Monday, September 22, 2008

Quick and Dirty. And of These, Dirty.

Yesterday an alert reader sent me a link to this compelling article by Floyd Norris of the New York Times, about the financial crisis--in which Mr. Norris sounds the first major alarm bell regarding the Wall Street bailout--not on the principal of the idea but on the (all too typical) parameters the Bush Administration is demanding from congress. The upshot? Just as the White House responded to 9.11 by crashing a piece of legislation that enabled them to hold people without charges and invade their privacy, just as the White House belatedly responded to Hurricane Katrina by waving environmental protection laws, the specific bailout proposed by the White House is, in its current form, a $700 Billion blank check for the Administration to do with as it pleases.

If passed, the bill in its present form will codify neither an explicit separation of failure-prevention from routine loss, nor a repayment scheme or equity participation for the American taxpayer. There is no new regulation in the bill, no provision for accountability--either in hindsight or moving forward--and no mechanism to prevent speculators from profiting at the public's expense as the bill goes into effect. There is even talk of a provision that will excuse banks from using the market-value of their assets to report their own financial well-being, on the truly Orwellian grounds that it was peoples' discovery of all this worthless paper, and not the accumulation of it, that caused all the trouble.

As stated unequivocally yesterday, The Key Grip does not believe that skipping the bailout is economically practical, despite the cheery images of multi-homeowning fat cats auctioning their twelfth and thirteenth car to make the mortgage on their own, scandalously kited property, since the after-effects of telling the wealthiest among us to eat cake would be far more damning for the rest of us. Rotten economic conditions will have their first impact on people who have less cushion, and in this context the temptation to permit the fat cats their ugly consequences will result in graver, more immediate consequences for everyone else. Something will definitely have to be done, and there are few thoughtful people left inside the beltway who haven't accepted this.

But, objections of Secretary Paulson notwithstanding, there is no reason why this matter has to be crashed through the legislature, and certainly no reason why the final bill cannot include repayment of the taxpayer as either a creditor or an equity partner (a la the Savings and Loan bailout of the early 1990s), and certainly no reason on earth why the bill should not constitute a reinstatement of the Glass/Stegall Act (or perhaps an even more ambitious form of regulation), with an eye toward ensuring that some sort of broader lesson can at last be learned, here. Time is the thing, now--as it always is when this Administration is on the cusp of getting its unchecked way: By manufacturing urgency for the bill's passage, Paulson and the White House have left the door open to accusing the Democrats of being responsible by "dragging their feet," a mantra that, no matter how cynical and preposterous, we've seen work all too well before.

This author would therefore like to ask that everyone reading this column write immediately to his or her elected representatives in Washington. The webpage that allows an electronic correspondence to be sent to the appropriate congressman, even if one does not know in advance who that person happens to be, is conveniently provided within the House of Representatives website, and is accessible here. The contact information for one's Senators can be found by repeating the process here. A clean, easy-to-read message might succinctly object to the crashing of this bailout through the halls of the capitol, and the absence of provisions for oversight and repayment. Those feeling especially frisky could copy and paste the text of the Norris article at the bottom of their own, personalized message. But at the very least, it's incumbent upon each of us to register our disapproval of the current legislation before it is too late.

And what of the political ramifications? This author still believes that the larger issue of a stumbling economy is a deal-clincher for the good-guys, if only with a few slightly more sober caveats than have been chronicled in these pages up to now. Clearly Mr. McCain is on the defensive at the moment, and clearly he has had, in the words of Cokie Roberts, "difficulty finding his voice" on the issue--presumably some sort of scared-NPR-journalist euphemism for the Republican candidate's sudden reversal of a career's worth of calling for deregulation of this very industry.

In the Sixty Minutes interviews last night, Senator Obama appeared comfortable and collected (and far more substantive than some lazy journalists have been suggesting), while Senator McCain appeared, even with the benefit of unlimited re-takes, to sound muddled and out of his depth. Just the sorts of things he would not have wanted to sound, if seeking to neutralize the charge of too much similarity to the current occupant of the White House.

Obama's argument on the state of the crisis, in two easy-to-digest doses, as interviewed by Steve Kroft:

Kroft: Should the government be bailing out all of these banks and insurance companies? We're talking about hundreds and hundreds of billions of dollars.

Obama: I think that our basic principle has to be that you don't bail out shareholders. You don't bail out CEOs who are getting golden parachutes and $100 million bonuses. That you are doing everything you can to protect taxpayers, making sure that people are able to stay in their homes, and that their mortgages don't go overboard because of bad decisions that other people make.

Kroft: You think we're in a recession?

Obama: Oh, I think there's no doubt that we're gonna see, when the numbers come out, that we are officially in recession. I think, for a lot of people, they've been feeling like we've been in a recession for years now. When their wages and incomes don't go up, and the cost of gas and groceries and home heating oil and prescription drugs are all going up, that feels awfully like a recession to them.

...Senator McCain's turn at the same issue, as interviewed by Scott Pelley:

Pelley: If you were President of the United States tonight and you were going to make an address to the nation regarding this economic emergency, what would you say?

McCain: I would tell the American people that we're in tough times. This certainly isn't a Great Depression, don't get me wrong: um, lay out the problem and the cause of the problem they're badly frightened right now. And we've gotta get their trust and confidence back.

Pelley: Are we in a recession?

McCain: Sure. Um, technically I don't know. Ah, unemployment is, ah, is up. Wages are down. Home foreclosures are, well, they're just incredibly high. Incredibly high. Those people, you know, those people, they don't care whether technically we're in a recession or not. The fact is they're hurtin'. And they are hurting very, very badly.

Pelley: In 1999 you were one of the senators who helped pass deregulation of Wall Street. Do you regret that now?

McCain: No. I think the deregulation was, ah, was probably helpful to the growth of our economy.

In a just world, these two performances would seal the whole deal--and if my grandmother had wheels she'd be a wagon. Already Obama's "Lehman Leap" has topped-out, with the two candidates stabilized in a tight national tracking band around D+5, far less than should be the case after a week in which McCain inadvertently compared himself not so much to George Bush Jr. as to Herbert Hoover. The Key Grip's error in assessing the ramifications of his gaffe, it would seem, is that the public capacity to retain a big news story past its usual ADHD-media shelf-life had already been so diluted by Paris Hilton ads and lipstick wars, that by the time something worth keeping in focus had come along there was no such focus left in reserve. It would seem that only further melting of the situation, and further gaffes by Senator McCain, will continue to sway voters in Mr. Obama's favor in large numbers on inertia alone.

Worse, the Obama camp must be genuinely worried about its two most visible (if uncompensated) surrogates, Nancy Pelosi and Harry Reid--as it is in the hands of these two people that his fragile image as the man with the better plan for Wall Street is inescapably entrusted. If Reid and Pelosi were to suddenly grow something resembling a spine, and stand up to the nonsense being advanced by Paulson and Bush with something resembling a confident tone of indignation for the outrageous lack of detail in the current bill, Mr. Obama could parlay the situation to his further advantage as yet more proof that the Republicans across the aisle "don't get it." But after the two years we've just had, those are very big if's indeed.

Probably the Obama people have already internalized this concern and forged a strategy--and probably their strategy will be to talk about the bill in terms that are just specific enough to alert the persuadable middle to its business-as-usual flavor. Ordinarily one would not have much reason for optimism that this strategy will work: were this 2002 or 2005, the White House would simply sink in its heels on a this-or-nothing proposition, and threaten to blame any Democrat who didn't vote with them for foot-dragging in a moment of crisis. But this time around things are different: The public is galvanized in its opposition to any bailout at all, and even more so in its opposition to a federally funded golden parachute. Senator McCain, pressured again last night to prove that he was different from President Bush, has already pledged to take a different approach to government spending and reform. He has (albeit belatedly) embraced the public consensus for increased oversight. He has pledged himself to empathy. With such a strong undertow of public opinion, it is conceivable that Mr. McCain, and not Mr. Obama, could find himself backed into a difficult corner when at last the time comes for a vote on the Senate floor.

And the most exciting aspect of this situation is that, this time at least, what happens between now and then is up to us.

Dave O'Gorman
("The Key Grip")
Gainesville, Florida


isuyankee said...

I think you are wrong on Paulson. There is no doubt in my mind that we were on the brink of a major collapse and the ramifications would have been severely damaging to the broad economy. Paulson, I think, acted as an American and not a partisan Republican. The ugly truth is that a lot of rich executives get "bailed out", but have no doubt that Wall Street has been changed forever. And it is a healthy change indeed. Consider that every incentive over the past 20 years has pointed the intelligent Ivy League grad to investment banking over say medicine or organic chemistry or astrophysics. The incentives have changed in an instant and perhaps our ability to compete in the world recovers as well. Again, the beauty of the situation, if Obama can communicate it to the voters, is that the Democrats have been proven correct on a whole slew of economic issues. The election is Obama's to lose and I don't think he and his team will lose it.

lordrosemount said...

The after-effects of telling the wealthiest among us to eat cake would be far more damning for the rest of us, as it always is--precisely because the wealthiest among us have so much farther to fall before discovering the many wonderful flavors of dog food.

Couldn't you have thrown any more metaphors into the mix there?!

Seriously, I do enjoy reading your blog and I'm a fan of your writing, but I have no earthly idea what that sentence was supposed to mean.

The Key Grip said...

Obama's new commercial is extremely effective. His best yet.

On the subject of bundling Paulson with the Oval Office, you may have a point -- though certainly the three-page bill sent over by the White House on the subject contains precious little evidence that any of the WH-insiders are acting as Americans.

The Key Grip said...

By the way, kudos, Lord Rosemount, for calling me on that sentence -- I'll go back and revise that sentence. Two might be better. These things don't get better by having people looking at each other and silently shaking their heads....

isuyankee said...

I think this bailout is widely misunderstood. As Norris points out the key will be in pricing the distressed assets. The government will be buying distressed mortgages, but in theory they should be buying them at fair market prices. There is a reasonable chance that they even make money on some of this stuff. We know that in the short term, the budget deficit rises, but we have no idea whether or not it will be a good "investment" by the govt long term. There is understandable angst about bailing out Wall Street execs, but this had to be done. There was no liquidity in the financial system and only Uncle Sam could change that. The strategy from here should be--look at this mess the Bush folks caused due to lack of regulation. Obama will change that and McCain--a committed deregulator until last week will always choose the wrong path.

lordrosemount said...

Haha, thanks! I was sure you'd take it in the right spirit :)

Incidentally your other correspondant makes a very good point: how much, exactly, are they going to pay for these mortgage bonds? Seems to me that whilst their value is obviously lower than the banks originally thought, they can't be completely worthless because most people (even sub-primers) are still going to want to keep up repayments and keep their houses if they can, even if it takes longer, and as for the defaults, well, those houses will find buyers eventually. But there again, if the values of the securities are written down sufficiently, what's the point of the federal government buying them in the first place? They ought to be able to attract buyers on the open market.

It's so difficult to find precise coverage of exactly what's happening here in the UK - I suppose the internet it is, really.

The Key Grip said...

I think the Guardian is as good a source for US news as any US-based news source.

...A fact that probably says more about US-based news sources, than it does about the Guardian.

As for the valuation of the assets in this bailout, that (along with everything else) would mercifully seem to be back on the table for discussion. When Newt Gingerich gives a national radio interview in which he says the Administration is turning this into a power-grab, then you know things have gone too far.