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 www.obamaschallenge.com.

Comments

[WeSeeYou]

Can someone tell me how those people who have become unemployed, those who are now forced to use food stamps or other economic supports to feed their families, those who lost thier homes, those currently sleeping in thier cars or in the streets because thier unemployment finally ran out - how are these people going to be affected by being 'forced' to bail out of the obscenely greedy and irresponsible multi-billionaires on Wall Street and the Bush Administration?

The numbers of people in these very situations is on the rise people! The number of unemployed and destitute people is growing by the minute in my own neighborhood.!! And NOT because they bit off more than they could chew! Are they going to be expected to have even more taxes taken out of their already meager unemployment checks? Will they be billed penalties and interest on thier 'new' tax obligations, because they can't afford to help out Wall Street?

[proreality]

Mr. Kuttner you should really call in some favors in pointing this out as a political stunt by the (R)eprobates! The (D)emoralized legislature is walking right into a trap. If they spend the money, the margin calls start, if they don't the system crash's, but what people don't understand is that has been engineered to do just that. The Dem's are playing the Repug's games, they need to stop listening to Hoover's 1931 plan and put forward FDR's 1935 plan, otherwise it will all be over.

[fignozzle]

i agree.... they just need to chill out till post election to act on this preposterous plan!

we could learn alot by waiting.....

[jhNY]

To me, the most telling development of this 'crisis' is the way European and Asian leaders are not signing up to be a part of The Coalition Of The Willingly Fleeced, and plan no comparable buy-back pograms in their own countries either.

[Semper]

Once Congress realizes that the bail out won't work, maybe they will come to their senses and backoff the legislation. One thing for sure, if this plan is based on the rational behavior of the consumer, and that this bailout is suppose to make us run and spend money to revitalize our businesses, home purchases, and spending habits, forget it. Most people do not act rationally. Financial advisors know this, stockbrokers, know this, insurance agents know this. As a matter of fact most professionals in the financial services industry know this. So why is Congress going to take a chance on this bailout, thats troubling and irresponsible. There is too much ego involved in Washington.

[rdipent]

I think that Obama should announce during the debate on Friday that he is temporarily leaving the campaign trail to go back to work on the bailout bill in the Senate. Let's put
America first. It would be interesting to see how McBush responds to that.

[pbley68]

Bush and Cheney are like Laurel and Hardy, and the Republican Party, the Keystones Cops, it always ends in disaster.

[ivangoldstein]

Asking for concessions on a $700 billion giveaway to the Goldman Sachs crowd would be putting lipstick on a pig.

Any politician that votes for this bailout will NOT get my vote.

[Cybersquirt]

Indeed. I don't care what kind of pork they add to it. I am SICK of paying for their profit.

"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.."

Could? LOL, you're too kind. ;)

[DocTwain]

I agree. Bush wants us to buy a another pig in a poke.
Let the worst finance firms fail.
If necessary, Mac a few.
There's enough credit in the system.

Congress: Not a dime for Paulson's Pig!
Invest in the working class and in infrastructure.

[bluevillage]

The contrast between the Obama and McCain press conferences today on the bailout was more than striking. Obama spoke pointedly to the specifics of the problems, in his answers to questions as well as in his statement, while McCain avoided answering questions directly and just repeated the points of his campaign stump speech. He looked like a dolt. I hope the media does the proper analysis of these two press conferences, and doesn't just try to "balance" the performances of the two men.

[californiadreamer]

I hope the word is out loud and clear to the democrats that they had better stand up for the american people who have lost the equity in their homes that they thought would help them in their retirement. I am sure that even if some of these bankers were fired/retired tomorrow they have put together a nice retirement package. They kicked out Mozillo of Countrywide but still pay for his country club dues and the use of the company jet. This bailout has made it very clear that the administration is entirely beholden to the banking interests. They try to rush the plan through without any scrutiny and say they do not want to add anything that would affect the bailout, as if the bankers have a choice. Well, it they choose not to help the homeowners, then the bailout can go in that direction and the bad debt that is blocking the system can be cleaned up by a goernment agency that has strict accountability and a major focus on the homeowner, The banks will have to take a significant loss on the bad debt they engendered through lax oversight and they will not get the added income from managing the debt restructuring. The Housing Bill that passed that is official in October would be a good template to use. This time around, the lenders would be required to renegotiate loans with borrowers who met the critieria of the bill.

[research]

Kucinich's thoughts on the Bailout.

http://kucinich.us/index.php?option=com_content&task=view&id=2442&Itemid=1

[AceInTheHole]

I overheard two old spinsters at a local coffee shop, who happened to be looking at Paulson and Bernanke testify before the Senate committee say . " Even Oprah's endorsement wouldn't give these guys credibility. who are these guys and were do they come from? " I interjected and explained to them, who they were. Then one of the old ladies said, "Well, if they are such big shots, why haven't we seen them on Oprah's show? I said , Well maybe they are just not that smart. And they probably don't know that no matter how rich and famous you are, in America, you are a nobody until you get to sit-down on Oprah's couch.

[PioneerKing]

McCain is not going to bother to show up in Washington to be held accountable for voting for the bill. That way he can take credit for it the way McCain refused to show up to vote for or agains the GI Bill but McCain takes credit for the GI Bill as though he wrote it and acts like he voted for it.

[MagisterLudi]

YES on President Bush's class action bill that made it harder for victims of corporate greed to be compensated. It was opposed by most civil rights and consumer groups.
YES on Bush's 2005 energy bill that included massive oil, coal, and nuclear subsidies.
YES to allow credit card companies to raise interest rates over 30 percent.

Guess which of the two Pres. candidates voted to support corporate oppression of American people.
That's right: BOTH.
Repubs want the wolfs to be in charge of hen house. Dems insist on foxes as long as the foxes change their names to "doves."

As long as these two parties maintain the political stranglehold nothing will change... nothing.

[ianrthorpe]

Still pushing the "Obama the bridge buildeer" line when it becomes more obvious by the day he is the divider who has split the nation more deeply than ever?

Face it, you Dems have screwed up disatrously. With the door of The White House wide open you picked probably the only man in the party who could lose.

http://greenteeth.blog.co.uk/?tag=america

[gaja]

Your comment is laughable.. And who was it who was in charge of this disastrous mess?? Who was calling for MORE DEREGULATION and LESS OVERSIGHT for years? McBush is not going to squirm their way out of this one... Re-thug-nicans have driven this country into the ground!

[jinjinpinti]

You face it,Sparky, that McSame's preposterous choice of Palin is the biggest "disaster" in American political history.

[cornflower]

Makes ya happy, doesn't it!

[gisellestwocents]

Some people need to grow up. We are in economic crisis here and you're concerned with how "divisive" Barack is? Barack is not divisive. Some clueless voters are divisive. Go look in the mirror and introduce yourself to one of them.

[rdipent]

You may be right, but at least we picked a man with brains, chracter and integrity who would be a great president if elected. You will never be able to say that about McCain.

[TexasDem0]

If a CEO gets fired for doing a bad job, why should he or she be excluded from the sting of showing up at the unemployment office? Typically, they are wealthy enough to choose whether or not they WANT to work again. How many of us have that luxury? Instead, they are rewarded for poor performance, and now, we are all expected to pay for their disasters.

[FGAofFLA]

The question now is this: faced with the complete and costly meltdown of their economic security, will the uncommitted middle class voters who were intending to cast their 2008 presidential vote for McCain-Palin -- in order to end Roe v. Wade, or to continue our military involvement in Iraq, or to send a woman to the White House, or to block an African-American from taking office -- finally wake up and realize those narrow-minded motives are exactly what the Rove-led Bush-Chene­y-McCain-P­alin Republicans have planned on all along? By voting against their own financial self-interests in order to uphold a non-negotiable attitude, those voters will be giving Bush-Cheney's supply-side economics four more years to work its magic for the wealthy 1 percent. Meanwhile, Bush-Cheney's lame-duck $700 billion Paulson plan, as written, is nothing more than a license to bail out Paulson's Wall Street friends with rules declaring that Washington should not question its financial Armageddon assumptions. Shouldn't we be waiting for our next administration to decide how this issue should be handled, rather than our current one -- the most egregiously irresponsible and disfunctional in history? Whatever happens, don't be surprised if, four years from now, many our cash-strapped neighbors who were lured into interest rate traps are out on the street, doomed to seek shelter under the bridges that were, by the way, neglected during years of mostly Republican-created government negligence and gridlock.