The Bail Out, Bad Management & Helmet Cams

This post comes a day late and $700 billion dollars short. I wrote most of it two weeks ago when the bailout was proposed in a 3 page document. Things have changed a bit since then but my opinion on this matter remains firm.  Helmet Cams appear to be the only  answer.

The way the government threw together their request demand for $700B, along with the insistence that we give it to them free of oversight and right away set off all sorts of warning bells for me.  For those that do not learn from history are doomed to repeat it. And I've heard their rant before.

First some background

I don't pretend to understand the intricacies of how our economy functions, but from what I've been able to glean in the past few days this "economic crisis" seems to have stemmed from:
  1. Our government's push to deregulate investment banking back in 2000. In other words, the government relaxed or eliminated rules about what investment banks could do.
  2. The invention of a "Mortgage Backed Security". Basically it's stock that is based on a group of mortgages likelihood of paying.
  3. Banks encouraging people to take out mortgages they could not afford. This was done because the value of the mortgage was in using it to back the MBS. No one was paying attention to the fact that the mortgages were unlikely to be paid back.
  4. Banks sold the MBSs to each other and insurance companies insured them. 
  5. When people stopped paying the mortgages they couldn't afford, banks realized the MBSs were not worth much. No one could sell MBSs (that's what "no longer liquid" means) and it became very difficult for companies to find actual money for short or long term loans.
  6.  In theory this leads to a ripple effect that makes people lose their jobs.
It's a pyramid scheme based on a lack of traceability between the mortgage value and the MBS that represents them.  When the people who could never afford mortgages in the first place stopped paying them, the pyramid collapsed.  For a really clear explanation check out this NPR Fresh Air podcast with Law Professor Michael Greenberger.

Here's the part that scares the crap out of me:

Our government,
 are now running around saying:

Seven Things I've Heard Before
  1. We are in grave danger!
  2. We must act quickly and decisively to avert this catastrophe!
  3. Our previous behavior was the right thing to do...
  4. You, the tax payers need to foot the bill for fixing this.
  5. The cost is high but the right amount for the problem
  6. You'll get a great return on this investment.
  7. There is no time to waste. We must have unlimited, unchecked power to make this work!
And I've heard this all before from the same people when they wanted to go to war with Iraq.

I remember it seemed pretty dire then too.  Saddam Husein was apparently going to start hurling yellow-cake-uranium-tipped-mustard-gas-infused-anthrax out of our TVs if we didn't sign give the government all the resources and latitude they wanted.

So we rushed to let them have unlimited unchecked power with which they went on to:
  • give Haliburton no-bid contracts worth billions,
  • rack up an $800B war bill that is still growing,
  • destabilize an already precarious region of the world,
  • sacrifice the lives of 4176 US soldiers, 
  • sacrifice the lives of ~87,985 Iraqi Civilians,
  • systematically torture prisoners,
  • create a center of excellence for terrorist recruitment, and finally
  • prove that Saddam had no actual weapons and was not actually a threat after all.
Good thing we rushed into that one...

And now we have a new crisis. The economy. The government wants $700 billion, no oversight, and no regulation to fix the economic meltdown they birthed. They want to use this money to bail out the  people/companies that raped and pillaged our economy while screwing their stockholders and simultaneously giving themselves massive bonuses.

Bad Management Techniques
A lot of very smart people are saying that as ridiculous as these government people are, they are correct that something must be done to stabilize the economy.  I honestly don't know, but I seriously doubt that a problem got this bad this quickly that we have to act within "days" to save the world.

This sort of request for instant mindless action is a pretty typical things to hear from bad management in any company.  They say things like:

  • We've got a huge challenge and only a short time to fix it!
  • We need to fix this by Friday, or We need to fix in in the next 14 days or else!
  • It's a proverbial life or death situation and we need you the workers to save us.
  • This is an All-Hands-On-Deck situation.
  • You help by doing exactly what we say and not asking any questions.  
  • This is not our fault. Our markets situation changed and we need to react. 
I've seen this literally dozens of times and it's always a load of crap.  As bad as things are, most of the time the organization doesn't mobilize fast enough to meet the managers deadline. And somehow life goes on. Very often the situation never gets fixed, and people just stop caring. Turns out, it wasn't such a big deal after all.

Back to the Bail Out

The way they are asking for this bail out wreaks of bad management that doesn't have a clue what they really need.  Moreover, it is clear that they caused the problem, or at least let it happen in the first place.  Maybe some action is needed. But rushed action, with unlimited power and no oversight? I call bullshit!

Assuming that we need to take some form of action, which I'm increasingly willing to believe as I learn more about MBSs, liquidity and the credit markets, I still find it irresponsible, dangerous and unconscionable that would rush to a $700B decision in days based on the word of clearly incompetent people.

My Proposal

I suggest an alternative plan:

  1. Take every mid to high level investment bank executive (identified by the ridiculousness size of their bonus) and throw them in jail. We'll sort out sentencing limits later. This is an emergency, remember?
  2. Take every dollar, investment, and asset belonging to those people and liquidate it. It now belongs to the "bail out fund".
  3. Set up term limits in congress and the senate equal to 2 terms, and a total of 6 years, per lifetime of a person. (It's harder to buy people that can't be re-elected for life.)
  4. Publicly finance all elections and put anyone even hinting at giving money to a government official in jail for 10 years. (It's harder to buy people that don't have a legal reason to take your money.)
  5. Put any politician taking money from anyone in prison for 10 years.
  6. Let a couple of really big investment firms fail.
  7. Keep that $700 billion of our tax money on hand. 
  8. Get the smartest people we can find people with a proven track record of success and evidence of a conscience (like Warren Buffet) and have them figure out what to do.
  9. Require complete transparency on the solution and it's implementation. (Everyone involved has to wear a helmet cam 24x7x365 until this is over.)
  10. When real people, the ones that pay bills and work for a living, lose jobs as a result, use the bailout money to retrain them for jobs in the renewable energy sector.
  11. Make a substantial investment in renewable energy. 
  12. Use some of the remaining money to make the USA education system the best in the world. 
You might say that this wont work because there isn't enough room in the prisons for all the investment bank executives, corrupt politicians and lobbyists trying to bribe said politicians. I have a solution for that as well:
  1. Cancel the war on drugs  (at least for marijuana) Saving $42B from the federal budget.
  2. Let all the marijuana offenders out of jail (~80k people in prison + 600k arrested and released each year)
  3. In year 1, take that $42B we saved and use it to fund education and training to reintegrate those released prisoners people into society.
  4. In year 2 keep the $42B.
  5. Use all the jail space for investment bank executives, corrupt politicians and lobbyists trying to bribe said politicians.

This 3 page bailout plan is an act of insanity brought to us by a group of hack-managers with a proven track record for sucking at exactly the thing they want $700B of our money to do. A bail out may be necessary, but there is no one I trust to have unconditional and unlimited power with $700B.  If we must do this, make them all wear helmet cams so we can see what they are doing with our money every step of the way.
In the two weeks since I wrote this post the bailout bill went from 3 pages to 450+ pages. It was just passed into law yesterday with less than 24 hours between when congressmen got the document and when they voted. The Sunlight Foundation asked for 72 hours and digital version tracking which seems like a really good idea. Here's a look at what's involved in following the updates with the governments current process.  It appears physically impossible for them to have read the bill they passed.  Good thing we didn't rush into this one.