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Thursday, October 16, 2008

Stiglitz: The US Taxpayer Got a Raw Deal"

Joe Stiglitz is not very impressed with Paulson or his plan:

Paulson tries again, by Joseph Stiglitz, The Guardian: Gordon Brown has won plaudits ... for inspiring the turnaround in Hank Paulson's thinking that saw him progress from his "cash for trash" plan - derided by almost every economist, and many respected financiers - to a capital injection approach. The international pressure ... may indeed have contributed to Paulson's volte-face. But Paulson figured he could reshape the UK approach in a way that was even better for America's banks than his original cash strategy. The fact that US taxpayers might get trashed in the process is simply part of the collateral damage that has been a hallmark of the Bush administration. ...

Britain showed at least that it still believed in ... accountability: heads of banks resigned. Nothing like this in the US. Britain understood that it made no sense to pour money into banks and have them pour out money to shareholders. The US only restricted the banks from increasing their dividends. The Treasury has sought to create a picture ... of toughness, yet behind the scenes it is busy reassuring the banks not to worry,... it's all part of a show to keep voters and Congress placated. What is clear is that we will not have voting shares. Wall Street will have our money, but we will not have a full say in what should be done with it. A glance at the banks' recent track record of managing risk gives taxpayers every reason to be concerned.

For all the show of toughness, the details suggest the US taxpayer got a raw deal. There is no comparison with the terms that Warren Buffett secured when he provided capital to Goldman Sachs. Buffett got a warrant - the right to buy in the future at a price that was even below the depressed price at the time. Paulson got ... a warrant to buy in the future - at whatever the prevailing price at the time. The whole point of the warrant is so we participate in ... the upside...

Buffett got warrants equal to 100% of the value of what he put in. America's taxpayers got just 15%. Moreover, as George Soros has pointed out, ... the ... government should have issued convertible shares ... to ... automatically share in the gain in share price.

Whether we were cheated or not, the banks now have our money. The next Congress will have two major tasks ahead. The first is to make sure that if the taxpayer loses on the deal, financial markets pay. The second is designing ... a new regulatory system. Many in Wall Street ... hope that, once the crisis is passed, business will return to usual, and nothing will be done. That's what happened after the last global financial crisis.

There is a hope: the last financial crisis happened in distant regions of the world. Then it was the taxpayers in Thailand, Korea and Indonesia who had to pick up the tab...; this time it is taxpayers in the US and Europe. They are angry, and well they should be. Hopefully, our democracies are strong enough to overcome the power of money and special interests, and we will prove able to build the new regulatory system that the world needs if we are to have a prosperous and stable global economy in the 21st century.

    Posted by on Thursday, October 16, 2008 at 12:42 AM in Economics, Financial System, Policy | Permalink  TrackBack (0)  Comments (40)

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