After the Revolt Against Wall Street

The fix was in. The leadership of both parties in Congress, both major presidential candidates, media poobahs, financial statesmen from Warren Buffett to Bob Rubin, all weighing in to support giving the Treasury Secretary a $700 billion revolving fund to bail out Wall Street.

And then Americans said, "stuff it." The bill was incredibly unpopular. Calls against were running 100 to 200 to 1, with venom. With Americans struggling, their salaries not keeping up with the cost of gas and health care, their homes losing value, their savings exhausted, their credit cards maxed out, foreclosures and bankruptcies on the rise, giving the Treasury Secretary, the former head of Goldman Sachs, $700 billion to try to bail out his friends on Wall Street was a very hard sell.

So in the House, the vote counters went to work. In both parties, to the extent possible, members in contested districts were to be given permission to vote against. Those in safe districts expected to vote for it. Leadership labored to assemble a bare bipartisan majority to pass it. But that increased the influence of progressives on the left and conservatives on the right who had relatively safe seats. Members of the Progressive Caucus split 50-50, but Speaker Pelosi produced the 150 votes she promised. Conservatives, eager to distance themselves from Bush, revolting against Rep. Boehner's leadership, and hoping to blame Democrats for the mess, bailed out on the bail out in large numbers. Pelosi wisely decided not to try to force it through with Democratic votes only.

But Congress can't walk away. Something must be done. The markets were already indicating the Paulson plan was inadequate. Moving to placate the right won't work. Conservatives are clueless. Their plan featured suspending capital gains taxes (as if investors would then rush to put their money in the banks' toxic paper), and further deregulation, letting banks hide the current value of their assets by suspending mark to market rules. That actually made it into the final bill, but it hardly would increase confidence in Wall Street. Rather than making further compromises with the conservatives, Democrats should put forth a plan that is far bolder and that deals with the real problems.

1. We need a real plan to get the economy going.

The Paulson plan had a big price tag, but wasn't likely to work. It was, as Nobel Prize winner Joseph Stiglitz noted, essentially a version of the trickle down economics that got us into this mess. Bail out the guys at the top and the benefits will trickle down to the rest of us.

The financial crisis comes from the collapse of an $8 trillion housing bubble. Banks - and many homeowners - made a lot of bad bets on the assumption that housing prices would always go up. The shadow banking system - including the off-balance sheet entities set up by the commercial banks - borrowed massively to make those bets. They invented exotic securities and over the counter, unregulated credit swaps and the like to add layers and layers to the house of cards.

Now it's collapsed. The real economy is in trouble. Consumers have lost trillions in home equity and are tightening their belts. We are headed into what is likely to be a long and severe downturn. Defaults on mortgages, credit cards, auto loans and other consumer debt are rising. Banks and investment houses have no idea what the value of the paper they own is, much less the condition of other banks. Financial markets are close to freezing up.

So Paulson asked for the authority to bail them out -- to buy some of the toxic paper -- not all of it by any means -- to "restore confidence" and create a market price for the stuff. Good luck with that. Bail out the guys at the top and it will trickle down to the real economy.

In fact, the downturn in the real economy -- rising unemployment, declining consumption, construction collapsed, retail sinking, manufacturing already more than decimated, states and localities about to make deep cuts in health care and construction, and layoff police, teachers -- is more likely to send the pain upward.

So what does the administration do? The president says it is "premature" to have a serious stimulus plan to get the real economy going. The Democratic leadership offers up a token $50 billion stimulus. The Republicans in the Senate wage a filibuster to kill it.

Worse, by authorizing $700 billion for the bank bailout, Congress would set up those who will argue that we have no money left to stimulate the real economy.

Instead progressives should demand a real -- $200 billion or more -- stimulus that invests in new energy, extends unemployment benefits, aids states and localities to avoid debilitating cuts, rebuilds our crumbling infrastructure and puts people to work.

2. A Plan for Financial Reconstruction

Second, the Paulson plan itself simply does not go far enough to deal with the reality that Wall Street needs to be purged of insolvent firms, excess capacity, and that imprudent lenders and investors have to take their losses. Paulson is looking to restore confidence by buying some of the banks toxic paper. He could well end up with a Halloween plan, pumping blood into the living dead.

What we need is, as Alex Pollock and John Makin, both of the conservative American Enterprise Institute, argue, is a Reconstruction Finance Corporation that has the power to take over financial firms, sort out the solvent from the insolvent, close down some, merge others, and back those that are solvent. Sweden provides, as many have shown, a good example of how this can be done -- with remarkably little cost to the taxpayer.

3. Staunch the Housing Hemorrhaging

Finally, more direct steps should be made to help forestall foreclosures and insure that housing prices don't simply collapse. The Paulson bill did instruct the Secretary to take steps to renegotiate mortgages on the paper that Treasury purchases. But with many of the mortgages sliced and diced into securities, Treasury will still have difficulty getting much done. And, the bill, in a testament to Wall Street's clout, omits the fairest way to sort out the victims from the bounders: empowering bankruptcy courts to renegotiate mortgages to keep deserving homeowners in their homes and reduce the flood of foreclosures across the country.

The turmoil in Europe and the decline in the markets are being read as warning signs that delay will be costly. And Congress is likely to try to pass a version of it with cosmetic changes once more, lipstick on pigs being in vogue. But in fact, the Paulson plan deserved to fail. It exemplifies the philosophy that got us in this mess -- the assumption, as Barack Obama noted, "if we give more and more to those with the most, prosperity will trickle down to everyone else," while ignoring the reality that the pain is shooting up.

We need real investment to kick start the economy. We need an independent agency with greater power to take over and sort out the financial community. And we need greater focus on staunching the hemorrhaging of housing values on Main Street, not the value of securitized exotica in Wall Street's basements. Let's start with a bold plan that can work and negotiate from there.

Comments

[citizen00000]

By the way, great article Bob, and a big thank you for allowing our comments. killthemessenger, actually our sons (generation X) are saying the same things we are. There are times for meltdowns and market corrections. BUT this is about so much more. America will have to change. Instead of it BIG GOVERNMENT trying to scare us into handing a blank check for $700 billion dollars to ANYONE, why don't we start with punishing the Fannies, Freddies, etc. who have been a big part of this? We let these greedy CEO's walk, while who is left holding the bill? The taxpayers, and this time we united and said NO MORE. Punish the guilty and quit bailing them out.

Our sons are all in the securities business. One has his own company, it is doing well even in this economy. He has taken much of his stocks out of WALL STREET at this time and paid off his mortgage, made sure he has foresight to keep his employees with a job. They also say that unrestrained bigger government will bring us to bigger corruption, taxes. THE PEOPLE have united, saying -- ENOUGH...BIG GOVERNMENT has overstepped its bounds. We are all calling our congressmen, representatives, its time for change. NOT merely a political problem whoever is elected will inherit this mess. America used to be of the people, for the people, by the people. United we will stand. Divided we allow ourselves to fall from a republic to a socialist state.

[Navy VET EOD]

As a fiscal conservative and social progressive (i.e. minimize expenditures while investing in projects and programs that have the greatest ROI in terms of the public good at large, not in terms of specific special interest groups), I would argue that we're not allowing "ourselves to fall from a republic to a socialist state". We are allowing ourselves to move from a free market economy to state capitalism (i.e. "big business", in this case Wall Street, has control of both the government and the market...see Liebknecht).

That's why a bill like the EESA, after being voted down on a Monday by a slim margin, passes "convincingly" on Friday: Tuesday, Wednesday and Thursday Wall Street was crawling all over Capitol Hill lobbying Senate and House members to vote "aye". They were also flooding the inboxes of congressmen with voice and email messages to counter the pleas of constituents who are against the EESA. Nationwide voters were 60% against, 40% for just minutes before the House vote on Friday.

Wall Street won. So who has the power: Wall Street or the voters?

State capitalism defined!

[LouisvilleLiberal]

Bush is the boy who cried wolf. It's hard to get nervous when he tells you that we are in real trouble.....and that this time it's for real.

Paulson is going to be going back to Goldman Sachs in Janauary and the man's net worth is half a Billion dollars. He's not exactly tuned into the working man.

Congress gets scared when they say things are going to get really, really bad if they don't sign over the cash today. They get so nervous that they barely ask any questions and don't get opinions from experts beyond the guys that are going to get the money. They should have paraded 100 middle class economists through the Congress and gotten enough advice so that they understood the situation before they tried to write a bill.

This time, finally, it seems that the voter won't be fooled again. We've been suckered too many times by this Administration and we have nothing left to lose. Thank God for the timing. It wouldn't be so easy to effect the outcome if the election wasn't right around the corner.

We need to force Congress to slow down and figure out what the real problem is and decide how we want our monetary system to work for America. Loosening up credit sounds like a short term solution. It sounds like Bush's instructions to go shopping after 9/11. We need a real solution this time....we can't afford anymore knee jerk reactions to imaginary disasters.

[twinkerbell]

Congress knows what the real problem is. It's them. The banking and brokerage industries gave $170 MILLION dollars in contributions to both political parties over the last 10 years. Think of what a tiny investment that is to get 700 BILLION dollars back as a bailout. People like you and I are irrelevant to their schemes. And now they may be spending us into bankruptcy, and now we've become a 3rd world colony, in debt to the likes of China, Japan 7 Saudi Arabia.

[UnknownSoldier]

Too many people are confused as to what to think. I would hope everyone here understands that there is money in our economy. The question is who has it right now and the answer is the rich people. Reagan Philosophy was that the Private sector was better able to handle the economy than the Government and should be given massive tax cuts so they would have the money to make the economy GO.

The Rich Private Sector agreed with that philososphy and took the money, now the private sector is saying they can not HANDLE the responsiblity of running the economy and wants to give it back to the government. However the Rich Private Sector does not want to give back the money they were given. The Private Sector was asked by the President to loosen up the money and to start lending or this SUCKER COULD GO DOWN and the Rich Private Sector said NO WAY.

Does anyone remember GREED IS GOOD and how it will fix America. Well America is a Ship and if you keep shooting wholes in it ( i.e. outsourcing jobs, and under paying American workers) the ship will sink and everyone will drown.

[joebaggadonuts]

Funny. What they really want is to prevent investment by government in infrastructure and technology to wean us from oil and the internal combustion engine. What their plan was is to suck (Hoover) all our money out of our wallets and out of our bank accounts and even out of our creditworthiness.

What they got was the Pavlovian response they have been training us to give every time someone asks us for (government) money. Not just no, but HELL NO.

What a hoot!

[Navy VET EOD]

Great piece!

Congress should pass the continuing resolution, get the President to sign it, adjourn the general session and open a pro-forma session (just so the administration can't pull anymore fast ones on us) to run through December. Let Pete DeFazio have the gavel in the House and Barbara Mikulski in the Senate.

Once the 111th is in session with Barak Obama as President and a new Treasury Secretary, then we can pull our heads together and work out a strategy.

No one's going to die from this in the interim.

I'm in my 50s and am also watching the equity in my home and the value of my 401K take a nose dive, but I have far more confidence in my ability---and yours---to recover soundly than I do in the "wisdom" of Goldman Sachs CEO Paulson, President Bush, and---with a few exceptions---our elected officials.

I have yet to see any results from a rigorous cost/benefit or alternatives analysis that spending even one dime on a Wall Street bailout would do anything to help. I don't think they have either. So upon what are they making this investment decision? A visitation from Jesus? Gut feel?

The hole is already too deep. It's time to stop digging and start thinking.

But the plan is to re-group after recess and try again.

Don't let them. Write your congressmen everyday if you have to, just don't let them do it.

[Navy VET EOD]

Forget what I said about Mikulski. She sold out. She deserves no gavel.

[arvay]

Here's a better proposal: Let the financial institutions collapse. Someone will buy and re-start them.

Whoever that is, they'll have to operate in a tightly regulated market.

Use the trillion dollars to:

Give every American who loses a job after a specific date unemployment benefits equal to 70 percent of their salary, with a cap of $90k. Until the crisis is over and unemployment falls below 4 percent.

Finance the mortgages of people who are losing their homes, until the credit markets recover and someone buys the debt and provides reasonable terms.

Rather than finance this by borrowing excessively from China and others, get most of the money by canceling sufficient military research and exotic weapons programs, closing most overseas military outposts, ending the Iraq war as fast as our troops can leave. No new aircraft carriers, new battle tanks -- zippo until the financial crisis is over.

Put permanent limitations on nutty consumerism. VISA and Mastercard mandated into debit cards only. No revolving credit allowed in the US.

Mandate reallocation of oil company resources to develop alternate energy sources. Shorter term -- build more refineries.

Of course, our economy will grow more slowly. That's only a problem for greedy types who want to make a killing. For them, there's a wonderful, unregulated marketplace in Somalia.

These measures will protect the only US asset that really counts in the long run -- the people.

[KillTheMessenger]

In other words, you want socialism 2.0. Why not say it with fewer words?

[Alterion]

Sounds like you didn't even read his post. Those changes are reasonable, and will not affect reasonable people at all.

The pubs should just put a bunch of parrots in congress, teach them to belch out 'Socialists!!' and time a reasonable ( read: might prevent exploitation of the masses ) proposal is passed.

[arvay]

A short political science lesson: socialism is the national ownership of the means of production. Everything, light and heavy industry, transport, agriculture etc.

This has been tried and has failed, as in the USSR and Cuba.

These measures are, I would maintain, practical and avoid the taxpayers financing a horde of criminals and business failures. Let me emphasize the last point -- these people and firms are failures and should be dealt with in a Darwinian way.

I think we need to abandon ideologies and their labels. Let's focus on what's practical and serves the interest of our people. I 'm arguing that the go-go-cowboy market model, financed by superheated credit and overheated consumerism, has failed spectacularly.

That's not ideology, that's empiricism.

I'm suggesting a new approach, slower growth, a credit system that encourages saving, care and focusing on things like family and environment, that have lasting value. Not no growth, but reasonable growth that fulfills reasonable goals. Not like a crazy consumer economy where regular people are gulled into mortgaging their homes to buy $100,000 cars, furniture and kitchen sets.

Maybe they could save some money for their kids' education! And those investments would build real prosperity.

[drkazmd65]

As opposed to the corporate socialism we are experiencing now?

KTM - you know enough to know better than to call what arvay outlines as socialism - or at least you should. Note - pretty much every point he/she outlines is ended by a market-based solution,...

For example,... "Finance the mortgages of people who are losing their homes, until the credit markets recover and someone buys the debt and provides reasonable terms."

See,... a market comes in after the crisis is over.

[KenGirard]

My simple solution:
Goverment buys X amount of each mortgage under the condition that the interest rate of the entire loan becomes 5% APR.
Wall Street gets some cash now, and keeps getting paid.
Goverment gets paid back it the end of loan with interest.
Taxpayer can afford to keep house, and likely has cash freed up.
It is investing in the taxpayers, while saving Wall Street, which saves Main Street.
If the taxpayer can't pay the loan off, then the house gets sold and the government gets it's cut.

[KillTheMessenger]

Including the good mortgages? So you want the US government to pay for your house, too?

:-)

[Zeje]

The government doesn't pay for the house. The mortgage is reset to 5%.

[citizen00000]

So glad WE THE PEOPLE have finally been heard. Being a baby boomer, just at retirement age, my spouse and I have worked hard to raise our three sons, served in the military during Viet Nam, paid our bills, have (or used to have) excellent credit. NOW, we are just about to lose our 401K, our minimal savings, our mortgage on our home is becoming so high we cannot afford it along with health care, medicines, fuel, or shall we choose food? We take care of elderly parents.

Democrats and Republicans both are responsible. They should quit fighting like little spoiled brats and put their selfish agendas aside think the people they represent. YES, now we are speaking LOUD and CLEAR If we go down THEY come with us. We little people have been doing without for a long time now. If we cannot pay our taxes, mortgages, even medical issues, its greatly due to THE GOVERNMENT who ignored us and we are bleeding profusely. THEY have our blood on their hands.

Before its too late, let's hope they can come up with a package that will be For the People. One more thing, while our Big Boys are so busy crying over Wall Street Woes, who's watching the terrorists, the country? It is a perfect opportunity for our enemies to strike. Also, WE THE PEOPLE are uniting; either reform or fall. At this time, they have so much further to fall than we do.

[KillTheMessenger]

Citizenoooo, if you are a baby boomer, YOU are the problem. Here is a message from Gen X:

"Gee, thanks, Dad, you really messed it up this time!"

[PadrePio]

Boo hoo for gen X you've lived in our shadow and it has eaten your common sense away

[Zeje]

No, Kill. The Wall Streeters are the young ones. Or maybe you haven't noticed, since you don't live in New York. The ones buying multi million dollar one-bedroom apartments in Manhattan are young. The ones buying $1,000 a bottle wine are young. The high rollers on Wall Street are, for the most part, young.

[sheila]

where is the disgorgement of profits, salaries and bonuses in these plans? when 5 of the bailout recipients paid out over $39 billion in bonuses in 2007 alone, it's time for some executive talent to pull out their check books and recapitalize their own institutions. it's about accountability as much as liquidity, and all the plans i've seen so far allow these Robber Barons to skate with all the money. that's not ok with me. anyone else feel like the money is easy to find in the pockets of the mercenary classes who caused all this and profited grotesquely from it?

it's a common theme nowadays in america. big oil is not only not required to lower prices, but they are not required to pay for the global warming they are causing or the spills like the exxon valdez. WE are expected to not only bear those entire burdens, but to keep the money rolling at them, while they try to co-opt the "renewable" energy era with their massive, deadly industrial solar and wind plants, instead of each of us getting solar, wind and storage of our own. that ain't capitalism, that's theft and corruption. the Robber Barons have had their time. now it's our turn. sustainable economy, sustainable ecology. the only answer.

[KillTheMessenger]

Welcome to the Communist Republic of North America!

Oh, wait. Newsflash: IT'S NOT GOING TO HAPPEN.

Sheila, you got to work with what you are given. And while I admit that that's frustrating, the structures in the US will not change anytime soon. We can only hope to nudge them a little bit back towards reality. An economic meltdown once in a while is a good thing. It forces people to think about the larger picture. And once they do that, there is a small chance for a small change.

[Libbyland]

WE THE FREAKIN' PEOPLE don't want no STINKIN' BAILOUT!!!

This is your intervention, all you Wall Street and Washington addicts to OUR MONEY: we're done. Use your own money to bail your own butts out of your own jam. You are the 1% who own 90% of everything. Sell one of your mansions. Clean out one of your off-shore accounts. Stop visiting your high priced whores for a few months. Sell some of your antiques. Sell the company jet(s) and fly like the rest of us do when we can afford to fly at all.

If you are so devoted to the companies you own, then act like grown ups and invest in the future of your own company. That's what the main street business owners do. Follow the example of the little guy you'd rather crush.

[ssmigs]

We don't want no stinkin' bail out!

Invest in We the People. Rebuild OUR infrastructure with this money and give regular people jobs and the means to afford their homes. Tax the 1% who have easily made over $700 billion in profits over the Bush years while We the People struggle to pay our bills and save, only to see it bleed away in more speculation on Wall Street, mismanagement in Iraq, a defense budget that is astronomical, bridges to nowhere, oil speculation.

It's time for a new American Revolution of the People.

[KillTheMessenger]

We the people just got $150 billion as a tax gift. It didn't do a thing. The structural problems that drive these events are on the scale of tens of trillions of dollars. Small gifts and running the printing presses hot will not solve anything. Americans will have to change so that America can change.

[racom]

Today we must insist on comprehensive, proven, enforceable regulations before any other legislation. No money, no buyouts, no deals cut in the back rooms, nothing until after a signed bill that reinstates regulation.

[Alterion]

Hypothetical Letter from the GOP to Financial Execs:

"We're so sorry you screwed up!! Here's $700 billion does that make it all better? We're so sorry we can't give you more! Can I lick your shoes now? Did Nancy Pelosi hurt your feelings? I'm so sorry is there anything else we can do for you? How about I wax and polish your Bentley? Can we scrub the floor of your bathroom and fill you a buble bath so you can relax and make it all better? Again, we're so very sorry we couldn't give you more money!!

Love, The GOP."

[Stirner]

"We need a real plan to get the economy going." Right Comrade... let's call the first one a "Five-year" plan.

[JM214]

Dear Senator Obama:

Getting elected is important, but not if the house you move into is crushed under the "mortgage deal" that's pending.

Seen the shark specials on TV? Closeups of the Great Whites tearing huge chunks off the still living whale pulled up beside the factory ship? Look at all like what's up in DC and NY right now?

The "conservatives" intentionally spent this nation into near-oblivion to kill the last vestiges of the hated New Deal and Great Society, and any future social programs. I guess that if elected, you know what you will have to work with -- "change" of the kind I have in my pocket.

Is the thought of "winning" suddenly too daunting? Maybe Gore and Kerry decided they didn't maybe really want the job. But you've come across as the last best hope for us wage slaves who will be paying for this no-consequences robbery by the Haves. If you want to be a leader, you had better get your best and brightest together, read the riot act to the American people, call BS on what's the greatest and most shameful grab of public assets in history, and offer some talking points, REAL remedies and common sense in exchange for the crap that's flying through the air these days.

So please, maintain your cool, but it's time for some fire, not triangulation in the end-game.

Sincerely, so very sincerely,

Jon McPhee

[kwftlaud]

The way I see it, the solution is very simple.
We are told that the problem here is that the system is filled with
"toxic" home loans that are not worth what they once were.
They are "toxic" because they are going into foreclosure , not because the houses are worth less
now than a year ago, but rather because the loan's interest rates have reset and the homeowners payment has quadrupled overnight. Its the rise in payments that is causing the foreclosures, not the falling value of the houses.
The solution is easy. Take the 700 billion and offer 30 year fixed rate home loans at a low interest rate.How bout maybe a few different programs that take into consideration someone's FICO score:
3% if you have over a 700 FICO score, 4% if over 600, 5% if over 500 , 6% if over 400.

Also, set up a program for business loans, and start them out at 8%
Maybe have a few different rates for business loans the same as home mortgagees using
some kind of credit report, or, size of their annual receipts.

The investment banks get their original investment back.
The homeowner gets to keep their house
The foreclosure problem goes away.

And all this would cost would be providing low interest rate .
Not a penny to the wall street that brought us this problem in the first place.
We did this in the 1930's, and it didn't cost the taxpayers a cent.

[kbrandauer]

I have been wondering why this isn't the approach Congress is taking... but I assumed they "knew something" I didn't. I guess I was wrong.