Archive for September, 2008

Adults desperately needed

So, was Nancy Pelosi’s speech what doomed the bailout vote? Apparently not, despite John Boehner and others trying to pin it on her.  Not according to Republican Representatives John Shaddeg and Darrell Issa late yesterday.  They branded Boehner and Eric Cantor’s claims as “stupid” and “idiotic.” And today, Michelle Bachman has joined in disputing the leadership’s claim.  So, just who is it that’s being partisan?  And, more importantly, just who is the GOP House leadership these days? For day’s Paul Krugman, Princeton economist and New York Times columnist has been decrying the lack of adult supervision. Yesterday, he wrote:

What we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend of mine said last night, “We’ve become a banana republic with nukes.”

As anger built over the bailout plan, the more I read, the more I realized that most people are against it because they don’t understand the nature of the current crisis.  I’ve written here that the real crisis is the credit contraction (freeze).  That’s what precipitated the bailout plan, even though the plan itself is aimed at the underlying problem of all the bad mortgage debt. Most people can’t see beyond or behind the Wall Street portion to understand its relationship to the credit crunch.  And unfortunately, nobody has been able to rise above the noise level of the political campaign to provide the information needed to make the connection.

Economist Laura Tyson provided the most easily understood explanation to date last night on Rachel Maddow’s show.  I really like Rachel.  She’s smart as a tack, has a great sly sense of humor, and has her finger on a lot of issues, as well as the “blizzard of words” that too often obscures reality.  Anyway, here are a couple of quotes from Dr. Tyson.

You know, all along, this has been called a bailout bill. It’s such a misnomer. We are in the midst of a massive credit contraction. It’s strangling the economy. It’s making it impossible for businesses to borrow, to keep their businesses going. It’s making it impossible for students to borrow, to keep their loans going, and homeowners to stay in their homes.

And what we saw today on the stock market, that shows what the market is anticipating.

 Dr. Tyson went on to describe in pretty stark detail what a credit freeze means to Main Street, not just to people who have investments in the stock market.

You know, what people should be concerned about is their income and their jobs, because the credit contraction means that employers, companies, cannot continue operations at their current levels. They cannot get the credit they need to keep their operations moving. The greatest danger now is a real economy recession. Stock markets can go up and down over time, retirement accounts can go up and down over time. The key thing is to get the economy safe from what looks like to be a bit of a serious recession.

I personally think that all these folks are underplaying things when they talk about recession, serious or otherwise.  What’s really at stake is a whole-scale global depression.  But I also understand the need not to create panic.  At that point the conversation between Rachel and Dr. Tyson turned to leadership.  And here, perhaps, is the biggest take-away from the entire exchange, when Dr. Tyson said,

You know, I always thought of leadership as being partly educational, partly explaining to people.

So, as people struggled to wrap their heads around the enormity of the situation, most were swamped by anger and frustration not with useful information.  

The President’s speech last week served only to heighten fears.  Rather than try to educate, to truly lead, he opted once again to use fear for political gain, both for John McCain and in all likelihood to try to salvage what little may remain of his legacy.  I’ve never claimed to be an expert. I did take macroeconomics — several decades ago.  I certainly can’t claim the level of expertise a Harvard MBA should afford him!  But, even if he had tried to educate us, would anyone have bothered paying attention to him at this point? 

I do wish that Speaker Pelosi had waited until after the vote to correctly place responsibility for the current mess largely (though not entirely) at the feet of the Bush Administration’s policies and their underlying economic philosophy.  Her timing gave the GOP an opening to slip in a knife attack to try to cover the fact that they couldn’t muster the votes.  On the other hand, she did manage to bring attention to how severely fractured the GOP coalition really is.  Perhaps more and more Americans will come to see that their real interests do not lie with the radicals who have hijacked the GOP and we can get back to deciding elections on the basis of the real issues and not the wedge ones that have served only to hold the GOP together for a few additional election cycles. Who emerges as the real leaders of the GOP will be telling and whether there are some in that party for whom putting country first is more than a slogan.


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As I watched the House defeat the proposed bailout, and the stock market plummet, I wondered.  I understand people’s anger at Wall Street and their anger that Main Street is being asked to pick up the pieces.  I share it.  But rejecting the plan seems fraught with even greater dangers.  Do we REALLY want the bottom to fall out of the economy the rest of the way?

Clearly, lawmakers were influenced by their constituents’ concerns.  But at what point do you put country first — ahead of your own political future?  It would appear that not enough of our elected “leaders” were willing to do that.  Sometimes leadership involves sacrifice, and this close to an election, sacrifice can be hard to come by.  Too many of them wanted the other guy to do the right thing so they wouldnt’ have to pay the political price back home.  That’s not leadership.  That’s cowardice.

Nobody wants to volunteer to lose their job.  The election is less than 40 days away, and all the members of the House are up for re-election.  So now, of course, the finger-pointing begins.  We can expect partisan blame galore, regardless of where the truth lies.

 It’s a gross oversimplification to think that the only people being hurt (or that the only people that should be hurt) by failure to pass bailout/rescue legislation are those nasty greedy guys on Wall Street and the corporate CEOs with their golden parachutes, regardless of the quality of their performance. We all get hurt by this.  If you own a home, your property value is declining in much of the country.  In some places it’s tumbling.  And if there are foreclosures in your neighborhood, you can expect to see an additional $3000 decline in your home’s value for each foreclosed property.  Similarly, if you have a 401(k), an IRA, or are one of the lucky ones to still have a defined benefits pension plan, what happens on Wall Street affects you directly.  The Dow has already lost over 25% of its value over the last year, and there’s no end in sight at this point. Interest rates on bank deposits and CDs will continue to fall as banks try to tighten their economic belts.   It’s not just brokerage houses or investment banks or insurance companies who get hurt. They’re only the immediate target. 

But as the credit freezes up, businesses large and small will feel the effects.  Some, perhaps a lot, will fail, throwing more people out of work.  And those that manage to stay afloat may respond to tighter credit and reduced consumer demand by reducing benefits and laying off people.  Higher unemployment rates translate to even higher numbers of foreclosures.  And so it goes. 

So, I’m angry.  I’m angry at Wall Street. I’m angry at corporate boards of directors who reward CEOs for their bad business practices and who enable their greed.  I’m angry at the hired guns — those who lobby for ever increasing de-regulation.  I’m angry at investors who are more interested in the next quarterly report than in the long-term.  I’m angry at a system that corrupts the legislative process to the point where Main Street is viewed as the suckers who will ultimately get stuck with the tab. I’m angry that the corporate media doesn’t live up to its responsibility to ensure an honestly informed electorate. I’m angry at politicians and political parties who use wedge issues to get people to vote against their own self-interest.  I’m angry at clergy who ignore the parts of scripture where it talks about caring for the less-fortunate among us and warns about the dangers of wealth blinding us to reality.  I’m angry at those in government who put special interests or their own self-interest above those of We the People.  I’m angry at an administration that lied and fear-mongered and failed to lead. I’m angry at voters who celebrate ignorance and incompetence, and who vote on the basis of who they’d rather have a beer with. In fact, I’m mad as hell.  And I’m not going to take it anymore!

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A couple of final thoughts about the bailout…

  • Text of what Congress will vote on has been posted here.
  • The individual tab doesn’t sound nearly as bad as the aggregate.  It’s actually less than $2300 per person.  When stacked up against what your 401(k) or pension or IRA or stock portfolio or your kid’s college fund has probably lost over the last few months, it’s a bargain.  The per household cost of a full-blown depression would have far surpassed that figure as well.
  • Experts are beginning to agree that the final cost probably won’t be the full $700 billion. So that cuts the $2300 figure down even more. 
  • The absolute power and lack of accountability or oversight in Paulson’s original draft made it dead on arrival, especially in an election year. 

About the only thing Thursday’s White House meeting accomplished in the final analysis was to put pressure on people in both parties to compromise on a final solution.  And negotiation and compromise are what characterize a functioning legislative body.  If that can be carried forward, we’ll all be far better off.

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There’s an intriguing conjunction between the GOP’s addition of private insurance as the solution to the current financial sector crisis and their idea of privatizing health insurance.  It’ll be interesting to see how the insurance concept fits into the overall bailout plan. Seems Hank Paulson has his doubts as to whether it’s feasible to expect troubled firms to be able to obtain insurance.  

And therein lies the crux of the conjunction.  One of the main concerns for many Americans about McCain’s health care proposal is that people with pre-existing conditions are priced out of the market.  If you are obese, are on an expensive medication to manage a chronic condition, or have a less than perfect health history, the likelihood of being able to obtain private insurance at any price is questionable. And if you can find someone to insure you, the cost will be high, as will deductibles and co-pays, with lower lifetime benefit limits. Given the following information from the Centers for Disease Control on obesity alone, that leaves a whole lot of Americans in the lurch. “In 2007, only one state (Colorado) had a prevalence of obesity less than 20%. Thirty states had a prevalence equal to or greater than 25%; three of these states (Alabama, Mississippi and Tennessee) had a prevalence of obesity equal to or greater than 30%.”

It’s interesting to note that members of Congress benefit from a taxpayer financed health insurance program.  I can’t help but wonder how many of them would find it difficult to obtain private insurance.  Certainly John McCain’s health history would prove challenging.  But he’s also eligible for another taxpayer funded health care system — Medicare.  So, I imagine he uses his congressional plan as his “medigap” coverage — to cover the 20% of costs that Medicare doesn’t cover.  In either case, his health care coverage is 100% taxpayer funded.  He just thinks the rest of us should rely on private insurance.  Must be nice.  I wonder if he’s ever even considered the irony inherent in that.

I have a perverse hope that the insurance part of the bailout plan proves totally unworkable.  Not because I want to see the taxpayers have to fund the whole thing, but because it just might prove the insanity of throwing all Americans into the private health insurance system as it currently operates. 

Obama’s healthcare plan calls for people to have a choice as to which system would work best for them.  Should people like their current plan, they could keep it, except it would cost them less.  For the rest of us, there would be additional options to provide coverage that’s affordable while remaining comparable in quality to the care Congress enjoys.

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As promised, here’s the continuation of an earlier post.  At one point during our exchange, Chris said, “I still hope that one of these days, people will realize that respectful and ethical discourse between differing opinions is the only way to properly govern…but, I guess that’s just the idealist in me.” I totally agree, even though these days I seem to be flipping back and forth between idealism and cynicism.

In response to Chris’ comment, I said:
Here’s the problem as I see it. There are two aspects to the problem. The mortgage meltdown is part of it. The freeze you’re proposing would mean in effect nationalizing all the entities that own US mortgage paper. A lot of those securitized mortgage derivatives were sold overseas. So it’s a global problem. We don’t have the laws to enforce a freeze. I suspect such a freeze would create a true panic. And that would bring down the entire system. We’d be plunged into a global economic depression. Don’t forget that China holds half a trillions of dollars of paper. Should they decide we’re toast economically and call in their chits, we’d all be taking crash courses in Mandarin.

The other major issue, also with global implications, is the credit crunch, which actually precipitated the rush to a bailout. Most businesses, large and small, depend on lines of credit to smooth out the normal ups and downs. The credit crunch makes credit much more expensive. As credit tightens, businesses struggle and fail. Higher unemployment and reduced private sector spending ripple throughout the economy. Ultimate result of a credit freeze is a depression. In fact, that’s one thing that separates a recession from a depression. Easy credit means more debt – for people, businesses and government. Necessary but needs to be used wisely.

I think Bush’s meeting and McCain’s injecting himself into the mix was political grandstanding. He brought a campaign aide with him, NOT a Senate aide like Obama did. That’s when things blew up. Coincidence? Perhaps. But given his history, his political philosophy, and his penchant for drama, it’s questionable. [See previous post.]

You might want to take a gander at a couple of columns from the Washington Post. Eugene Robinson and E.J. Dionne aren’t buying McCain’s explanation as “non-political” either. Nor are the folks on CNN. Unfortunately, the people who get all their news from Fox get a very different take on whether it was a stunt or a brilliant move. Jon Stewart nailed the comparison.

Turns out the list the Sen. Shelby was waving around came out of the Chicago School of Business — the intellectual home of disaster capitalism. You’ve heard me mention Naomi Klein’s Shock Doctrine. Her thesis is that these folks look for and even precipitate disasters, then go in while people are in shock and set up their own brand of extreme laissez fairecapitalism, along with a fascist style of governance. They wouldn’t be able to succeed if people weren’t in shock. It’s classic neoconservative economics, except that they call it neoliberalism.  So far the US has resisted it, at least domestically.  But the current situation is ripe for them. And a lot of the other pieces are in place to make it happen here — some of Bush’s national security directives, for example.

The reality is that we (both Dems and Repubs) have been keeping this thing going for quite some time, probably since Reagan. Deregulation is part of it, but we’re wallowing in debt. National, local and state government debt, but the huge amounts of consumer debt has kept the economy afloat. We’re hardly a producing nation any longer — unless you count all these exotic financial instruments “products.” [Ok, I know that’s a bit of an exaggeration, but let’s face it, we’re not producing tangible products like we used to.] It’s been more like a giant Ponzi scheme, and the house of cards is about to collapse. Paulson’s original proposal was extreme — too much concentrated power with no accountability or oversight — but the general principles that had been agreed to, until McCain rode in like the Lone Ranger, looked reasonable. As Paul Krugman says, we need some adults. Paulson needs adult supervision. The question is who can provide it.

I don’t think they need a final agreement immediately.  A set of basic principles would probably be enough to calm the markets.  So they’d have time after that to fill in the details. If somehow McCain and the Repubs manage to pull off a victory, all bets are off.

The other thing is that the bailout won’t cost as much as the pot of money on the table. It’s basically the working capital. They’re talking about buying loans at discount, refinancing/restructuring them, then re-selling them, hopefully at a profit. In the meantime, you’ve kept people in their homes and made the money from their payments. As the institutions you’ve bailed out get healthier, their stock value improves, and since you own an equity share, you’re making capital gains when you sell your shares. And finally, since you’re the government, you don’t have to pay taxes on the revenue! One of the proposals I heard today was that the feds would make only half the money available without additional Congressional approval. That would tend to “encourage” efforts to get the loans healthy and sold so they could re-use the money as needed.

One of the proposals is to create a quasi-independent “corporation” like the RTC. Buying up loans was what the RTC did during the S&L mess in the late ’80s and early ’90s. Eventually most of those loans were sold off. Some had to be written off — mostly the crony ones — but they were the minority. And even though they were relatively loans, they were a very small percentage of the grand total. But people are going to take advantage when there aren’t adequate regulations or enough inspectors. You’d think we’d learn!

Chris came back with:

You’d think we would learn…not just from our own experiences as a nation, but from the experiences of others. For instance, Sweden went through a similar crisis (although, in many ways, much more of one than ours) in the 90’s. What worked for them as a bailout was to buy the bad loans from the banks that gave them at a reduced (or at least current market value) price. The plan from Paulson (from what I understand) says NOTHING of buying these loans at current market value, but in fact states that we should buy them based on what their market value would be when the market recovers and the businesses that issued them have recovered from this fallout. To me, that is pure BS! Why in the hell should we, as taxpayers, spend more for these loans than the private sector would to bail these institutions out? And if we are going to do so, why shouldn’t that expenditure be one that pays off the individual loans to the point where they are brought back within market expectations? In essence, my question is: why are we bailing out the “golden parachute” holding major corporations instead of bailing out the individual homeowners? Granted, there is the argument that we cannot “reward those who made the bad decision to take on more debt than they could handle”. But what about the argument that we cannot reward those who intended to make a profit by giving loans to people who, according to all former “regulated” conditions, could not handle them? Even if we demand no golden parachutes and changes in leadership and new regulations on these corporations, are we not simply sending a message that “well, if you’re a poor person who was told ‘you’d be better off paying this rent money into a home that you haveequity on, and now we can finance you’, it’s still your fault for getting into this bad loan, but now we’ll bail out the corporation that gave you the bad loan”. Oh, but by the way, you’re still screwed, and we’re not about to help you out, because that would be sending a bad message that people can make irresponsible decisions, and end up not paying for them? Unless, of course, you are a major financial corporation, in which case, you can make bad decisions that everyone ELSE ends up paying for, including those now homeowners who should never have been given the financing they got in the first place? It just seems to me that it would be cheaper and easier to bail out the individual bad loans to the point that people CAN be held accountable as opposed to bailing out the entire bad loan industry. Somehow, I can’t quite wrap my head around this one.

So, I responded:
Given that many Americans view Sweden as socialist, I doubt their solution would be considered politically viable — at least not publicly. But what you describe as the essence of their plan is what worked here for the S&L mess, except that calling the agency the Resolution Trust Corporation made it sound more like a private sector entity. It eventually was folded into the FDIC.

I share your concerns about the bailout. But doing nothing and just letting it all collapse isn’t an option. The stakes are way too high. I just don’t see a viable alternative. The AIG deal is a loan, and we’ve bailed out companies with before with loans. Lockheed and Chrysler come to mind. Those loans were paid off. The difference here is that we also now own 80% of AIG.  So, the feds essentially control the company. AIG has lots of valuable assets. Theirs was a liquidity problem. The cash infusion let them keep running, and the first thing the new “owners” did was to fire the CEO. And the FBI is investigating AIG, Fanny, Freddie and Lehman. There may be arrests, trials and jail time for their CEOs… as long as they don’t drop dead like Kenny Lay did. I still think the feds should have gone after a good chunk of Lay’s money, but I wasn’t sheriff, so I didn’t get a vote on that one.

The dollar amount of Paulson’s plan is eye-popping and completely mind-numbing. Section 8 of the draft plan was clearly unacceptable to everybody except Paulson/Bush. It clearly wasn’t going to fly. So it’s gone — unless the disaster capitalists somehow prevail, in which case we’re all totally screwed. I truly don’t see that happening without some sort additional huge disaster or a coup.

Here’s the text of the original proposal. I don’t see anything in it that speaks to purchase price conditions. And assuming the process is more open than originally proposed, your concerns aren’t likely to materialize.

USA Today listed the key elements of the principles that apparently had been agreed to before McCain showed up:
1. Authorize $700 billion for the government to purchase troubled assets and buy equity in distressed financial firms. Require the Treasury Department to make rules to prevent excessive compensation for executives whose companies benefit from the rescue.
2. Establish a strong oversight board with authority to halt the program, a special investigator general to monitor it, and regular government audits.
3. Require the government to renegotiate mortgages it acquires under the program with the aim of helping borrowers keep their homes.

4. Phase in the money for buying troubled assets, with $250 billion available immediately, $100 billion to be released if the Treasury secretary certifies it is needed, and the last $350 billion available with another certification, but subject to a congressional vote to block it.

One thing that both parties realized early on was that the taxpayers wouldn’t stand for golden parachutes. In fact, there’s been talk of limiting exec pay for the participating companies to $400k — same as Bush makes. I’m thinking that would fly well on Main Street and not give the Wall Street types much room for argument that didn’t sound selfish.

It just really pisses me off that McCain chose to try to play hero to try to save his campaign. Another instance of not putting country first. I’m not sure who initiated the idea of the WH meeting yesterday — Bush? McCain? — but it’s pretty clear that’s when things blew up. Reports says that McCain had very little to say — in other words, didn’t contribute ANY leadership. Meanwhile, Obama demonstrated both leadership and a command of the problem, peppering Paulson with questions, seeking still more and newer information on the situation and on his thinking. Of course, that’s in addition to having been in frequent contact with him well before the meeting, when he might actually be able to do some good.

The blow-up proves just how tenuously the GOP is holding together. It’s been cobbled together with several mutually incompatible factions for quite a while, and this may actually be its death knell. Heard someone saying last night that the bailout deal may negate any benefit the Palin nod had. McCain pulled in the social conservatives but is about to lose the fiscal ones. The latter group may opt to write in Paul or vote for Barr instead. The social conservatives will continue to drool over Palin — unless they’re also fiscal conservatives. They might just decide to stay home.

I didn’t see this one until after our email exchange, but here’s an interesting alternative to the Paulson plan, even with its probable modifications.

The GOP’s plan calls for more deregulation. That’s gotten us into a mess every time. I can’t fault McCain’s suggestion to review the existing regs and consolidate them and the “oversighters” into something coherent. But MORE deregulation? No way, no how, NOT! The other key component of the GOP plan calls for private money to solve the problem. The LA Times has been all over this whole story. They’re reporting that credit has all but frozen. Banks aren’t even lending to each other, and other credit is so pricey that it might as well be unavailable. Given this, one must wonder just where all that private capital would come from.

So, as of Saturday, Sept. 27, there still isn’t an agreement.  I remain very concerned about the implications of taking on more debt bailing out the institutions that got us to this point.  The GOP plan is seriously flawed. Doing nothing isn’t an option.  I just don’t see any viable alternatives.  A fine mess we’ve gotten ourselves into.  I guess all I can hope for is that Congress will put enough teeth into the plan so we taxpayers aren’t left hung out to dry and that those administering whatever solution do as good a job fixing things as the geniuses who got us here did in screwing things up.

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So, it WAS a stunt…

Ever since McCain announced he was suspending his campaign to rush to Washington (some 18 hours later) to save the day on the bailout talks, I smelled a rat.  Today, it turns out I was right. Confirmation came from none other than Eric Smith, a top aide to Rep. John Boehner of Ohio.  Smith, said Republicans revolted over what they saw as an attempt by Democrats to jam through an agreement early Thursday and deny McCain an opportunity to participate in the agreement.

Country First?

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Last night Chris commented on my previous post.  I know Chris, and he and I continued the conversation with several email exchanges.  He’s a very bright 20-something with education debt, who’s trying to make ends meet as he gets established in his career.  He represents a lot of his peers in that he’s concerned about the implications of the proposed bailout on his generation. He seeks out information from a variety of sources — NPR, CNN, The Daily Show, The Colbert Report, and blogs.  Note that none are print media.  I’ll be stringing our conversation together, editing it  for continuity and will update this post later.  His views are worth considering.

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