Fishing in Troubled Waters
As the events of the past 24 hours have shown, the Republicans lack both the leadership and the unity to bring home any variant on Paulson's proposed bailout deal. This has been a special fiasco for John McCain, and a richly deserved one.
With the Republicans now in thorough disarray, the question now is whether the Democrats have the wit, the nerve, and the unity to do this right. As the politics stand today, a plan may well have to pass Congress mostly with Democratic votes. If the plan works, the Democrats are heroes. If it fails, they are goats. So it had damned better be done right.
But first, let's take a moment to savor the Republicans' self inflicted political wounds. McCain's ploy to cast himself as an above-party leader in the financial crisis, and incidentally to wriggle out of the Friday presidential debate, backfired. The White House meeting was hastily contrived to help McCain, but all it did was help derail the deal.
Far from demonstrating his claim of putting country above politics, the caper was pure opportunism. Contrary to his high-minded claim to be "suspending his campaign," he continued to run the negative ads and his surrogates continued to trash Obama. He wouldn't even say what plan he'd support, and sat largely like a stone at Thursday's White House meeting while Obama joined the discussion and tried to seek common ground. The meeting was supposed to showcase McCain as a leader, but that role went to Obama.
You can just imagine the thinking over at Team McCain. Hey, let's send John to Washington to consummate the bailout deal. He can look really presidential, we'll say we're putting country above politics, and we can even bump Friday's debate to October 2, and kill the Palin-Biden debate as well. High fives all around. Ooops.
And imagine these turkeys negotiating with, say, Putin.
Is there a silver lining in this mess? It sure signals severe disarray both in the McCain camp and in the Republican Party. But what about the future of the economy?
The emerging House Republican plan for a "private sector solution" (backed by more government insurance and tax benefits) is pathetic. It's not really private at all, and it won't solve the problem. But what will solve the problem?
A better plan would have two core elements: First, most of the government money goes to refinance mortgages rather than buy up bad paper. Once the mortgage market stabilizes, some value returns to the bonds backed by mortgages. That way, homeowners are the primary beneficiaries, not the incidental ones. Second, government takes a majority stake in the major failing institutions, takes a good look at their books, and only then pumps in equity capital as necessary. When the crisis passes, government closes the ones that are beyond repair, and sells off the good bits.
Some Democrats are still hoping to salvage some variation of the Paulson. But the Republicans have done them a favor. It's time to give that approach the decent burial it deserves, and start over.
Since the House Republicans have deserted the field, the Democrats might as well step up to the plate and do it right. If it takes another week or two, that's fine. This is not about rescuing the stock market day to day. It's about fashioning a program that will work.
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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.
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Republican leadership = grandstanding and primping for the camera! They acted like two-year olds as they tried to figure out what to do when they started getting calls from their constituents. America is in a crisis. Kick these Republicans out of the Whitehouse and sweep some of them out of Congress!
How, oh how, can we get the polls in Washington to enact a plan as sensible as this?
I fear for our nation.
IN the 60's people protested. Hardly anybody protests anymore. Why? Because we got fat, many of us and fat = lazy. Now we have the internet and blogging which makes it easier for us to cast our opinion as if that actually does something. It gets what we feel off our chest but not into the heads of our elected ones. Real protest means standing in front of congress and the white house and screaming, "I am sick and tired and I am not going to take it any more!" Unfortunately, I am as guilty as nearly all of you. I feel torn between serving my country as a protester vs. walking off my job as a registered nurse. My head hurts...
iralarry sez: "IN the 60's people protested. Hardly anybody protests anymore. Why? Because we got fat, many of us and fat = lazy."
People protest now.
Ever been in a "Free Speech Zone"? The same Supreme Court that decided GWB won the election in 2000 said it was ok for the government to restrict the exercise of the 1st Amendment to "Free Speech Zones". Now the government gets to designate when and where you're allowed to exercise your 1st Amendment rights.
But you've probably never seen one. That's because their purpose is to quarantine protesters away from where the politicians might see them, or the media report on them.
http://www.newscorpse.com/Pix/free-speech-zone.jpg
http://www.brumax.com/freedomofspeech.htm
http://simonbillenness.blogspot.com/DNC%20pen%20restrictions.jpg
And if you choose to protest OUTSIDE of the designated "Free Speech Zone", then you're a rioter and the cops can bust your head and haul you off to rot in jail until whatever you're protesting is over with.
Same thing if you're a journalist and you try to report on people protesting outside the designated "Free Speech Zone".
The charges against you will probably ultimately be dismissed, but you'll still get your head busted and be prevented from exercising your 1st amendment rights.
Impeachment of the President and Vice President for starters. NO pardoning powers once the proceedings are started. They are responsible for this as they are for everything since and including 9/11 happening. This is not a blue dress issue. This is OUR country.
The Republican plan is a better plan. Instead of the government buying bad loans they want to loan the banks money and provide default insurance for which they will have to pay.
Where's the text?
Probably in their dreams or in their ar*e!
And then the government comes to bail out the default insurance company which is undercapitalized? Shades of AIG! Who is willing to step up to the plate and offer such default insurance--with adequate capitalization? That's part of the problem.
Financial institutions with money are too fearful to loan money to other financial institutions because they don't know if they are secure enough, because noone knows what bad stuff they may be holding--or what that bad stuff may actually be worth. And then the loans aren't available to Main Street. That's the credit crunch. So how does a government loan (and default insurance) help? It provides temporary capitalization that might get institutions lending to each other. Maybe. But it doesn't solve the underlying problem of what the bad stuff is worth so the companies can be valued appropriately for the market to work and capital to flow--capital needed by businesses to get their loans for inventory and equipment so that workers can have jobs and get paid, money for students to get a loan to get a college education, etc.! The Paulsen plan would probably work IF the government doesn't overpay for them and, therefore, can sell them back for a price that allows the government to break even.
Horsefeathers!
It's a Corporate Welfare Giveaway just like the Paulson plan; only camouflaged slightly better, to let the republicans walk away from responsibility for their Corporate Welfare scheme.
PLUS, it's the vehicle for more TAX CUTS FOR THE EXTREMELY RICH; a "temporary" suspension of Capitol Gains taxes. Just like the Bush tax cuts ... call it temporary, then start agitating right away to make it permanent.
So, instead of just giving a trillion dollars of taxpayer's money to Wall Street Thieves, you exempt those same Wall Street Thieves from paying any tax on the money they've stolen; make another trillion dollar hole in the tax base.
"This is not about rescuing the stock market day to day." Maybe. But I'll wager that many of the players are hoping that the markets will be up on Sept. 30. That' s the effective date of the quarterly mutual fund and retirement account statements that we'll soon be getting - and that we'll be thinking about on election day.
The only thing that surprises me in all this is Barney Frank's participation in the robbery. I thought he was on our side. How naive! As Molly Ivins said, "No matter how cynical you get, it's hard to keep up."
BRAVO! You just made a new fan, appleknocker.
I was a little surprised at Barney as well. I have written him off for doing the right thing for the nation.
What's the solution you ask?
Sarah Palin.
She has been to NY City now, has seen Wall Street.
Ergo she is a financial expert who has the experience to solve this crisis.
You know, you might be on to something.
Let Sarah Palin give the Wall Street Thieves the 700 billion, and leave the taxpayers out of it.
This needs to be the headline post!
You are 1000% right. The Dems now have cover to take their time. They should put a completely new deal on the table that favors main street.
Please do an email blast to the congressional Dems before they blunder into a deal too soon!
Agreed.
If 85 or 90 % of us proles outside the Beltway are aganst the Bailout, those are numbers you cant ignore.
Obama had better be looking at that even if he has to backtrack, but I think it may be too late for that.
This could turn around so fast that you wont even see it coming.
What will the polls look like if elected officials allow the economy to slip into a full-fledged ('30s-style) depression? It is Obama, not McCain, who is trying to do the responsible thing for the country.
Actually, neither of them is trying to do the "responsible thing"; they're both just trying to avoid getting blamed for the mess and losing the election thereby.
The best I can say for Obama in this mess is he appears to be slightly less irresponsible than McCain, but I guess that's about all you can hope for under our current day political system.
I'm still voting for Obama, but by now it's only as the lesser of two evils.
I hope he manages to stay the lesser of two evils until election day.
... but I don't have a lot of confidence.
First and foremost. Why is no one insisting for an audit. This is a mamouth failure of corruption in the very high level and they have the gall to insist we bail them out so they can continue the fraud and be in control of everything we have . This is exactly what Hitler did in the 30s..Who do they think they are fooling..
Who are they fooling, most Americans? yup
You can fool SOME of the people ALL of the time.
Did you know that 34% of the American people APPROVE of how GWB is doing the job of President. He's actually UP by about 6% since last spring.
And think about this - MSNBC, NBC belong to General Electric Corporation.
What has been General Electric Corporation's cash cow for the last umpteen years? If you guessed manufacturing appliances or their media empire, guess again ...
http://en.wikipedia.org/wiki/GE_Consumer_Finance
"GE Money is one of six major operating divisions of General Electric. The division, headquartered in London, claims 130 million global customers and offers a range of financial products, including private label credit cards, personal loans, bank cards, auto loans and leases, mortgages, corporate travel and purchasing cards, debt consolidation and home equity loans, and credit insurance."
Do you think MSNBC & NBC favor the proposed bailout?
And which side do you think Rupert Murdoch's Wall Street Journal and Fox News are going to favor?
What about CBS Corporation or Disney-ABC? Reckon they might benefit financially in any way from this bailout package passing?
What's actually amazing is that so FEW are being fooled all of the time.
Great post Robert! I am getting your book on Obama. Really impressed with your punditry of late, particularly the stellar standing up to the Bully Hannity.
Mr Kuttner
Can you do a mass emailto Congress of this one paragraph? That would be a great national service:
A better plan would have two core elements: First, most of the government money goes to refinance mortgages rather than buy up bad paper. Once the mortgage market stabilizes, some value returns to the bonds backed by mortgages. That way, homeowners are the primary beneficiaries, not the incidental ones. Second, government takes a majority stake in the major failing institutions, takes a good look at their books, and only then pumps in equity capital as necessary. When the crisis passes, government closes the ones that are beyond repair, and sells off the good bits.
Yes, refinance the mortgages at the current housing price. Sure, there will be some loses, but not as great as the cost of a bailout and the prospect that it will not even work. Homeowners must take a hit to some extent, but not every American for the foolishness of their greed and the lenders for theirs. Make ALL refinanced loans have mortgage insurance. If most of the people who can not pay their mortgages were to have the means to refinance, much paper would be saved, the housing market will rebound in the future, it always has and always will.
Your analysis is all backwards. Obama went to Washington, bent over and was ready to sign off on a government sponsored bailout. Where's the change in that. When the dust settles the American public will realize McCain didn't cave in and was looking for a better deal for the American taxpayers. How does that make McCain look bad? It doesn't. Wait and see and watch the polls in about a week.
I hope you are picking a good tune as you whistle past the graveyard.
McCain looks bad because everyone is reporting this for what it is -- a purely political stunt that proves that with McCain it is "campaign first, country last"
"McCain looks bad because everyone is reporting this for what it is -- a purely political stunt that proves that with McCain it is "campaign first, country last""
Bullsh!t. Your being duped. The only ones reporting that McCain blew up this thing is the Democrats and their lackeys in the main stream media. If the Democrats felt this was such a wonderful plan why didn't they just sign off on it and bask in all the glory of saving the economy? They hold the majority and had the backing of the President so the veto wasn't an option. They wanted the Republicans to have their fingerprints on this deal so they could take cover from the public who is 90% against this deal.
WTF? You cannot be serious. They both went to bend over....the problem is that McSame fell asleep.
The solution is to return to tight regulation and monitoring of markets since these people have proven they need to be on a short leash with other people's money. Attendant to that is that businesses that fail or are taken over, or sold should withhold any and all pay for the executives and management involved in the failure of the company. No performance. No pay. Period. And driving your company into bankruptcy is zero performance. The result should be zero remuneration.
I like it....can you get it to Obama?You know 6 degrees of Kevin Bacon and all that?
There are only two camps on the Hill: the complicit and the clueless. both cross the one-party line, the criminally rich.
here are the ONLY two presented options, but all options have only two results:
1. "do nothing" (a bigoted politically divisive term) = severe, deep and painful recession, but relatively short lived in our Keyesian economy
2. bailout = infusing more fiat currency into our Keyesian economy, devaluing the dollar and causing hyperinflation and a long drawn out depression.
regulation vs. deregulation is an irrelevant arguement in our fiat monetary system, the Federal Reserve. it is akin to arguing over whether the gaping chest wound was caused by the mortar or its shrapnel.
Look to Hayek, Friedman and our Constitution for answers.
End the Fed, let option 1. do its work and I guarantee you we won't have a bubble/burst scenario like this again.
What on earth would cause a "severe, deep and painful recession" to end if the government does nothing?
We do nothing, the credit markets freeze up, and many employers throw their employees out into the streets because they cannot raise capital to buy raw materials, make payroll, etc.
We do nothing, credit card companies suddenly raise interest rates on credit balances to 50% in order to force regular people to part with whatever cash they have, and even those with jobs are suddenly in hard economic times.
Without employment income and much more stringent restrictions on credit card balances, and people simpl stop buying anything but food, fuel, and gasoline.
Economic spiral goes circling towards the drain because no incomes means no purchasing, and if no purchasing, no need for workers to produce products.
Exactly how is society supposed to right itself if the entire economy collapses?
Part 1
Texastrixie asks: "What on earth would cause a "severe, deep and painful recession" to end if the government does nothing?"
The normal business cycle would. The only real argument is over how "severe, deep and painful" the recession would be, how long it would take for the normal business cycle to bring another recovery, and who's going to suffer the pain of it all.
Every recession is eventually followed by a recovery, just as every recovery is eventually followed by another recession.
The "true believer" free marketeers believe doing nothing will make the recession SHARP and SHORT.
The "pragmatist" free marketeers say they believe pumping a trillion dollars into the Wall Street banks RIGHT NOW will mitigate the recession and hasten a recovery.
I don't think so.
Part 2 - read part 1 if you can find it.
I believe giving all that money to Wall Street is going to make for a short lived BOOM, and hasten an even louder CRASH instead of a recovery.
We do need to re-regulate the financial markets, but I don't think that's going to happen.
If we really wanted to mitigate the problem (there really is no solution), we'd adopt a plan where the rescue goes to people who are losing their homes because they got into these RIP-OFF mortgages.
We should offer the banks guarantees if they refinance the loans as regular fixed rate mortgages based on the current values of the real estate. The terms should be such as to allow the home-owner to stay in their home and pay the mortgage.
That should provide the banks with enough liquidity, but the banks should have to take the loss on the write downs. They can recoup it by cutting their CEO's salaries and the government wouldn't even have to intervene.
Remember, it was EXCESS liquidity that got us into this mess in the first place. Giving the Wall Street Thieves MORE liquidity won't undo the damage, it'll only make it worse.
I take it you either;
A) Have a REALLY strong "short" position in the market right now.
B) Have most of your money invested in gold.
C) Live in cabin up in the mountains like Ted K.
D) All of the above.
The author is correct that the TRUE problem is the fact that the underlying bonds are worthless because the mortgages they are backed by are worthless (and they are leveraged at 20-1.)
Increase the value of the mortgages by making them worth something and the bond market recovers, thus adding in liquidity. This also strengthens the position of the underwriters and makes their books recover.
No brainer. Swap out mortgages with Fannie May or Freddie Mac mortgages (which the Gov owns now anyway) and it recovers on it's own WITHOUT the bailout.
AND the Gov. gets an equity position in the mortgages so that when the Housing market recovers, they get a ROI.
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