Stimulus, Yes; Bank Bailout II, No

You can say one thing for Sen. Susan Collins of Maine. She is performing the service of giving bipartisanship a bad name.

Maine's current $6.1 billion budget has a revenue shortfall of $830 million, and Maine is facing the same kinds of layoffs and program cuts as other states. But Collins thinks it's clever to cut from the recovery package by some $40 billion in desperately needed to aid the states, in order to....what? In order to show that "moderates" can force the Obama administration to bend? I hope the lady's phone is ringing off the hook from bewildered constituents.

One also hopes that the House, where there is no filibuster rule, will push back, big time. Progressive strategists are talking about forcing Republicans to engage in an old-fashioned filibuster, with cots on the Senate floor, in order to shame so-called moderate Republicans like Collins into allowing the final conference bill to come to a vote. That would be salutary. But whatever the ultimate size of the stimulus bill that reaches President Obama's desk, it is likely to be only the first installment. I will bet that Congress will have to enact additional spending legislation as the economy seeks deeper into recession.

While the compromise bill has too many concessions to tax cutters in both parties, at least the administration has the basic concept about right. The bill is clearly not just meant as a one-shot, but a down payment on more adequate social outlay and 21st century infrastructure. As the recession deepens, if Obama does his job he will mobilize public opinion and isolate Republicans who would rather sink the economy than give a Democratic president legislative success. The current recovery bill is a good first step.

The same, however, cannot be said about the even more important administration initiative, the revised bank rescue plan. If we get the scale of stimulus spending right, it will put people back to work and prevent the economy from collapsing for lack of purchasing power. But if the banking system stays in a state of cardiac arrest, it will continue dragging down the rest of the economy.

Treasury Secretary Tim Geithner has postponed unveiling details of the plan yet again, until Tuesday, citing the need to work on the stimulus legislation. But Geithner and other administration officials have already leaked enough details to make clear that they lack the nerve to do what needs to be done.

Geithner has gone out of his way to throw cold water on the idea of bank nationalization. Rather, the new plan will be some variation on the original strategy that former Treasury Hank Paulson sought and then rejected--getting toxic assets off bank books without asking a great deal in return. The plan reportedly will allocate $50-100 billion for mortgage relief, but here again this is to be done indirectly rather than through direct federal refinancing of distressed mortgages.

Here's the problem with this whole approach. The government has not been shy about telling banks what to do, but has done so in an ad hoc manner, without adequate information, without a strategic plan, and without the authority that goes with ownership. The Wall Street Journal recently published a devastating investigative account of how the Treasury Department ordered Bank of America to acquire Merrill Lynch, a deal that turned out to be a disaster for the acquiring bank. Executives were warned that if they did not go alone with the plan, the Journal reported, there would be hell to pay.

Basically, the government has been acting as if it owned the banks, but in a half-backed, scattershot manner. It would be far better to nationalize the large banks outright, sort out their balance sheets, and then decide what level of financial relief is required to get the banks functioning. This prevents the dilemma of government either overpaying for assets that are currently under water, or failing to provide enough aid. If government is the owner, then government actually runs the bank and there is no risk of windfall benefits to banks at taxpayer expense. When the banks are back on their feet, they can be sold to new private owners.

The current approach, apparently to be revised only slightly by Geithner, produces the worst of both worlds. Government is left holding the bag for the losses, but government lacks the direct tools to run the banks properly. On the mortgage front, it would be far more effective for government to simply refinance at-risk mortgages directly, as the government did in the 1930s under Roosevelt's Home Owners Loan Corporation.

Obama's problem is that his key economic appointees are averse to radical solutions to a radical crisis. Geithner and National Economic Council chief Larry Summers have both been quoted saying that governments "make poor bank managers." Geithner's own track record as point man for the rescue efforts of the Bush administration certainly proves his point, at least as far as his own work is concerned. But in fact, the Federal Deposit Insurance Corporation, which does take over failed banks from time to time, has an excellent record of sorting out their balance sheets, nursing them back to health, and then returning them to the private sector. The Treasury lacks this competence. This is all the more reason for government to build up the necessary expertise and then take over failed banks, rather than just pumping in money and intervening in fits and starts.

There is time to add more money to the stimulus package if the first attempt falls short. But time is fast running out on the more urgent need to get the banking system functioning.

Robert Kuttner is co-editor of The American Prospect. His latest book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."

Comments

[jeantepper]

What can we do to get the president, Congress, and the mainstream media to take seriously this obviously important perspective?
I envision thousands of people in the streets in cities all over the county under the slogans:
No Bailout for Banks!
Take them over and make them work for us!
But the left has no infrastructure to make this happen.
How can we build one?
We need an economic justice rapid response internet system.
Anybody have any ideas?

[RTIII]

Dear Mr. Kuttner,

Overall a good article, reasonable ideas, reasonable observations.

I agree with your criticisms of Obama's staffing problem, and I agree that nationalization has a place. I, however, would prefer we nationalize the Federal Reserve, which, as I'm sure you know, is neither Federal, nor does it manage a reserve of any kind. The second step I advocate is letting the banks just fail outright and instead of bailing them out at all, create new banks using the capital we would have put into the failing ones as seed for the new. As for letting FDIC handle the failed ones, OK, I can agree with that, as necessary, but I don't want to see taxpayers putting anything into these money-pits.

Thanks for your article. We need more "food for thought."

BTW, you REALLY need to get an ed itor.
.

[LoyalOpposition]

Let it be known that it was the previous administration (Bush's) that made this demand:

"Here's the problem with this whole approach. The government has not been shy about telling banks what to do, but has done so in an ad hoc manner, without adequate information, without a strategic plan, and without the authority that goes with ownership. The Wall Street Journal recently published a devastating investigative account of how the Treasury Department ordered Bank of America to acquire Merrill Lynch, a deal that turned out to be a disaster for the acquiring bank. Executives were warned that if they did not go alone with the plan, the Journal reported, there would be hell to pay."

[SwampeastMike]

I can perfectly describe the problem faced by the three main consituents of our economy: the financial system, the government and the people in four short words;

I owe, I owe.

The people fairly understand that government owes and that too many people owe as well, but are clueless as to how the financial system owes. The people are told that "housing is the core of the problem", don't know why. People who have kept their personal debt within reason are especially perplexed--"Hey, I've done what the 'money smart' people--the bankers and investment advisers--say to do to play the game fairly.

The "big" financal system--investment banks and hedge funds (increasingly difficult to distinguish)--owe because of "mark to market".

Mark to market allowed mortgages (assets) sponsored through our government-assured means (Fannie & Freddie) to be continually upgraded in value by rating agencies.

Owner: "Tell me what it's worth."

"That's more than I paid. I can sell it, take a quick profit and make more of these loans (assets) for more profits."

Multiple sales later (with fees for rating and commissions for selling), Fannie and Freddie find their money input--remember, their purpose is to loan--coming from their PREVIOUS loans now "marked to market" and sold again and again.

[kj11]

One way to help consumers and bring banks under control is to get back to a reasonable margin between what banks pay to borrow from the fed and what they charge for interest on credit cards. The margin increased in the early 1980s, when the fed increased interest rates really high, and the banks increased credit card interest rates to 20% for the first time (from about 12%). Then, when we got through the economic crisis, the feds reduced their rates, but the banks never brought their rates back down (except maybe for highly qualified customers).

Lower credit card rates. The banks are making too much money on them and their fees.

[joebhed]

It is a sore point right now.

My suggestion is that the people (that would be the GOVERNMENT)
demand that,
in return for ANY government(that would be the TAXPAYERS) bailout money,
EVERY bank receiving bailout money MUST increase the amount borrowed sufficiently to BUY OUT its credit card operations,
and change those balances into UNSECURED PERSONAL LOANS,
made affordable by their term,
at a rate of interest of the cost of money borrowed(from the TAXPAYERS) plus two percent.

It's not only fair.
It restores buying power to the consumers who need it more than ever.
It stabilizes bank loan portfolios by using the taxpayer monies to reduce risk, and to increase the likelihood of repayment.
Economic democracy.

Someone needs to let Geithner know.
Because HE is who is acting on behalf of the people.

[BrownWithEnvy]

The amendments and concessions being made to the stimulus package are a tragic mistep by the Congress and the President. The problem with GOP thinking is it only examines a foot in front of their faces. It is always a bandaid rather than a cure. Tax cuts and stimulus checks are a testament to that, because without the other provisions, we won't be right back where we are now, we will never move forward at all. Yes we need to stimulate the economy right now, but we can't only look at tomorrow and forget about the next day. R & D of green energy creates jobs immediately and ALSO reduces dependence on foreign energy (sorry repubs in back pockets of big oil). The improvements proposed in the infrastructure are improve and build roads, schools, hospitals, internet capabilities... etc that will continue to pay dividends for decades to come, and its not worth its weight in big business tax cuts??? Please pull our heads out of our hindquarters and make our voices heard to our senators and reps.

[BrownWithEnvy]

It astounds me to see the absurdity that has unfolded in this whole ordeal. The GOP so concerned with spending had no problem pouring money into a criminal war/occupation of Iraq for the better part of a decade, but impedes every attempt to right the wrongs of the past. Add that to the negligent deregulation of Wall Street that is unequivically responsible for the banking "collapse" and in turn the resulting economic crisis that transpired, and you have the very people who started the fire preventing its extinction. Now they are more concerned about making power plays rather than representing the very constituents they were elected to represent. It is beyond shameful.

[joannenj]

I don't get it. If I go on lavish trips and not pay my mortgage; I forfeit my house. The banks was BILLIONS of dollars and are lining up for more. They did not do anything they were supposed to do with the original package. Yet the Republicans don't mind giving them more.

When it comes to helping cities and families they have a major problem with it. Suddenly the government is spending too much money. I've had enough.

It is time for the people to speak up. Where's our voice in this? We can't wait for the administration to fight for the people. We have to speak for ourselves. Start a phone campaign. Start an email compaign. Vist your State representative's office, Call all of the television stations and let them know that the Republicans are WRONG on this. They have been wrong for years and they are WRONG, WRONG, WRONG. The time to act is now people! SPEAK Up!

[Lark817]

I emailed and called both my Senators, all state Congresspeople, and many, many other Senators and Congresspeople. I told them to support the stimulus, the bigger the better. I told them if they did so, I would support them 100%. I told the Repubs that I would work extra hard during the next campaign to see they do not get reelected if they didn't support the stimulus. Did everyone else. It's easy enough to write the message in Word and paste it into each email. Just take 20 minutes and do it everyone. Then have some fun and go to Faux News and other right-wing sites and tell them the same thing.

[Agent420]

Ever think that we might be doing CPR on the dead carcass of "all our eggs in one basket" banks? Banks should either put in leg irons or nationalized.

[dnpvd51]

Obama is losing all his credibility with Geithner and these TARPs.

The people do not like these bailouts and for good reason. FDR did not bailout the banks. WHen the banks reopened under FDR they were solvent. These banks did not come back for a bailout six minutes later.

The economy wil not find its bottom until this bank mess is sorted out, and the bank mess can only be sorted out after the losses are realized.

[jestfam]

nice statement dnp i like what you said and for once someone on here sounds like they have a brain.

[mlaiuppa]

The bailout money was split in half specifically to monitor what the banks would do with it with no more than a 'trust me' for compliance. Well, they used it for bonuses and trips and they've hoarded it. None has been used for loans or to help with the current economic crisis.

Why throw good money after bad?

Tell the banks point blank; no more. You didn't use what we gave you wisely. You're not getting any more. Try again next year and you better have something better to show for it.

Take the other half of the bailout and ADD it to the stimulus to put back every single item that was cut. Every one.

[AGarcia]

Here, here. I say give all the TARP to the stimulus.

[Joethepauper]

Yeah, $350 Billion would go much further toward infrastructure and energy independence, rather than caviar and yachts.

[SPQR1775]

The banking system and the pretense that they are failing is a falacy, that is why the banks refuse to say what they did with the money. They are trying to force a global merger of banks to look up the world and move it more towards a NEW WORLD ORDER. All this started with Reagan while G.H. Bush did all the dirty work in the back, it started again with Cheney. Imagine Cheney was appointed to look for a V.P. then he appointed himself and that shows how dunce W.Bush was, he selected CHENEY? It is laughable, they stole the election in 2000, cause 9-11, cause Katrina, cause the economic issue, created Iraq and now where we are in 3 trillion in debts, the GOP voted NO on help for AMERICA, they wanted 3 trillion more in tax cut for their buddies, and 36 Senators voted for 3 trillion in tax cutts while refusing to vote for President O 820 billion, hmmm I am flabagasted here. NOW WE KNOW WHERE THE GOP have drawn the Battle line. The economy will continue to fail, but the President will look better like aged wine because the GOP will look like they created the mess and they will have! YES WE WILL END ALL THIS BS by the GLOBALIST GOP!

[Joethepauper]

When Bush held that news conference about the economy in September, and basically scared the living s#it out of everyone, I thought something was up. Then, he scared congress into approving the TARP, but for some reason, the Repubs, who had always marched in lockstep with Bush, voted against it. That was perplexing. Now I know why: There was no real emergency....So what if some mortgages were delinquent? 90 days, big deal! Lower the interest rates on those predatory loans, and the troubled assets would straighten themselves out. The whole thing was MANUFACTURED. The same people who collected the TARP money were the ones who caused it (knowing in advance that they could do whatever they wanted and still get bailed-out). Between Bush scaring people into cutting-back on spending, and the deflation of the dollar by printing $350 Billion of them (or $700 Billion), no wonder it melted-down! The Republicans who voted against it knew that the Dems would look stupid for voting for it when the bankers spent it on themselves. They forced a stimulus package on the next admin. that they will also block, making the Dems look foolish again (because their business friends are going to hunker-down and not even try to stimulate anything for at least 3 1/2 years. If the stimulus fails, they get re-elected and continue looting. How much stock and property could you buy at firesale prices with $350 Billion, to later sell at a profit?

[jestfam]

wow joe you should work in congress. I think you know more than anyone. Why is that people like you think that the democrats and republicans are not the same people. They both want your money and thier money. They dont care how they get it as long as we all suffer. There is not perfect side and neither side does exactly what they say. Your trying to point fingers when a lot of this belongs on both not seperate sides. All of our people up there need to refocus. I think a good idea would be to have 4 year college grads be picked to be our senators and governors and because we want something new instead of the same old junk, maybe they would have new ideas and ways to help out all over. I also think we should have term limits of 8 years so that the same old stagnant ways dont continue to happen.

[spinmas]

I agrree wtth the article..freeze or cancel TARP II, thats what Obama should do if he is smart...but from what I read he is also a part of this "new world order" deal...heaven help us all...our leaders evny despost and dictators and bountiful cheap labor..how else can the rich and well heald remain this way>>

[Viper]

Lets understand that the banks, not w/o fault have bad assets around the world because of Toxic assets which are the mortgages on our devaluing houses which people are walking away from due to variety of reasons that date back to the 1980s (free trade, cheap imported goods, trickle down, de-industr­ialization­, massive budget and trade deficts, invasion of Iraq, free unregulated markets, mindless free trade and outsourcing... which Americans voted for time and again and often with their dollars and who suddenly have virtue and have found a new villan other than themselves...

Wiping out investors in finanical instituions whose stock is widely held by retires and pension plans, is just one more asset devaluation like housing and the stock market in general which deepens the problem and its costs, and further reduces confidence in the market place... cuasing capital outflows instead of inflows. With each frop in the underlying assets of our economy, the money supply is reduiced and the need for government monetary infusionn increases.

There is no economist of merit who does not belive thaat allowing Lehams to fail was an expensive mistake... costing at least 2 trillion and adding that much to the bailout... Its distressed sale of assets then became the value of the assets on all the banks books...

If no one defaults, the asstes become non toxic... the problem is us and how we voted and shopped for the last 30 years.

Regards

[dnpvd51]

Investors need to take losses. If there were only gains for investing imagine the size of the bubble.

As for Lehman, I am sure it was handled badly but not because they let the bank go under. The people in government are either incompetent or crooked and they should be fired.

Parties that relied on the bank in good faith should probably be protected. The government needs to go in and sort this out. But this needs to be handled in an honest and transparent manner.

Investors need to take losses.

[Paul]

Looks like the Republican Southern Strategy has morphed into the "Lost Cause" mentality.