Do Paulson and Bernanke Doom McCain's November Chances?

If his new plan remains afloat, Treasury Secretary Hank Paulson, from the Wall Street wing of the GOP, may well have doomed the November chances of John McCain, the presidential nominee of this month's Main Street-oriented Republican national convention. By promoting the mother of all financial bail-outs, Paulson has all but mocked McCain's recent anti-bail-out rhetoric, as well as whetting the Arizona Senator's slowly growing awareness that Wall Street misbehavior and greed and the year-long Paulson-Bernanke string of botched policy and rescue missions have been a disaster for 1) the United States and 2) what's left of Bush and Republican credibility.

McCain has never been much on economics, but Paulson's indicated arrangement with the Democrats -- financial firms will get to turn in the toxic debt and financial instruments they can't peddle for reimbursement by an American taxpayer-funded entity -- is so bad that if the former Navy pilot grins and accepts it he will look like a wobbler and a Grade A sap. He's already lost the edge he had coming out of the Republican convention. Barack Obama, by contrast, can get away with being evasive because the Democrats look like they're accepting a measure principally authored and promoted by Paulson and Federal Reserve Chairman Ben Bernanke.

Now for a little bit of background. We're not just looking at a real estate mess. Over the last quarter century, the total of public and private credit market debt in the United States -- most of it, in fact, is private -- has more than quintupled from $8 to $48 trillion, the biggest such orgy in world history. Over that period, domestic financial debt - the money borrowed by the financial sector for expansion, consolidation, empire-building, leverage, exotic mortgages, gambling, you name it - swelled from just $1 trillion to some $14 trillion. Employing these economic steroids, the financial sector ballooned itself from 14-15% of what back in the mid-1980s was the Gross National Product to 20-21% in 2004 of the newer Gross Domestic Product calculation. In the meantime, the once-dominant manufacturing sector fell far behind, dropping to just 12% of GDP. In a nutshell, the economy has been hijacked in recent decades by the very groups who now purport to have remedies - Wall Street, from whence Paulson emerged, and the money-bubbling, don't regulate the dangerous practices Federal Reserve Board, from whence Bernanke comes.

The public is finally starting to understand what's been going on in this perverse milieu of Wall Street socialism where private individuals get the profits and the taxpayers underwrite the bail-outs. It has a long history; in Bad Money I have a chart that lists fifteen or so rescues over some 25 years. Finance has now grown into an octopus, with dozens of debt, speculative, credit card, mortgage, interest group and Washington lobby tentacles that will lock onto any new bail-out proposal and turn it into another food supply. Even as the new "legislation" is being drafted, you can bet all the lawyers, lobbyists and big donors are already on the phone to key people in Congress, the White House, the Treasury and the Federal Reserve. Anybody with a good nose can almost smell the fixes and corruption, and of course, political critics and the public will be told that there's just no time for debate, no time to go over the details. Don't pass it tomorrow, pass it yesterday. We can assume that George W. Bush will sign it, possibly with a fleeting smirk.

Will this bail-out solve the current mess? Of course not. For the last year, Paulson and Bernanke have been Fumble and Bumble. They won't strike at the roots of the problem - indeed, one could almost say the two men represent those roots - so their rescue gimmicks fail and the crisis extends and deepens.

Ironically, the best hope for resistance comes not from the left but from free-market elements of the Republican Party. I have not had much good to say about the GOP for years, but recent events may hint at their political and ideological renewal. Sometime back, when Congress passed the Fannie Mae and Freddie Mac bail-out program, Senator Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee, ultimately voted against it. He had worked on its early stage, but ultimately voted no because seeing a pay-off to "Wall Street and K Street (the Washington lobbyist corridor)". Then the Republican National Convention, in a rejection of Bush, Paulson and Bernanke, put an anti-bailout section in its 2008 platform. A few days ago, the ranking Republican on the Senate Banking Committee, Richard Shelby of Alabama, called on the Fed to reject bail-outs and allow the markets to work even if the consequences are "brutal." And on September 18, a hundred Republican members of the House of Representatives sent a letter to Paulson and Bernanke requesting that the two men "refrain from conducting any additional government-financed bail-outs for large financial firms."

I suppose there's a chance that McCain could decide to oppose the administration and truly fight this latest round of Wall Street socialism. Maybe instead of asking George W. Bush to fire SEC Chairman Cox, McCain could come out against Paulson and Bernanke. But the odds are much greater than an embarrassed McCain will flounder toward November defeat.

That would mean that the anti-bail-out forces in Congress and at the grassroots will take over the national party helm in 2009, and it's not too late to start right now. If they strike a tough stance in the next few days, they could expose, delay, amend and even block -- by any available means -- what amounts to a massive mutation and even perversion of the U.S. economy. The leader of the hundred House Republican conservatives, Congressman Jeb Hensarling of Texas, summed it up quite neatly: "Enough is enough. It's time to bail out the American taxpayers from bail-out mania." Hopefully, we're looking at a September battle cry.

Kevin Phillips is the author, most recently, of Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, published by Viking in April.

Comments

[badmoney]

I'm concerned about the fungibility of the funds provided under the Paulson plan and other bad assets a bank or other such recipient of these funds may have.

To take a somewhat extreme example, could a bank use these bailout funds to cover some totally unrelated liabilities like outstanding bills from "entertainment expenses" incurred lobbying for this bailout plan itself?

In general, how can we guarantee that the bailout is in fact used for the stated purpose i.e., to cover the liquidity squeeze caused by delinquent mortgage loans? It seems to me this is more likely to be used to cover all sorts of unrelated "business expenses", golden parachutes, yachts, ski vacations, etc., etc.

[Sevensea]

Wishful thinking.

One might think that if a political party had its central ideology - its raison d'etre - so utterly discredited as 'laissez-faire' capitalism has been over the last week, they would inevitably be thoroughly annihilated at any forthcoming election.

However, most voters only have a vague understanding of the principles that underly modern Republicanism and of the profound implications of the week's events.

[themodernleader]

Why hasn't Obama put Kevin Phillips, American Patriot on his economic renewal team? He must have the very best economic advice mixed with political wisdom. Two hours spent with former Republican Kevin Phillips would be worth more than a month spent with academic and Wall Street advisors who know more and more about less and less. Of course, his Wall Street advisors have their own self-interested and often hidden agendas. Obama must select the best and open advice and advisors the nation has to offer.

[Diana]

Mr. Phillips, this woebegone pessimist is relived and encouraged by your hope that this outrageous bailout will not take in its current form.

I've been a long-time admirer and believer in your vision. Thanks.

[Sito]

Lets count all the messes.

1-Afganistan going down the tubes.
2-Iraq, weel need I say more.
3-Iran is still enriching uranium.
4-North korea is restarting it's reactor.
5 -Russia invades Georgia, se we are all Georgians now.
6-Foreclusres and unemployment both up.
7-The aftermat of Ike, not mention the lingering misery of Katrina
8-Broken health care system
9-Seven years alter 9-11, the US is no more secure.
10-No we have the inancial meltdown.

Could life in these United Statesbe any more chaotic. Correct me if I'm wrong, but didn't Hitler use choas to seize absolute control of Germany? And let me add illegal spying on Americans, a little SS maybe.

[idest]

He also used bigotry, which modern conservatives utilize all too frequently, if more subtly. But honestly can we all just agree to not compare anyone to Hitler and the Nazis?

[robeson]

The fact that Paulson wants quick action is very suspicious. It appears to be a WMD type action of give me the money or die.

[repearwo]

Hate to agree with Republicans, but No-Bail Out makes real good sense.

RISK. Where is it. When the average man on the street goes into a bank for a loan he is charged interest rates depending on his "risk" based upon past credit and earnings, etc. There are elaboate models to determine "risk" for just about everything. "Risk" is the life blood of the finaical markets, the higher risk the greater reward, or is it. If when you risk and fail you are bailed out, where is the risk.

Next time you go into a bank for a loan tell them you are taking a risk doing business with them, so you will take a 10% interest rate on all of your depositis. After all the Risk is pretty high these days, and it is after all our money that is bailing them out.

[justsomeguywhocameby]

Bush and Co. aren't done yet.
Text of Draft Proposal for Bailout Plan
I ran across this unintentionally. It's stunning. The Bush administration is asking Congress for unlimited authority to raise and spend $700,000,000,000 with no reporting for three months, no oversight by anyone, and not subject to any judicial review. This is such a blatant power grab it takes my breath away.

This sort of blank check is how we got the Iraq war. Congress must change this draft document radically and not be bullied by the administration's fear tactics.

http://www.nytimes.com/2008/09/21/business/21draftcnd.html?ref=business

I don't care if my words get posted but the text of this document needs to get out there.

[Military1]

Is Paulson pushing this bail out to" Protect" his old company Golden Sacks? Were they coming up in the next round???
He is protecting Goldman Sachs: WHO IS PROTECTING THE TAXPAYER??
Paulson does not think that the Financial Instutions should be held accountable:
This "Monster Is Growing" they keep adding to it hourly.
First they needed $85. Bn then Add $100.Bn then needs $500.Bn more now they need $700.Bn instead of the $500.Bn.
It is a "FACT" they don't know how much they need:
They don't have a "CLUE" as to how to "SOLVE" this problem:
They are "CLUTCHING" straws, hoping something will work:
"THE TAXPAYER IS BEING RAPED AND PLUNDERED"
"TAXATION WITHOUT REPRESENTATION"
"BAILOUT" "RIPOFF":

[Military1]

Is Paulson pushing this bail out to"PROTECT HIS OLD COMPANY GOLDMAN SACHS?? Were they coming up in the next round of failures??
PAULSON IS ONLY INTERESTED IN KEEPING THIS THING GOING UNTIL HE AND BUSH SAY SO-LONG SUCKERS IN JAN 2009;
HE ALSO IS PROTECTING GOLDMAN SACHS. WOW GS STOCK WENT THRU THR ROOF SEP: 19th.
WAY TO GO "HANK' YOU A HERO AT GS;
Financial Instutions should be held accountable: "HANK DON'T THINK SO"
This "Monster Is Growing" they keep adding to it hourly.
First they needed $85. Bn then Add $100.Bn then needs $500.Bn more now they need $700.Bn instead of the $500.Bn.
"ALREADY PUT UP $85bn+$100bn and NOW ADD $700bn === $885bn
It is a "FACT" they don't know how much they need:
They don't have a "CLUE" as to how to "SOLVE" this problem:
They are "CLUTCHING" straws, hoping something will work:
"BAILOUT" "RIPOFF": "A SHAFTED TAXPAYER";

[leslie6042]

It's too early to know what effect the financial crisis will have on election results, but the financial crisis and the proposed solution is the die-hard conservative's dream! For a generation (actually since the new deal), the real die-hard conservatives have been hoping and trying to eliminate all entitlements - Social Security, Medicare, Medicaid, welfare, etc. Their massive borrowing sprees, regardless of the deficits they create, combined with tax cuts, eventually create a government debt load so massive that the government risks total default and the only solution is to cut, cut, cut and cut government programs, including once sacred entitlements such as Social Security so that eventually they are eliminated. Voila!
Although I realize that we cannot permit the system to collapse and the proposed bailout may be necessary to prevent that, Paulson is praying on everyone's fear of system collapse and may achieve his lifelong dream.

[ajax2]

KPBS in San Diego killed the Phillips broadcast interview with Moyers last night. I guess discussing the current economy wasn't news worthy.

[jacqmac]

Once upon a time-four years ago-someone by the name of Arianna HUFFINGTON wrote a book titled 'Fanatics and Fools: The Game Plan for Winning Back America'.

The DEMS HAVE THE "DREAM CANDIDATE" THAT IS DESCRIBED IN THAT BOOK! Ask yourself this question: "IS it POSSIBLE TO BE A 'FISCAL CONSERVATIVE" and a "SOCIAL LIBERAL"?? NOPE! This is why, in the last four years, the BUSH TEAM has given UP being any KIND of 'compassionate conservative'. They AREN'T. And, if the old 'Private sector will take care of things, including the poor, the hungry, the sick' argument comes to mind-I want to ask you THIS question:

DO YOU WANT TO LIVE IN A COMPANY TOWN? That is what America is becoming. A COMPANY TOWN is a town built by industry for its workers. The COMPANY OWNS THE GROCERY STORE, THE HOSPITAL, THE HOUSE YOU LIVE IN. THE COMPANY OWNS the Mayor and City Council. The COMPANY owns the streets on which you drive your car. THE COMPANY says, 'We PROVIDE for you! You don't have to worry about any kind of decisions, as a matter of fact, ignore those voices coming across the valley. WE KNOW WHAT IS BEST FOR YOU! WE KNOW WHAT IS GOOD FOR THE TOWN!
WE KNOW! DON'T worry! Be happy! And of COURSE, we will gladly extend you credit at OUR store, because that way we know that you will WORK HARDER FOR US!

Obama/Biden '08 OUR LIVES DEPEND ON IT!

[Pquilson]

It occurs to me, after reading your post, that perhaps it is the "Political Class" who are playing all of us for fools. Perhaps it is they, in your scenario, who are the "Company" and the rest of us are the "workers".
I do not agree in the least with the bailout. Because I am hard-hearted? No. Because I understand that without the ability to fail, there is no ability to succeed. If I make a bad decision, I have to live with the consequences of that bad decision. That is why I try to make good decisions.
If the government (read taxpayers) bails out the financial markets (read Fannie/Fred and AIG in particular) what incentive do they have to then make good decisions regarding lending practices. Of course, those bad lending practices were demanded by the "Political Class" to buy votes. Remember, when you rob Peter to pay Paul, Paul will surely support you.
The "Political Class" dreamed the new American dream, the "right" to own a home. The "right" is for equal opportunity to achieve through hard work, the ability to own a home. Now, we (read taxpayers) are expected to pay for the folly of the "Political Class". Yes, they are the company, now, and we, we are just the "workers".
I make no distinction between political parties, as they are both guilty, in my estimation. We are offered no choice in this campaign, in my opinion. Both will be disasters.

[Kassandra]

Actually, I'm beginning to wonder, with this terrible Republican ticket; an old man who may be getting sicker in front of our eyes and a weirdo from Alaska who believes in witchcraft ( http://open.salon.com/content.php?cid=17604 ) if the republicans didn't really WANT to throw this thing and are surprised that, like lemmings, Americans are willing to follow them off the cliff?

The Republican ticket is just to bizarre to be believed, yet after years of Koolaid drinking, I guess you can't turn propaganda around in a second. McCain was NOT the best choice and if they wanted a wild-eyed Christain Armageddonist, why not Huckabee?

No, I think they were trying to throw this thing...but the "party faithful" have clung like limpets!

[kasinca]

The same heros on the right you expect to save this country are the ones who have been in charge most of the time since their hero Ronnie Reagan started this march to deregulation. In a nutshell, the fox has been watching the henhouse and it is what the republican thugs wanted.