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.