From TPM Reader CC …
Considering as how the proposed Wall Street bailout will be one of the most intensely lobbied efforts in American history, will there be anyone left to manage John McCain’s campaign?
TPM Reader JS makes another …
You would never know it from watching the news, but one of the candidates in this race happens to have been previously implicated in a national scandal involving pressuring regulators to back off of a bank making risky moves with its assets, leading to disaster for investors and an expensive government bailout.
Is there a good reason why no one is mentioning John McCain’s Keating Five membership in any of these arguments over who is on the side of regulating risky private banking practices? I know that McCain sort of asked for our forgiveness or something at some point during his “maverick period” around 2000-2003, but since he wants to engage in a debate about who is on the side of government regulation of risky banking practices, I think maybe we’re allowed to call him out on this issue. Does anyone believe that if Barack Obama were one of the Keating Five that the Republicans would for some reason hold back from mentioning that fact?
There appears to be pretty widespread agreement that some major rescue plan is in order. But I’m having a hard time finding economists or others with related expertise — either on the right or left — who don’t believe two things: a) that this plan gives way, way too much discretionary power to the Treasury Department with little requirement even to make reports to Congres and b) as Paul Krugman puts it, “there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.” Whether that means equity stakes for taxpayers or simply some assurance that the USG won’t be paying premium prices for worthless crap, that key component just doesn’t seem to be anywhere in the proposal.
And unless I’m not being clear, this request isn’t simply for effect. This is not a rhetorical question. I’m really looking for examples. I can see lots of politicians saying we need to do something now or we’ll all die and lining up to vote for whatever Paulson says. But I’m curious how many economists there are (or people with relevant professional expertise) who don’t agree that these two shortcomings must be rectified.
I’ll leave to others whom I respect to craft out just what sort of plan is likely to be successful in stabilizing the financial markets and equitable to taxpayers. But any sort of narrow focus on executive compensation strikes me as a load of crap. Yes, they are too high. And yes, I believe they are part of the problem. But I don’t think I need to know too much about economics to know that they are not a significant structural problem in what led to this mess. And the dollars in questions are chump change compared to the bill the big investment houses are now pawning off on the American people.
The key components in exchange for the money have to be some sort of equity in the companies being rescued (I’ll leave it to the experts to figure out the mechanics — which I grant is likely a highly complex matter) and structural reforms that create oversight, accountability and transparency to ensure nothing like this happens again.
And in case it isn’t obvious, those begging as they cling by their fingertips on the precipice are not in a position to be making any demands or calling any proposals “deal killer.”
Late Update: My instincts tell me that the effort to pretty this up by adding a ‘stimulus package’ is equally bogus. That’s not to say it’s not important in itself. But if we blow 700 million or a trillion dollars cleaning up Wall Street’s mess, having also budgeted 25 or 50 billion on helping ordinary people won’t make that trillion dollars any less blown. The focus here needs to be on making sure this bailout makes sense, isn’t going to be farmed out to Neil Bush and provides something for taxpayers in return. Let’s keep the focus on that.
At the meeting between Sarah Palin and Henry Kissinger.
As noted in the previous post, I’m quite convinced that some drastic action needs to be taken to avoid a cascading and debilitating series of crises. But the more I look at this plan, the more wrongheaded it seems. But if I’m understanding this deal, the taxpayers are going to pony up close to a trillion dollars to take bad debts off the hands of financial institutions who were foolish enough to make the deals in the first place. And in exchange, I think the tax payers get nothing? Sebastian Mallaby makes the good point that this is radically different than the S&L Crisis RTC which was liquidating the assets of thrifts that had already gone belly up — paid the ultimate price, as it were. And as the insurer on the accounts, the government inherited the assets anyway. It was just a matter of selling them off. But here the point is to take these bad debts off these companies’ hands so they can go back to being profitable businesses. This is moral hazard on steroids if I’m understanding this right.
Also, according to the Journal, finance industry lobbyists are already giving orders to Republican hill staffers not to allow any meaningful reforms or protections for taxpayers. So, just the money. No strings attached.
House Republican staffers met with roughly 15 lobbyists Friday afternoon, whose message to lawmakers was clear: Don’t load the legislation up with provisions not directly related to the crisis, or regulatory measures the industry has long opposed.
“We’re opposed to adding provisions that will affect [or] undermine the deal substantively,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, whose members include the nation’s largest banks, securities firms and insurers.
A deal killer for the group: a proposal that would grant bankruptcy judges new powers to lower the principal, interest rate or both on a mortgage as part of a bankruptcy proceeding.
Late Update: Mulling this more and listening to the insights in your emails, the key clearly is how much the government pays for these distressed assets. They may be bad debts. But that doesn’t mean they have no value at all. Bought at the right prices and given time on the books — which the government is uniquely in a position to allow them to do — the government could even turn a profit on some of them. But the key is at what price they’re bought and whose get bought. That seems like precisely the kind of process that requires oversight and accountability to make sure the taxpayer doesn’t get fleeced.
Dancing on the Edge of the Abyss Update: Paul Krugman has a post up that I think tracks basically along the lines I’ve raised — only from the viewpoint of someone who has a profound understanding of these things rather than no understanding at all. He says, no deal.
Yep, It’s Crap Update: I can’t seem to find any of the people who I respect thinking the bailout plan, as presented, is a good idea.
There are subjects I know a lot about and others I know very little about. And the high-wire financial mess we’re currently in falls clearly into the latter category. But I know enough to be troubled that we appear ready to give upwards of a trillion dollars in unfettered and unreviewable spending authority to the … let’s face it, the Bush administration, the folks who did such a bang up job in Iraq and New Orleans.
This morning a friend told me it’s like the Iraq War all over again — Shock & Awe, followed by an occupation of Wall Street, and all with no exit plan.
In all seriousness, Paulson seems like a very able guy. And without a roadmap in hand, he appears at least to have avoided catastrophe so far. But let’s take a moment to realize just how much money we’re talking about.
It is probably inevitable in such cases that the public gets stuck with a lot of the bill for the recklessness and perhaps even criminality of the people who got us into this mess. Even if it is their ‘fault’, we (as a country and its citizens) are simply too bound up with the consequences of their actions to let them play out in an unfettered manner.
But we need both some orderly system of decision making and some conditions imposed on the people, and the industries, that brought us into the ditch.
Here’s a note received today from one TPM Reader …
The current proposal for the bailout — $700 billion to be used however the administration chooses to use it — should not be allowed to pass in its current form. This is the same administration that has mismanaged Iraq, DOJ, Katrina. Why can they be trusted to preside over this in a way that is even-handed and for the benefit of the taxpayers? As Krugman and Atrios have pointed out, if insolvency rather than liquidity is the real problem, then this may not even fix the problem. Even if there is some modest stimulus package appended to the bill, the bill will still be a bad idea if it gives such unprecedented and unchecked power to the Bush administration.
It would be great if you guys could lead a push — like the anti-SS privatization one from a couple of years ago — to impose limits and rules on the bailout. The Dean Baker post on your site is a good proposal and maybe it makes sense to press congressman to agree to elements of it, particularly the caps on executive comp which has gone completely out of control here. It also makes sense to regulate the CDS market — $65 trillion in it, more than in banks, with no transparency.
Make those who are to be rescued agree to some conditions so that this will not happen again. Otherwise, this is basically giving Wall Streeters (who are to be fair friends with both parties) a lot of money for nothing in exchange.
We’ll be publishing more of your emails. So please let us know your thoughts.
Barack Obama attacks John McCain on Social Security, warning voters in Florida that the financial crisis would have led many people to lose their retirement money under such a system. That and other political news in today’s Election Central Saturday Roundup.
TPM Reader CR:
Please please be against this bailout. I cannot begin to think of all the
myriad reasons why this bailout as it is being floated is a bad idea of the most colossal of proportions, but I will try.Why are there no [details], because it will be a pig in a poke. There will be a bums rush just like when Bush tried to pressure Congress into passing the Protect America Act. They will wait until right before the election and try and jam the Democratic party up and say that if they do nothing then we are all going to Hell in a hand basket. There will be nothing good about this plan unless you are a big banking and insurance CEO. What a surprise!
While the Resolution Trust Corporation was a moderately well regarded solution to the 80’s S&L scandal, this proposed idea does not, and almost certainly will not be similar, though its proponents will claim it is. The RTC took over failed banks and sold off the banks’ assets. Very simple. It was simply an enormous bankruptcy trustee.
The crucial difference here is that this bailout will not be taking over failed banks, just taking over the bad debts of the failed banks. So the banks will be able to live on and be free to do the exact same thing all over again. I cannot think of a worse philosophical, policy, or practical solution than this.
You have banks and investment houses that lobbied Congress to remove restrictions on their activities and now their own activities have loaded them down with the crushing weight of bad debt from which they all profited handsomely before they got stuck holding the pile of s**t. …
If we are going to subsidize taking over these bad debts, then we should be taking over the entire banks and liquidating them. Period.
TPM Reader BC:
Why do I have the feeling that this bail out of the financial system is going to be the market equivalent of the Patriot Act? We’re in a crisis which gives the Bush Administration an opportunity to push legislation through Congress with little or no debate. In six months from now, how many “little surprises” are we going to find out about? Gifts to the industry or Bush Administration that got inserted into a bill that was approved without being read — let alone, thoroughly examined — by most members of Congress.
I agree something needs to be done but do we really trust the people that brought us this mess to develop an optimal solution? Our financial markets operated safely and successfully for over half a century under the Glass-Steagall regime. Since we started deregulation, it has been crisis on top of crisis. Democrats should not agree to any bail out that does not include reintroduction of regulatory safeguards and effective oversight. Unfortunately, I have heard almost nothing from them except for Barney Frank. That leads me to conclude that they will be a.) unprepared to present a plan and/or b.) unable to articulate it in a way that can win public support.
TPM Reader TC:
Is it just me? With this last enormous bail out of our Wall Street Investors/Corporate America, I have this picture in my mind of these cartoon Republicans sweeping out the last of the people’s money from the vaults. It took eight years, but they managed to get it all. The War/Private Contractors, the Oil Companys, the deregulation and fleecing of America. These Republicans started their tour of duty eight years ago with the coffers overflowing, flush with cash.