Will TARP Cover the Economy
Or Merely Protect the Wealthy?
Remember NY's Budget Tsouris
By Henry J. Stern
September 23, 2008
The Sun, Imperiled, Needs Backers
The New York Sun has told the public that, in the absence of a capital infusion by additional supporters, it will cease publication at the end of September. The Sun has been an enormous gift to the civic and cultural communities during the six and one-half years it has been in existence.
These are hard times for newspapers in general, with readers and advertisers switching to electronic means of communication. I love to read the printed word, and particularly value the Sun for its intelligence and the variety of viewpoints it offers.
The Sun has been a valuable source of information about all three levels of government. It is not in anyone’s pocket. I hope the newspaper can be saved, and if any of our readers has the means to be helpful, please call Seth Lipsky at the Sun.
Will TARP keep us dry, or hang us out to dry?
The $700 billion bailout of America’s financial institutions is called TARP (Troubled Asset Relief Program) by its proponents, President Bush and Treasury Secretary Paulson (most recently chairman of Goldman Sachs). To its critics, it stands for (Total Abdication of Responsibility to the Public). Whether the acronym was intended or not, tarp is a short form of tarpaulin, which is a strong water-resistant covering, thrown over an object for protection from bad weather or other hazards. (BTW, the USA PATRIOT Act was a farther-fetched acronym: Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act. It was passed in October 2001, shortly after 9/11.)
It appears that the Bush-Paulson proposal will not pass in its original form, which was essentially a book of blank checks for the Secretary of the Treasury to sign as he deems fit, with limited opportunity to recover the taxpayer funds to be expended. It has been threatened that contention over the bailout will delay it so much that the economic system will collapse, setting off a major depression as shares owned by the public are wiped out by bankruptcy.
The situation is, of course, complicated by the Presidential election, now just 42 days away. There will be great pressure on Congress to resolve the issue before November 4. Each party is likely to seek advantage for itself in the situation (Surprise). Congressional action, however, will only be part of the measures that must be taken to restore confidence in the market and avoid fiscal disaster.
After telling us in 2003 that Saddam Hussein had weapons of mass destruction which could destroy America in 45 minutes, the Administration has a credibility gap that dwarfs the Grand Canyon. It is possible, however, that the path they suggest is the better than failure to act, if the plan is sufficiently and promptly modified by Congress. Certainly the prospect of economic collapse, if it occurs, is dire. But how does one predict economic decisions which may be irrational.
The Swedish way of dealing with a similar situation like this is described on page C9 of today’s Times. Sweden faced collapse of the banking system in 1992, Carter Dougherty describes what they did, and how the economy was saved, at minimal cost to the taxpayers. Assuming that most of the story is true, it could well provide a model for the United States.
We see the need for rescue of a system brought down by greed and miscalculation, by loopholes in the law and by regulators who anticipated disaster, but failed to act, perhaps out of fear at rocking the leaky boat.
At this point, the rescuer should be able to take an equity position commensurate with its financial input to a private corporation, so that if and when good times return, the taxpayers can be made whole?
When Wagner and Stern First Met Trump - The Same Issue Arose in 1976.
When the 30-year-old Donald Trump put together his first major real estate transaction in 1976, transforming the Hotel Commodore into what is now the Grand Hyatt, just east of Grand Central Station, he received substantial tax abatement from the City of New York. This came during the administration of Mayor Beame and was handled for the city by Deputy Mayor Stanley Friedman.
Councilman Robert F. Wagner, Jr. and I, his Council colleague from Manhattan, publicly objected to the Trump deal, not because we opposed the tax abatement, which was needed to make the project economically feasible, but because there was no provision for recovery of the city contribution if the project proved successful. It turned out to be a great success, part of the city's economic recovery after the fiscal crisis of 1975, and it launched young Trump on a remarkable career in real estate..
The same principle that Bobby Wagner and I raised 32 years ago is at stake here, the government can give away money (or tax relief) , but there is no adequate way to recover the benefit or, Heaven forbid, make a profit for the taxpayers on the transaction no matter how profitable the development turns out to be. The shareholders are enriched, but the state that made the project possible is shut out.
Don’t Ignore New York's Budget Problems. (Tsouris means Troubles.)
The drama in Washington has taken attention away from the budget problems of the State and the City. The State is in worse shape, in part because its bicameral dysfunctional legislature is far less responsible than the city council. Governor Paterson has taken a sensible position on the necessity to reduce expenditures.
Nothing in his twenty-two year legislative career gave anyone the impression that he would do that, which is probably one reason there was no opposition when Eliot Spitzer chose him as his running mate in 2006. Today is Day 190 of the Paterson administration, and while Spitzer fell disastrously below expectations, Paterson has so far exceeded them.
In the field of budget prediction, it is customary for public officials to make pessimistic predictions for the fiscal year, and then take credit for meeting the gap and balancing the budget, as which required by law for both the city and state. The Federal government need not balance its budget; it has the option of printing money, and increasing the national debt limit with the approval of Congress. At the moment this sentence is being typed (1:15 pm, EDT, 9/23/08) the national debt stands at $9,734,671,647,361. For the last year, the debt has been rising at the rate of $2.02 billion a day, which is about $1.4 million per minute. Congress has been asked by the Bush administration to increase the debt limit to $11.3 trillion dollars.
The problem is that the State and the City are both spending at a rate that exceeds their anticipated revenues. As you know, there are three ways to attack this problem: 1) raise taxes 2) reduce spending 3) borrow money through some subterfuge.
1) may chase people out of the city, that is called “voting with your feet.” 2) may reduce services and make the city a less safe and attractive place to live, and 3) will lead to higher taxes, because the money must be paid back with interest.
1) It will be interesting to see what efforts will be made to reduce the gap for FY 2010, the impending city fiscal year which starts July 1, 2009, the state fiscal year, which starts April 1, 2009, or the Federal fiscal year, which starts October 1, 2009. As you can see, each level has its own fiscal year, and none of the three is the calendar year.
2) The sooner one begins with budget reduction actions, the less extensive the cuts will have to be. Nothing is expected to be done, however, before the elections, and then we will be in the holiday season. There is a tradition, at least in local government, that if you don’t fire someone before Thanksgiving, you don’t do it before New Year’s, so as not to ruin anyone’s holiday. That is fair and reasonable. It leaves a three-week window of opportunity between Election Day and Thanksgiving. We will see what happens, but one must first measure the impact of the bailout on the economy, which will be unlikely to be measured until next year.
3) No one in government wants to cut anything unless it is absolutely necessary. Unfortunately, one does not find out what is necessary until the vessel or the agency hit the iceberg, after which the loss is likely to be far greater than if one had changed course on receiving a warning. There has been ample notice here of an impending crisis in government budgets, just as the subprime crisis was publicly known a year and a half before the house of cards collapsed. As the prospective victims sought to escape, the crisis worsened. It was not the ripple effect, it was the domino effect, with each failure leading to others, as ships previously believed seaworthy foundered in the gale.
#500 09.23.2008 1495wds |