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.
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Thank you for the clear-eyed reading of this sorry state of affairs, Mr. Phillips. I appreciated the truth-telling in your "Numbers Racket" article in Harper’s Magazine too. Hope to see you on "Bill Moyers Journal" in the very near future.
I am looking into obtaining a passport should McCain get elected. After all this hard work for Obama, maybe some time in France and Italy would be a refreshing change. Last I heard, and when I am entitled to it, I can forward a social security check anywhere.
Thank goodness Bush didn't succeed in privatizing social security ...
Social Security must never be privatized. The past couple of days has provided enough evidence. What needs to be done is to add money to the Social Security Trust and make sure it is not accessed for anything but Social Security.
PHILLIPS is spot on again!!! REACLL--HE WAS A GOP GUY,,,HE wrote famous book 40 yrs ago or so ''THE EMERGING REPUBLICAN MAJORITY''
I have great respect for Kevin Phillips - he has been relentlessly right about much in American life in the last 30 years. I could be convinced a bailout is not in our long term best interests - especially when it's cobbled together in an election year. It is one of the great weaknesses of representative democracy that it often pays to do what is popular, not necessarily wise or prudent.
My question is - what does "brutal" mean? Does anybody have any idea what a crash would mean, especially for the "least among us?" Only when we know exactly what Bernanke and Paulson fear - the worst case scenario - can we make a decision based on reason.
No one can answer your question because we are in uncharted territory and that's why people are terrified.
Think Ike and Katrina times a trillion.
The only reasonable decision anyone can make at this point is to keep repeating, "Fear is the mind-kille
'From your mouth to God's ear.' How any free-market Republican could support such a bailout is beyond me. Reagan must be turning over in his grave.
I would only add that the date December 15, 2000 will live in infamy.
Raise taxes on the rich, raise the capital gains tax to encourage long-term investing, raise interest rates to encourage savings, reduce military budget and spend on infrastructure.
Kevin: Thank you for not saying, "I told you so!", even though you have every right. Classy as always.
Nobody in the administration cares whether McCain wins or loses - they are too busy trying to dismantle government regulation - this time by spending all of our future tax receipts on bailouts for Wall St - before the end of Bush's term.
The Democrats better have an answer or we are going to be better off turning to socialism.
Europe is looking pretty good right now.
Bailouts ARE socialism.
Bailouts like this one are facist, not socialist.
A socialist bailout would give the money to the people who actually hold the mortgages they cannot afford to pay. This would cost far less than what is being proposed now.
The problem is that banks creatively repackaged these bad loans into derivative investment vehicles, and this infected the wider securities market - everybody wanted a piece of the high-profit debt.
Problem is, they kept selling the same bad paper over and over until it looked more like a ponzi scheme than a real market.
The Chinese got burned too, and now they are calling the shots on the bailout. See comment above by PioneerKing.
The problem comes down to this--as it always does in government investment--from a ruthlessly pragmatic perspective--will it do the nation more harm than good to bail out these suckers, because after all it's not just the institutions, but everyone involved with them, and the effects on the economy world wide that are at issue. Of course, we need to go back and impliment stringent regulation; i.e. get over de-Regunomics; we need to get over trickle down in changing our tax policies; and we need to implement laws that hold ceos financially responsible for the chaos created for shareholders and employees alike. But the idea that we should not bail out these companies on principle alone is ridiculous. This is the real world, and we have to play it as it lays. In implementing new regulations we must consider how to prevent this, perhaps by putting into such regulatory legislation the demand for a supermajority only to overturn it. Like all financial issues of state, ideology gets in the way of reality, and more than at any time in my life time--62 years--we need to be hard headed and hard eyed. I don't know if Obama and the Dems are up to that, but I know for a fact conservatives who are still dewy eyed about Ronald Reagan and the current crop of Republicans have consistently proven themselves incompetent, myopic ninnies.
I'm confused. I was under the impression that the U.S. government is heavily in debt to China, Japan, Mexico for crying out loud, and who knows who else. Where is this money supposed to be coming from since, as we all know, corporate America isn't exactly paying their fair share of taxes and whines about paying any taxes at all and America might as well change its name to the United States of Deficits. Do we have to go to China or another country to get this money? Is our foreign debt overstated? How can McCain talk about 3 trillion plus in new tax cuts and Obama tell us that universal health care is doable? I feel like I've been in an eight year Twilight Zone episode that keeps running without commercial interruption. Can we believe anything anymore? Since election 2000 it seems that we're in a permanent state of suspended disbelief. Where did my country go?
Repugs are socialists and fiscally irresponsible.
No - not socialists. If they were, they wouldn't privatize the profits. It's only the LOSSES they want to hang on the state.
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