarters in the United States." That would exclude foreign-based institutions with big U.S. operations, such as Barclays, Credit Suisse, Deutsche Bank, HSBC, Royal Bank of Scotland and UBS.

But a Treasury "Fact Sheet" released at 7:15 Saturday night sought to give the administration more flexibility, with an expanded definition that could include all of those banks: "Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets."

The major change in the suggested eligibility requirements is the biggest change that Treasury publicly made after a day of briefings and conversations with Capitol Hill, and is likely the first of many.

Aspects of the $700 billion, two-year proposal that are still under negotiation include what, if anything, will be added to the administration's simple but sweeping proposal. And the parliamentary route, such as what committees or hearings might be involved, has not been finalized.

House Financial Services Committee Chairman Barney Frank (D-Mass.) has a hearing scheduled for Wednesday that is likely to focus on the proposal.

Under what congressional officials called a likely scenario, the measure could go to the House floor on Thursday, with passage expected the same day.

The Senate could take the package up as soon as Friday and send it to President Bush for his signature, although the Senate schedule is less predictable and had not been determined.

Officials expect passage by huge margins in both chambers because Paulson and Federal Reserve Chairman Ben Bernanke have told congressional leaders the country's financial stability depends on it.

House Democrats plan to insist on adding protections for homeowners facing foreclosure. They also want to add a measure to help homeowners facing bankruptcy and an executive compensation restriction designed to prevent golden parachutes for the heads of troubled institutions.

Sen. Barack Obama (D-Ill.), who was supportive of the bailout concept in a statement released Friday, believes that "whatever gets done in Congress has to protect Main Street," senior adviser Stephanie Cutter said on MSNBC on Saturday.

On "Fox News Sunday," Paulson told Chris Wallace that he would resist the Democrats' desired limits on executive compensation.

"If we design it so it's punitive and institutions aren't going to participate, this won't work the way we need it to work," Paulson said. "Let's talk executive salaries: There have been excesses there. I agree with the American people. Pay should be for performance, not for failure. We've got work to do in that regard. We need to do that work. But we need this system to work. And so reforms need to come afterwards. My whole objective with the plan we have is to give us the maximum ability to make it work."

And the secretary told NBC's Tom Brokaw on "Meet the Press" that he doesn't want new regulations simultaneously: "That's not doable to do that immediately. But we very much need new regulations."

Senate Banking Committee Chairman Chris Dodd (D-Conn.) told Stephanopoulos on ABC: "If we're going to spend taxpayer money to get rid of bad debt in these places, what is the reciprocal obligation … from the firms? … I think there's going to be a strong interest to deal with the Main Street aspects."

Appearing with him, House Republican Leader John A. Boehner of Ohio retorted: "We've already dealt with that, when we had the housing bill last summer. I didn't vote for it, because it's $300 billion bailout for scam artists and speculators and others around the housing industry. But there are a lot of tools in there to help the Federal Housing Administration deal with the foreclosure problem that's out there. We need to rise above partisan politics … and deal with this as adults."

Bush Requests up to $1 Trillion in Bailouts

Bush Officials Urge Swift Action on Rescue Powers

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The Bush administration, moving to prevent an economic cataclysm, urged Congress on Friday to grant it far-reaching emergency powers to buy hundreds of billions of dollars in distressed mortgages despite many unknowns about how the plan would work.

Henry M. Paulson Jr., the Treasury secretary, made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that it could reach $1 trillion.

The outlines of the plan, described in conference calls to lawmakers on Friday, include buying assets only from United States financial institutions — but not hedge funds — and hiring outside advisers who would work for the Treasury, rather than creating a separate agency. Democratic leaders immediately pledged to work closely with Mr. Paulson to pass a plan in the next week, but they also demanded that the measure include relief for deeply indebted homeowners, not just for banks and Wall Street firms.

At the end of a week that will be long remembered for the wrenching changes it brought to Wall Street and Washington, Mr. Paulson and Ben S. Bernanke, the Federal Reserve chairman, told lawmakers that the financial system had come perilously close to collapse. According to notes taken by one participant in a call to House members, Mr. Paulson said that the failure to pass a broad rescue plan would lead to nothing short of disaster. Mr. Bernanke said that Wall Street had plunged into a full-scale panic, and warned lawmakers that their own constituents were in danger of losing money on holdings in ultra-conservative money market funds.

People involved in the discussions on Friday said that Mr. Paulson said he did not want to create a new government agency to handle the rescue plan. Rather, he said, the Treasury Department would hire professional investment managers to oversee what could be a huge portfolio of mortgage-backed securities.

He indicated that he wanted to buy securities only from United States financial institutions, a decision that could anger legions of foreign institutions that poured hundreds of billions of dollars into the American mortgage market in the housing boom, and have customers located here.

Basic questions remained unanswered as of Friday evening, including how much of the mortgage market the administration hoped to buy up. The broader economic questions were even more daunting. What were the dangers in letting the government borrow another $500 billion — which ultimately might have to come from foreign investors — at the same time the deficit was already skyrocketing?

Would this epic bailout lead to the same kind of runaway inflation that plagued the United States throughout the 1970s?

But as the stock market zoomed for the second day in a row, mainly in response to hopes of a sweeping bailout plan from Washington, President Bush and lawmakers alike focused on how fast they could deliver as much government help as necessary.

“Given the precarious state of today’s financial markets — and their vital importance to the daily lives of the American people — government intervention is not only warranted, it is essential,” President Bush said in a speech in the Rose Garden at the White House.

News of the giant rescue plan sent stock markets soaring around the world. The Dow Jones industrial average shot up 368 points, or 3.35 percent, on Friday, after having jumped 410 points on Thursday on early rumors of the plan. The rally erased the losses from earlier in the week and allowed stock prices to end higher for the week. Perhaps more important to Fed and Treasury officials, the credit markets showed signs of thawing as well. Yields on three-month Treasury bills had sunk to almost zero on Wednesday and Thursday as investors fled from most debt securities and poured their money into the safest and shortest-term Treasuries. But on Friday, the yield on three-month Treasuries had edged up to 0.99 percent — still well below normal, but much closer to normal than before.

Meanwhile, the Federal Reserve and Treasury deployed additional tens of billions of dollars to prevent an investor panic and flight from the nation’s money market mutual funds. Such funds, totaling $3.4 trillion in assets, are held by tens of millions of individuals and are traditionally considered as safe as bank deposits. But they had come under pressure in recent days as investors began to pull money out faster than the funds could sell assets.

The Fed announced that it would lend money to money market funds to make certain they could meet all the demands of investors without having to sell off assets — including mortgage-backed securities — at fire-sale prices.

The Treasury Department, in a coordinated announcement, said it would use $50 billion in the government’s Exchange Stabilization Fund, a fund normally reserved to deal with currency imbalances, to insure money market fund customers against losses.

While the stock market showed its euphoria, the political obstacles to resolving the financial crisis remained high. The first is simply a matter of time: Congress is set to adjourn at the end of next week, and it is being asked to approve a plan involving more money than any single program in history.

As of Friday evening, Mr. Paulson had yet to deliver a formal plan to Congress. House and Senate leaders pledged to work through the weekend, but they insisted that Mr. Paulson bring them a detailed plan rather than just an outline.

An even bigger obstacle was the goal of the plan. President Bush and Mr. Paulson made it clear that their primary, and perhaps only, goal was to stabilize the financial markets by removing hundreds of billions of dollars in “illiquid assets” from the balance sheets of banks and financial institutions.

“Confidence in our financial system and its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken,” the president said. “We must address the root cause behind much of the instability in our markets — the mortgage assets that have lost value during the housing decline and are now restricting the flow of credit.”

But Democratic lawmakers insisted that any plan would also have to provide relief to millions of families that were poised to lose their homes to foreclosure.

The House Speaker, Nancy Pelosi of California, said she would insist that the plan “uphold key principles — insulating Main Street from Wall Street and keeping people in their homes by reducing mortgage foreclosures.”

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said the plan would have to include requirements that the government reduce the loan amounts or improve the terms for many distressed borrowers.

“We should be more willing to write down the mortgages,” Mr. Frank said in a telephone interview on Friday. “We’ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.”

Democrats also plan to push to include another economic stimulus measure that could provide extra money for Medicaid, highways and public work projects. Republican leaders quickly warned Democrats against trying to use the emergency to extract other gains.

“Loading it up to score political points or fit a partisan agenda will only delay the economic stability that families, seniors and small businesses deserve,” said Representative John Boehner of Ohio, the House Republican leader.

In the conference calls with lawmakers, Mr. Bernanke said that the critical need was to have the government unclog the financial system by taking over unsellable assets — primarily securities tied to bad mortgages — so that financial institutions could resume normal business. Without action, Mr. Bernanke warned, the panic would quickly lead to a deep and extended recession.

In a briefing to reporters on Friday morning, Mr. Paulson said administration officials would try to lift the overall mortgage market by having the Treasury Department immediately start buying mortgage-backed securities on the open market.

The Treasury Department had already announced plans to buy $5 billion worth of securities issued by Fannie Mae and Freddie Mac, as part of its bailout of those two government-sponsored mortgage companies earlier this month. But Mr. Paulson plans to step up the Treasury’s buying, a move reminiscent of the Japanese government’s attempt to prop up Japan’s stock market by buying shares.

In addition, Mr. Paulson said Fannie Mae and Freddie Mac would be pushed to buy more mortgages and mortgage-backed securities. Because the government has seized both companies and put them into a conservatorship, policy makers have direct control over their activities.

Congressional officials said that they expected to get copies of a written proposal from the Treasury Department either late Friday or Saturday morning at a meeting on Capitol Hill between Treasury and Congressional staff members.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said that he was eagerly awaiting the administration’s plan. “I am anxious to see what they are going to offer and what tolerance level there is for things we feel a need to include if they don’t include it themselves,” Mr. Dodd said in an interview.

Bush seeks'​'​dicta​toria​l power​"unrev​iewab​le by courts

Treasury Seeks Authority to Buy $700 Billion Assets

By Alison Fitzgerald and John Brinsley

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The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.

The plan, designed by Treasury Secretary Henry Paulson, is aimed at averting a credit freeze that would bring the financial system and economic growth to a standstill. The bill would bar courts from reviewing actions taken under its authority.

‘‘It sounds like Paulson is asking to be a financial dictator, for a limited period of time,'' said historian John Steele Gordon, author of ‘‘Hamilton's Blessing,'' a chronicle of the national debt. ‘‘This is a much-needed declaration of power for the Treasury secretary. We can't wait until the next administration in January.''

As congressional aides and officials scrutinized the proposal, the Treasury late today clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage-related assets and, after consultation with the Federal Reserve chairman, ‘‘other assets, as deemed necessary to effectively stabilize financial markets,'' the Treasury said in a statement.

The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.

Bigger Than Pentagon

The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.

A failure by the government to support the U.S. financial system could lead to ‘‘a depression,'' Senator Charles Schumer told reporters in New York. ‘‘To do nothing is to risk the kind of economic downturn this country hasn't seen in 60 years.''

The Treasury is seeking authority to step in as buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, following government takeovers of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.

‘‘Democrats will work with the administration to ensure that our response to events in the financial markets is swift,'' House Speaker Nancy Pelosi said in a statement.

Fast Track

The majority party will seek to reduce mortgage foreclosures and create ‘‘fast-track authority'' for an overhaul of financial regulation, Pelosi said. Democrats will ensure ‘‘the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms.''

The proposal will include curbs on executive pay for the companies whose assets the government will be buying, Steve Adamske, a spokesman for Representative Barney Frank, said today in an interview.

Democrats also will include a plan to stem foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration, the Federal Deposit Insurance Corp., and Freddie MacFannie Mae, Adamske said. Frank, a Democrat from Massachusetts, is chairman of the House Financial Services Committee. and

‘‘The consequences of inaction could be catastrophic,'' Senate Majority Leader Harry Reid said in a statement.

‘Serious Issues'

‘‘While the Bush proposal raises some serious issues, we need to resolve them quickly,'' he said. ‘‘I am confident that, working together, we will.''

House minority leader John Boehner, an Ohio Republican, said today he is reviewing the proposal but didn't say whether he was inclined to support it.

‘‘The American people are furious that we're in this situation, and so am I,'' Boehner said in a statement. ‘‘We need to do everything possible to protect the taxpayers from the consequences of a broken Washington.''

Congress, which may pass legislation as soon as Friday, needs to ‘‘make sure there are protections built in for taxpayers,'' said Schumer, a New York Democrat on the banking committee. Lawmakers should ensure ‘‘taxpayers who gave the money will be put ahead of the stockholders, bondholders and others.''

Paulson is seeking an expansion of federal influence over markets that hasn't been seen since the Great Depression, said Charles Geisst, author of ‘‘100 Years of Wall Street'' and a finance professor at Manhattan College in New York.

Hoover Era

Geisst likened the plan to the Reconstruction Finance Corp., which was chartered by Herbert Hoover in 1932 with the goal of boosting economic activity by lending money after credit markets seized up.

President George W. Bush said he called leaders in both houses of Congress and ‘‘found a common understanding of how severe the problem is and how necessary it is to get something done quickly.''

‘‘This is going to be a big package because it's a big problem,'' BushAlvaro Uribe at the White House. ‘‘We need to get this done quickly, and the cleaner the better.'' said following a meeting with Colombian President

Democratic presidential nominee Barack Obama said in a radio address that he ‘‘fully supports'' Paulson and Fed Chairman Ben S. Bernanke's efforts to stabilize the financial system. The plan, however, should benefit both main street and Wall Street, he said.

Republican Presidential nominee John McCain ‘‘looks forward'' to reviewing the proposal while focusing at least in part on ‘‘minimizing the burden on the taxpayer,'' said Jill Hazelbaker, communications director for the McCain campaign.

Ban Legal Challenges

The ban on legal challenges of actions by Treasury is ‘‘distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act,'' said Jerry Markham, a law professor at Florida State University and author of ‘‘A Financial History of the United States.''

‘‘What you don't want happen is to have lawsuits that will slow things down and cause problems,'' he said.

The proposal would raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion and require the Treasury secretary to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that.

Paulson would gain discretion to act as he ‘‘deems necessary'' to hire people, enter into contracts and issue regulations related to a revival of U.S. mortgage finance, according to a three-page proposal. The Treasury would ‘‘take into consideration'' protecting taxpayers and promoting market stability.

Hiring Authority

The Treasury plans to hire managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, a person briefed on the proposal said yesterday. The document specifies that Treasury may buy only assets from U.S.-based financial institutions issued or originated on or before Sept. 17.

The House will pass legislation to implement the plan by the end of next week, and the Senate will act soon after, Frank said yesterday in an interview on Bloomberg Television's ‘‘Political Capital with Al Hunt.''

Bush today said he's unconcerned that the price tag on the package may seem high.

‘‘I'm sure there are some of my friends out there that are saying, I thought this guy was a market guy, what happened to him,'' the president said. ‘‘My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''

The Bush administration seeks ‘‘dictatorial power unreviewable by the third branch of government, the courts, to try to resolve the crisis,'' said Frank Razzano, a former assistant chief trial attorney at the Securities and Exchange Commission now at Pepper Hamilton LLP in Washington. ‘‘We are taking a huge leap of faith.''