10/24/2008 05:12 am ET | Updated May 25, 2011

A Fine Mess

Support for the Paulson plan continued to unravel late Monday and Tuesday morning, as the Treasury Secretary prepared to face two days of scorching hearings on Capitol Hill. In many ways Paulson is the worst possible ambassador for a plan that would give him carte blanche to bail out Wall Street, as a senior representative of the very Wall Street club that created the mess.

Until now, Paulson has faced fairly tame questions from talk show hosts. Today and tomorrow, he will face populist outrage from senators and representatives; and many Republicans will be as indignant as Democrats. The political far-right, over the past 48 hours, has united against the plan. Some on the right, such as those at Cato and Heritage, oppose the idea as principled libertarians who think government should keep hands off the economy, come what may. Others, like Newt Gingrich, have never cared much for Wall Street. More moderate Republicans have also lashed out at Paulson, reflecting the anger of their own constituents, in hopes of saving their own skins. Washington today is filled with born-again regulators.

Senators will point out that Paulson has even positioned some of his Wall Street cronies to profit both from advising the Treasury and from getting a piece of the action; and that Paulson's original plan included nothing for Main Street. His testimony will be self-annihilating, and will only intensify the popular backlash.

Financial experts have increasingly expressed skepticism about the technical aspects of the plan. For the scheme to work, the Treasury would have to pay prices for dubious assets well above their current market prices. This could create windfalls for the very people who brought us this mess, but not necessarily restore the system to health. Many argue that stabilizing the mortgage sector by helping homeowners directly would do more to redeem the value of mortgage-backed securities than having the government buy otherwise worthless securities backed by mortgages homeowners can't afford.

All of this has weakened Paulson's hand, and given Democrats a lot more leverage to add provisions that insert more of the public interest into the deal. These will prove very hard for Paulson and Republicans to oppose. The Senate Democratic Caucus is scheduled to meet this morning, and Senators with whom I spoke late Monday were in a tough mood.

It now appears that Democrats, at minimum, will get:

--A second stimulus package as companion legislation.

--Substantial mortgage relief for homeowners, not just bankers.

--Some kind of independent supervisory board to which Paulson must report.

--Some equity position for the government, in exchange for all this cash.

--Some limits on executive windfalls for participating companies.

The bill could well depend on a majority of Democrats supporting it, with a majority of Republicans voting against it--either because they reject the entire idea of a bailout, or because they don't like the Democratic add-ons, or because they need populist cover with their constituents, or because they expect the plan to fail and don't want the blame.

The effect on the two presidential campaigns is likewise intriguing and paradoxical. For the first time in the history of the Republic, both presidential candidates are sitting senators, and both will cast votes on the plan.

At Obama headquarters, my sources say there is an internal debate about what it would take for Obama to vote for the bill. If the bill is significantly toughened, the odds are that he will support it. The vote will enable him to assume one of his favorites stances--the progressive who bridges differences. He can claim that by hanging tough, the Democrats dramatically improved a badly flawed and self-interested Republican bill. This will display Democratic unity and concern for a broad public interest, nicely contrasting with Republican opportunism and disarray.

John McCain, meanwhile, has spent the past two days trying to reposition himself to Obama's left, expressing outrage at Wall Street's "greed," attacking the Paulson plan as too friendly to Wall Street, and even proposing a $400,000 compensation cap on executives whose firms benefit from the plan. But commentators and the Obama campaign have had a field day pointing out McCain's serial reversals on these issues.

At this writing, McCain seems more likely to cast a vote against the plan than Obama. If McCain does vote against the plan, and it is not sufficient to stabilize financial markets, he can say, "I told you so" and cast himself as the agent of real change and Obama as the establishment man. McCain's campaign is sinking so fast that he has little to lose by throwing this Hail-Mary pass--except for reinforcing the sense of Republican opportunism and disunity. But if the government spends $700 billion and financial markets keep tumbling, McCain could look like a seer.

On Wall Street itself, financial markets that had rallied last week in hopes of a quick rescue, braced themselves for another day of losses. Even if enacted, the plan could contain amendments that would cut into profits. And if the rescue did successfully stem the carnage in the banking sector, that in turn might bring down more hedge funds that have prospered by betting against bank stocks and mortgage securities. So Congress will be debating the plan against a background of escalating damage in money markets--which briefly stabilized last week only on the promise of a nearly instant $700 billion bailout.

Last night, I found myself on CNN's Lou Dobbs' show, with David Cay Johnston of the New York Times and Bill Gross of PIMCO, the rare senior Wall Street critic of the financial razzle-dazzle and a man I have long admired. But last evening, Gross took a shameful dive, lavishing praise on Paulson and defending the plan. This puzzled both Dobbs and me--until I read an item in this morning's New York Times including Gross among those whose firm hopes to get some business managing assets for the Treasury. Et tu, Bill?

The only constructive thing about this fine mess is that it will very likely sweep out the party of the casino economy. Rebuilding an economy in which Wall Street once again serves Main Street will take a while longer.

Robert Kuttner, co-editor of The American Prospect and Distinguished Senior Fellow at Demos, has just published Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency (Chelsea Green). He is blogging daily about the election and the economic crisis at