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

[neoprimordial]

You could credibly make the argument that the trough-pigs running AIG and Fannie/Freddie *knew* that our government wouldn't let them self-destruct, so all they need do was live stratospherically high off the hog and wait. Perhaps you're right that we need to really feel the financial anguish of massive corporate failure, but maybe not just yet? Things are so fouled up out there right now, mega-entities like AIG go down and who knows where the torment will come to a halt. It's likely to be a living hell far worse than the "brutal" that people are already enduring.

I really believe that you have to have effective appropriate regulation, but as you say, once the lobbyists & such are allowed in the mix, reforms end up being less or not at all effective and a decade or so later the same problems turn up. We need a ball-breaker on a white horse to come in undeterred by special interests and just clean house. Maybe a special czar-like personage? A Spitzer type without the scandal?

As far as McCain standing up against corporate welfare, he's on the wrong team and 8 years different. Obama would need to be the one who stands up and puts a stop to it, and there are hints that that's just what he would do. Biden is already publicly against it. We'll be living in very interesting times if Obama and the reform-minded Republicans actually get together on this.

[jeffinseattle]

Deja vu 1980's style S&L banking bailout, involving The Keating Five and
John McCain's close friend John Keating. Connect-the-dots PEOPLE!
John McCain's close friend John Keating cost YOU and I
taxpayers 124.6B. What will a McCain/Palin administration cost us????

Obama/Biden08

[Mason]

Another close friend and McCain's current economic guru is Phil Gramm who is responsible for repealing the Glass-Steagle Act that Congress passed in the 30's to prevent exactly what caused this sub-rime lending nightmare. In the name of free-market economics, removing responsibility for a borrower's default by allowing lenders to loan money to unqualified borrowers and misrepresent the zero-value of the borrower's promise to repay the loan on an over-appraised property and sell the loan on the secondary market was a free ticket to instant wealth -- until the chickens came home to roost. And roost they have, big time. And now we the People are supposed to pick-up the tab??????

[Nightbender]

These economic libertarians are nihilists. They will not be satisfied until the logical extension of their failed laissez-faire theories morph into scorched earth.
The Republican/conservative theory based policies of trickle down simply DO NOT WORK!
They are doomed to failure, except in closed societies....until the peasants get fed up enough to revolt.

John McCain's response is to blame Barack Obama for this mess, while McCain has been the willing manservant for the Royalists in business and finance that created it.
The wheel's are off, and McCain can only sputter insults and nonsensicle blubberring.

[Mason]

Now that Bernanke and Paulson, with Bush's blessing, want to transfer the obligation to repay this multi-trillion-dollar theft by the rich to the screwed, blued, and tattooed middle-class taxpayer, which includes me, are we supposed to bend over, grab grass, and submit to yet another rape with a thank-you Mastah and a smile on our face?

What happens if we say enough is enough and refuse to pay our taxes? Are we going to be tossed into jail?

I am furious and not inclined to respect or follow any laws that steal my civil rights, make me responsible to pay restitution for thievery by the rich, classify me as a terrorist because I have the temerity to dissent, and send me to prison because I refuse to submit to rape with a thank-you and a smile on my face.

I HAVE HAD ENOUGH OF THIS BULLSHIT!

[NicoleAnon]

I really don't think Bernanke and Paulson are "raping" anyone. There really is a differnce between bad economic policy and sexual assault - you should try making your point in a less offensive way.

[Mason]

I respect your comment and right to disagree. Just so you know, however, I considered whether my comment might be over the top before I posted it and decided that it accurately characterizes what is happening. I will not apologize for speaking the truth, as I see it, but I understand where you're coming from and respect as well as honor your viewpoint.

Peace.

[rdiaz921]

This is a free country. He is practicing his freedom of expression . If you didn't like what you were reading, you should have discontinued. Since you chose to read through the whole thing, you were interested in what he had to say.

[530Rose]

I want the information that was given to congress made public. I don't trust any of them to actually put Americans first, unless those Americans are their powerful friends and contributors. In order for corporations to take advantage of this bail out, anyone that has "excessive wealth" should be heavily taxed and all golden parachutes should be immediately unavailable. These crooks should not get bailed out by the middle class, they should be thankful they are not all getting jail time!

[rich3324]

It's called putting country first, and just not using it as a slogan.

[flatus]

Jeebus, let the Republicans have the money. All those flashy suits don't come cheap, you know.

[deliriousgod]

its the hockey mother of all bailouts

[SEQUOIABISON]

Well said Kevin, your books are brilliant and coming from a former republican, your article has even greater credibility.

Basically I secretly thank Lehman Brothers for declaring bankruptcy before the election, it stopped the McCain express in its tracks and got the lipstick and pig thing off the air.

The collapse of the free market economy was inevitable, I am only glad that the rapidly decaying trickle down system of taxation is finally going to be put to rest.

The crash of the stock market was definitely a knock down blow to McCain and only time will tell if he can recuperate from that shot to his mid-section.

Obama right now is skillfully on the offensive and could possibly deliver a knock out punch that will destroy the mavericks reputation as a free market trickle down advocate and put Mr De-Regulator on a downward spiral leading up to election day?

The collapse of wall street and the fact that the government had to bail out these free market corporations is a testament to the failure of this absurd idea of trickle down economics.

We must have a more egalitarian system of government that does not favor one financial bracket over another, where government does not give large sums of money to a small minority group of wealthy people in the hopes that their spending will trickle down and benefit those who did not get a corporate welfare handout.

Obama/Biden

[boophus]

I think the problem started when it was made law that a Corporation was an entity like an individual voter. This allows the corporate body to escape responsibility for thier actions by sloughing off cells (individuals they scapegoat) and leaving the taxpayers to foot the bill. It is unequal equality because corporations are a conglomerate of anywhere from 20 to 50,000+ people. Lets call it 2500. Now assign a weight of 200 lbs so have a combined weight of 500,000 lbs. Saying that they are equal to a single 200 lb man is ridiculous. Well in effect that is the power corporations have over our country. They're comprised of too many little people to just let them suffer the effects of thier actions without impacting our country yet they are only profit motivated so they have no moral compass beyond that and maybe the CEOs having something beyond a simulated religiosity. Yeah right it is all about image.
We need Obama to stop the supreme court from being packed with more pro corporations and anti-constitution/ anti-habeas corpus judges with anti-choice as a payoff to religious right for betraying thier country to force thier beliefs on us. I have hopes that Obama can and I will do my part by backing him all the way. I say that when you are drowning , the hand of a black man is just fine to pull you to safety. Obama is holding his hand out.

[sheikwil]

McCain voted on deregulations with help caused the mess on wall street and he should be held accountable just as much as those greedy CEOs and preditory lenders because he helped open the door for the corruption.

[Synergy463]

Phil Graham (McCain's pick for Sec of Treasury) is the one that deregulated all of the insurance which drove housing in the first place. The guy who said, "We're not in a recession... it's all in your head. We're a nation of whiners"... Is this who we want governing our financial health for the next 4, maybe 8 years?

I don't see how McCain can spin this...

[boing007]

This fiasco smells really bad. Y'all's been robbed! The biggest heist in human history. Don't let them get away with it.

[kellygrrrl]

Little W heads over to Kinko's to print up some new money

that $20 in your wallet is worth about $8

Do the American people "get it"???

not sure I'm ready to hear the answer

[Mason]

I think that $20 is worth n more than $0.0002

Pretty soon we'll have to go shopping with wheelbarrows full of cash to buy a loaf of bread.

[rdiaz921]

I knew I was on the right track when I said that I was beginning to feel like I'm living in a third world country.

[Clairvaux]

Good post!

[Praedor]

You're barking up the wrong tree. The GOP will NOT be taken over by the financial conservatives, kicking out the loonie religious whackos, and stop government bailouts. Besides, the answer is not to simply not bailout the Wall Street millionaires and billionaires, the answer requires REGULATION. It requires the full reinstatement of Glass-Steagall.

These are things the Grassley's and other anti-bailout nasties will NEVER go for. They want this sort of thing to repeat and repeat without any regulation whatsoever.

[margardner]

A must read: McCain and his economy plan.

http://caffertyfile.blogs.cnn.com/