I understand the Dow is up a bit today, so maybe we’re not seeing financial Armageddon yet. Time for some evaluation.
The best analogy I can come up with to describe the federal government is as an organ riddled with cancer. And the cancer is the damn supply side trickle down pro-corporation anti-regulation free market ideology liberals gonna gitcha boogaboogabooga crowd that has shouted the rest of us down since 1980.
For too long, their voices drowned out all others in our national political discourse. But for all their bellyaching about elitists and liberals and how badly their opponents ran the government, they never worked out a coherent governing philosophy themselves. As Bill Scher says, the Right’s mantra is less government, lower taxes and a strong military. Those are sales points, not a comprehensive plan for running a country.
With that in mind, let’s look at what’s happened in the past few days.
The utterly corrupt and incompetent Bush Administration has claimed for the past several months that problems in the financial sector were contained. Then, suddenly their hair caught fire, and they proclaimed the financial sector on the brink of ruin and Congress must act now now now now. Then the Administration handed Congress a half-assed proposal that did little more than shovel money in the direction of people who had caused the crisis and give the executive branch more unsupervised power to deal with it.
(I want to add that this is a very familiar pattern. I’ve seen incompetent co-workers and managers do the same thing. It’s a three-step process. One, assure the suits in the executive suites that everything is just fine when it isn’t. Two, when the disaster can no longer be hidden, tell the suits that you can fix everything as long as they give you more time and authority and don’t look too closely at what you’re doing. Finally, if you haven’t already been fired, find another job and dump the mess on someone else.)
A broad consensus quickly formed in Congress that no way were they going to pass the Bush Administration’s proposal as it was. That was a promising sign. So how did it fall apart yesterday?
I’m not a finance whiz, but those who are say that the problem should be fixed through an entirely different approach from the one that the Bushies proposed. See, for example, Joseph Stiglitz:
We could do more with less money. The holes in financial institutions’ balance sheets should be filled in a transparent way. The Scandinavian countries showed the way two decades ago. Warren Buffet showed another way, in providing equity to Goldman Sachs. By issuing preferred shares with warrants (options), one reduces the public’s downside risk and ensures that they participate in some of the upside potential.
This approach is not only proven, but it also provides both the incentives and wherewithal needed for lending to resume. It avoids the hopeless task of trying to value millions of complex mortgages and the even more complex financial products in which they are embedded, and it deals with the “lemons” problem – the government gets stuck with the worst or most overpriced assets. Finally, it can be done far more quickly.
At the same time, several steps can be taken to reduce foreclosures. First, housing can be made more affordable for poor and middle-income Americans by converting the mortgage deduction into a cashable tax credit. The government effectively pays 50% of the mortgage interest and real estate taxes for upper-income Americans, yet does nothing for the poor. Second, bankruptcy reform is needed to allow homeowners to write down the value of their homes and stay in their houses. Third, government could assume part of a mortgage, taking advantage of its lower borrowing costs.
By contrast, US treasury secretary Henry Paulson’s approach is another example of the kind of shell games that got America into its mess. Investment banks and credit rating agencies believed in financial alchemy – the notion that significant value could be created by slicing and dicing securities. The new view is that real value can be created by un-slicing and un-dicing – pulling these assets out of the financial system and turning them over to the government. But that requires overpaying for the assets, benefiting only the banks.
Not all finance gurus may agree with Stiglitz on the Swedish model, but from what I have read a large majority agree that the Administration’s basic approach is deeply flawed.
However, Congress more or less tweaked Paulson’s approach rather than try something completely different. They improved it mightily, according to many. But my understanding is that the smarter people in Congress figured the more conservative members would dismiss the smart approach outright. So instead of the best bill, they put together the best bill they thought they could sell to the right-wing troglodytes in the House.
And it still didn’t pass.
Here’s where the cancer analogy comes in. The organ is being strangled by a malignant mass and is barely functioning. The best proposals are a non-starter because the cancer has to be catered to. But the cancer won’t let a “flawed but better than nothing” bill pass, either.
The House conservatives who sank the bailout didn’t do so because they were listening to loud and angry voices. They sank the plan by accident. They were trying to double-cross the Democrats. First, they wrung lots of concessions out of Democrats at the negotiating table as the price for delivering 80 votes. Then, by not delivering 80 votes and forcing Pelosi to pass the bill as a partisan Democratic bill, they were going to wage a demagogic anti-bailout campaign. But Pelosi refused to be played for a sucker and so the conservative inadvertently sank a bill that, all evidence suggests, they actually wanted to pass. They just wanted to vote “no†on it for short-term political gain.
And, of course, when Pelosi didn’t fall for the trap they complained she had been “partisan.”
Yes, a minority of House Democrats voted with a majority of House Republicans against the proposal. Some Dems did so out of cowardice; they’re in a tight race, and it’s an unpopular bill — more about that in a moment. A few, I understand, voted against it because they wanted a better bill with more protection for taxpayers and homeowners. Noble, but impractical. As Paul Krugman and others say, probably all that can be done now is to patch something together that will keep the economy limping along until a new administration and Congress is sworn in. And pray that will be an Obama administration, because McCain clearly is out of his depth on this issue and will be no better, possibly worse, than Bush.
One of the reasons the bill is unpopular is that there is a colossal vacuum of leadership in Washington, which is another symptom of the cancer. It should fall to the President to explain to people that the consequences of not addressing the financial crisis will cost them more dearly than a “bailout.” However, for all practical purposes we don’t have a functioning POTUS. Now, too late, a large majority of the American people understand that George W. Bush is incompetent and cannot be trusted. So even if he had it in him to deliver an FDR-like address on the crisis, no one would listen to it.
And here we are.
Ever hear of the boy that cried wolf?
2001 BinLaden wolf ignored, then crisis, then told anthrax wolf would eat us if we didn’t go along
2003 told aluminum tubes would eat us so we had to go along
2005 real wolf katrina ate neworleans and churches were told to go rescue it
2008 real mortgage wolf ignored then real wolf ate wall street, we were told we had to come rescue again
No one believes boy(s) that cry wolf
Congress and alot of angry citizens tell Wall Street to drop dead
Real wolf still on prowl- now a bank failure wolf
Waitaminnit. At least Democrats in tight races voting with their constituents are actually doing what they’re supposed to do. Framing it as cowardice may have some truth, but it’s more productive to at least reward them for doing the right thing and telling them “see that wasn’t so bad, was it? you might just get reelected for that”.
A buddy occasionally emails me a financial newsletter he receives. An interesting excerpt:
“The great economic historian Charles Kindleberger wrote in his seminal study of financial crises, Manias, Panics, and Crashes, that, “[f]or historians each event is unique. Economics, however, maintains that forces in society and nature behave in repetitive ways. History is particular; economics is general.”
“This is a very important observation. While each financial crisis is unique in terms of its causes and the types of assets that it engulfs, the conditions that led to it are always driven by human irrationality and hubris. Financial busts are preceded by financial bubbles. The current bust was preceded by a debt bubble whose unique manifestations were debt securitization and credit derivatives. Underlying these novel debt structures were the human emotions of greed and fear that led to abuses by even the most sophisticated individuals and most highly respected institutions in the market.
“While these human attributes are the most difficult to legislate, their ability to wreak havoc is clear evidence that they must be regulated in a thoughtful way. Recently, former New York Federal Reserve Governor Gerald Corrigan led a group of market experts that released a report entitled Containing Market Risk: The Road to Reform, The Report of CRMPG III (Corrigan III) (August 6, 2008). In that report, Mr. Corrigan and his colleagues wrote the following very wise words:
“The fact that financial excesses fundamentally grow out of human behavior is a sobering reality especially in an environment of intense competition between large integrated financial intermediaries which, on the upside of the cycle, fosters risk taking and on the downside, fosters risk aversion. It is this sobering reality that has, for centuries, given rise to universal recognition that finance and financial institutions must be subject to a higher degree of official oversight and regulation than is deemed necessary for virtually all other forms of commercial enterprise.”
What we’ve been seeing all year, culminating in this bail-out, is what happens when [free-market] ideology trumphs practicality and common sense – regulations are for liberals. We saw in the Soviet Union – how a country rich in resources can be destroyed and its potential squandered as it suffered through 70 years of blind adherence to leftist ideology; today we’re seeing a parallel result of a quarter century of blind faith in the Market God and the Invisible Hand.
Personally I find the situation too complex to be able to understand the pros or cons of any solution – but I at least understand the causes of the problem.
It’s interesting to me that many solutions have come forward from various quarters, from people I even respect. Given my incomplete understanding however, I’m nonetheless extremely suspicious of any solution coming from those who either created the problem to begin with or who are still true believers of the Market God.
And I find it interesting and disgusting that Republicans tried to use the bailout to get it passed and then blame the Democrats for it. These people are scum.
[I]t’s more productive to at least reward them for doing the right thing and telling them “see that wasn’t so bad, was it? you might just get reelected for thatâ€.
I believe this crisis will still be with us, in some form, on Jan. 21, 2009. That means every member of the House who is re-elected on Nov. 4 still has to face the music in the new term. This makes me wonder how on earth they’re hedging their bets:
Option 1: it all just fixes itself?
Option 2: it all burns to the ground, and a Dem president and majority Congress rebuild it with firm, load-bearing regulations, in the manner of FDR?
Option 3: it burns down partway, and a Dem president and majority Congress get stuck in a dangerous, half-functioning economy, trying to clean up the mess.
Option 1 is conservative magical thinking. Option 2, liberal magical thinking. Option 3 is the most likely to occur, but it means all the Congresscritters (not just the Dems) who saved their jobs are still going to be stuck in a dangerous mess. So, the question is: Get re-elected? Why?
Maha Said:
One of the reasons the bill is unpopular is that there is a colossal:
1.Maybe a colossal collapse of truth between human beings.
2.A colossal lack of trust brought on by bad behavior.
3.A colossal lack of honesty that has overtaken basic goodness.
4.We Americans know that it is over, we tried our best, but it is over.
5.Our government can pass a few more bills to try and recoup some capital, but we know.
6.The neoconsuperfratboy house of cards has fallen.
LAter
Me
So will Bush be credited with being the one who drove the stake into the heart of Reganomics? Then I guess his presidency won’t be a total wash after all.
Oh, and Palin is disintegrating at warp speed.
She’s gone from bad to worse while troopergate is still hot on her heels. In her latest exchange with Katie Couric she delivered a basic… “fuck off with your entrapping questions” reply…but said it in a folksy Alaskan valley girl manner. It’s become obvious that sweet home spun Sarah is getting nippy, and probably beginning to better understand Darwin’s evolutionary theory of survival of the fittest.
Swami, loved your comment #6. There’s hope for the sad, lonely little monkey yet.
I heard Reaganomics also succumbs to direct sunlight and holy water. Don’t know about garlic.
“Bushy, the Vampire Slayer!” Who knew?
Great, wide ranging post. I love that some of the right wing commentators are now finding out how easy it is to turn all that anger and hatred around. It’s sort of like Frankenstein’s monster or Pandora’s box. Or the genii. Once you let it out, it’s not as easy to control as you might have thought and it can end up coming after you just as easily as not.
Oops. Wrong comment/wrong post. This should have been posted at the one directly above. Oh, well. My point still stands.
About this post and the bailout…. I understand there’s a lot of anger out there, but when I hear economists talk (you know, people who actually ARE supposed to know what they are talking about), it appears that many of them are very afraid of what might happen if we don’t do anything. I will admit that I know next to nothing about all this, but it sure sounds like doing nothing, or even doing something but not doing it quickly enough, is not a very good option here.