Monday :: Sep 22, 2008

Much More Than A Financial Crisis


by Turkana

(UPDATES below)

Things looked so ominous, on Sunday, that the most intelligent comment about the proposed Wall Street bailout actually came from the sometimes incoherent Republican Senator Jim Bunning. Seriously. The New York Times quoted Bunning as saying:

The free market for all intents and purposes is dead in America.

This was at the end of an article indicating bipartisan support for the bailout, with Democratic Senators Chuck Schumer and Chris Dodd sounding supportive, while Democratic Congressman Barney Frank was talking about adding some regulatory oversight, and Speaker Nancy Pelosi was pushing for an additional stimulus package. The more hard-hitting responses came from scholars such as Paul Krugman, whose initial response was a blunt "no deal," and Jack Balkin, who pointed to serious Constitutional problems.

As Krugman wrote:

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And 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.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

In a later post, he broke the crisis into four key stages, and noted that capitalization seemed the critical one:

So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem.

So, not only would we taxpayers be on the hook for what amounted to a free pass to criminally irresponsible lenders, the plan itself would not actually solve the problem. But it's even worse.

Balkin:

The Bush Administration began in crisis. It now appears to be ending in crisis.

Following the 9/11 attacks, the Administration claimed that it needed enormous new powers to meet the threat of terrorism. Members of the Office of Legal Counsel spun out wild theories under which the President had virtually dictatorial powers when he acted under his authority as commander-in-chief. The OLC also drafted an extremely broad authorization for the use of military force (AUMF) that the Administration would later use as proof that Congress had already authorized virtually anything it wanted to do.

The past seven years have required enormous efforts to keep the Administration from making ever more outrageous claims of unreviewable authority and engaging in ever more unaccountable practices.

And now, as Ronald Reagan would say, there they go again.

Unlimited, unregulated power. Standard fair for an administration that considers itself legally dictatorial.

The modus operandi of the Bush Administration has been to use crisis to seize unreviewable power for the executive. Have we learned nothing from the last seven years? True, the face of our new Dear Leader is Mr. Paulson, and not Messrs. Bush and Cheney. But who, pray tell, do Mr. Paulson and his associates work for? If one truly credits the theory of the unitary executive so beloved by the Bush Administration, who, at the end of the day will these masters of the universe be taking orders from? And whose friends, business associates, and allies will stand to benefit from their deal making?

One might even call it a Shock Doctrine. And Balkin makes a non-partisan appeal to reason:

But there is more. The current secretary of the Treasury will soon be gone, replaced by the appointee of a new Administration, run either by McCain or by Obama. The next President-- and the next Secretary of the Treasury-- will face the very same temptations. If you think that the current Administration will behave itself appropriately-- a dubious proposition given its history-- do you have any guarantee that the next Administration will be equally well behaved? (As one commentator pointed out below, the Democrats have their share of friends and allies on Wall Street too. And don't even get me started about a McCain Administration advised by Phil Gramm.) We set a dangerous precedent by handing more and more unreviewable power to the president to nationalize large aspects of our economy and run them without effective oversight.

One would have thought that conservative, free market Republicans, of all people, would have warned us of the dangers of state planning and state control of the economy. Certainly they have spared no opportunity to denounce reform of our health care system as socialism. These accusations seem to be stilled, however, when the issue is bailing out the Republican Party's friends on Wall Street, while enlisting many of these friends in running the new state corporate enterprise, and selling the assets back to the same group later on.

It is a bit like the privatization of the old Soviet Bloc. Faced with crisis, the old communists became the new capitalists; they made the most of changed conditions by buying up old state businesses and running them as capitalist oligarchs. In America we see the same logic in reverse: Faced with a crisis of their own making, the old capitalists become the new communists.

As always, Glenn Greenwald minced no words, comparing what seemed to be an emerging consensus to the similarly brilliant consensus that emerged about Iraq:

First, the fact that Democrats are on board with this scheme means absolutely nothing. When it comes to things the Bush administration wants, Congressional Democrats don't say "no" to anything. They say "yes" to everything. That's what they're for.

They say "yes" regardless of whether they understand what they're endorsing. They say "yes" regardless of whether they've been told even the most basic facts about what they're being told to endorse. They say "yes" anytime doing so is politically less risky than saying "no," which is essentially always and is certainly the case here. They say "yes" whenever the political establishment -- meaning establishment media outlets and the corporate class that funds them -- wants them to say "yes," which is the case here. And they say "yes" with particular speed and eagerness when told to do so by the Serious Trans-Partisan Republican Experts like Hank Paulson and Ben Bernake (or Mike McConnell and Robert Gates and, before them, Donald Rumsfeld and Colin Powell).

So nothing could be less reassuring or more meaningless than the fact that the Democratic leadership has announced that what they heard scared them so much that they are certain all of this is necessary -- whatever "all this" might be (and does anyone think that they know what "this" even is?). It may be "necessary" or may not be, but the fact that Congressional Democrats are saying this is irrelevant, since they would not have done anything else -- they're incapable of doing anything else -- other than giving their stamp of approval when they're told to.

And what it says about our nation, overall?

What's most vital to underscore is that the beneficiaries of this week's extraordinary Government schemes aren't just the coincidental recipients of largesse due to some random stroke of good luck. The people on whose behalf these schemes are being implemented -- the true beneficiaries -- are the very same people who have been running and owning our Government -- both parties -- for decades, which is why they have been able to do what they've been doing without interference. They were able to gamble without limit because they control the Government, and now they're having others bear the brunt of their collapse for the same reason -- because the Government is largely run for their benefit.

With potentially cataclysmic consequences:

Other countries are debating it. The headline in the largest Brazilian newspaper this week was: "Capitalist Socialism??" and articles all week have questioned -- with alarm -- whether what the U.S. Government did has just radically and permanently altered the world economic system and ushered in some perverse form of "socialism" where industries are nationalized and massive debt imposed on workers in order to protect the wealthiest. If Latin America is shocked at the degree of nationalization and government-mandated transfer of wealth, that is a pretty compelling reflection of how extreme -- unprecedented -- it all is.

But there's virtually no discussion of that in America's dominant media outlets. All one hears is that everything that is happening is necessary to save us all from economic doom. And what's most amazing about that is that the Natural, Unchallenged Consensus That Nobody Questions can shift drastically in a matter of days and still nobody questions anything.

But the potentially good news finally came late Sunday. A seeming stirring from the expected Democratic torpor, and a seeming suppression of the habitual reflex to capitulate. We'll see how it plays out, but Speaker Pelosi now sounds more adamant about not being willing to play. Pelosi's statement, as quoted on the Time Magazine blog The Page:

Congress will respond to the financial markets crisis by taking action this week in a bipartisan manner that will protect the taxpayers’ interests. The Administration’s $700 billion proposal does not include the necessary safeguards. Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation.

We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome. Democrats will act responsibly to insulate Main Street from Wall Street.

As we proceed to deal with this crisis, this is clear recognition that the party is over for the Bush Administration’s anything goes, failed economic policies that have damaged our economy, undermined the middle class and further pointed out the need for a New Direction.

Let's hope she stands firm, for once. She has support from the leader of the Democratic Party. Barack Obama's full statement:

The era of greed and irresponsibility on Wall Street and in Washington has led to a financial crisis as profound as any we have faced since the Great Depression. But regardless of how we got here, the circumstances we face require decisive action because the jobs, savings, and economic security of millions of Americans are now at risk. We must work quickly in a bipartisan fashion to resolve this crisis and restore our financial sector so capital is flowing again and we can avert an even broader economic catastrophe. We also should recognize that economic recovery requires that we act, not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America. But thus far, the Administration has only offered a concept with a staggering price tag, not a plan.

Even if the Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects some basic principles.

  • No blank check. If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight. Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check.


  • Rescue requires mutual responsibility. As taxpayers are asked to take extraordinary steps to protect our financial system, it is only appropriate to expect those institutions that benefit to help protect American homeowners and the American economy. We cannot underwrite continued irresponsibility, where CEOs cash in and our regulators look the other way. We cannot abet and reward the unconscionable practices that triggered this crisis. We have to end them.


  • Taxpayers should be protected. This should not be a handout to Wall Street. It should be structured in a way that maximizes the ability of taxpayers to recoup their investment. Going forward, we need to make sure that the institutions that benefit from financial insurance also bear the cost of that insurance.


  • Help homeowners stay in their homes. This crisis started with homeowners and they bear the brunt of the nearly unprecedented collapse in housing prices. We cannot have a plan for Wall Street banks that does not help homeowners stay in their homes and help distressed communities.


  • A global response. As I said on Friday, this is a global financial crisis and it requires a global solution. The United States must lead, but we must also insist that other nations, who have a huge stake in the outcome, join us in helping to secure the financial markets.


  • Main Street, not just Wall Street. The American people need to know that we feel as great a sense of urgency about the emergency on Main Street as we do the emergency on Wall Street. That is why I call on Senator McCain, President Bush, Republicans and Democrats to join me in supporting an emergency economic plan for working families – a plan that would help folks cope with rising gas and food prices, save one million jobs through rebuilding our schools and roads, help states and cities avoid painful budget cuts and tax increases, help homeowners stay in their homes, and provide retooling assistance to help ensure that the fuel-efficient cars of the future are built in America.


  • Build a regulatory structure for the 21st Century. While there is not time in a week to remake our regulatory structure to prevent abuses in the future, we should commit ourselves to the kind of reforms I have been advocating for several years. We need new rules of the road for the 21st Century economy, together with the means and willingness to enforce them.


  • The bottom line is that we must change the economic policies that led us down this dangerous path in the first place. For the last eight years, we’ve had an “on your own-anything goes” philosophy in Washington and on Wall Street that lavished tax cuts on the wealthy and big corporations; that viewed even common-sense regulation and oversight as unwise and unnecessary; and that shredded consumer protections and loosened the rules of the road. Ordinary Americans are now paying the price. The events of this week have rendered a final verdict on that failed philosophy, and it is a philosophy I will end as President of the United States,” said Senator Barack Obama.
  • At Slate, Michael Kinsley points to the simple truth that Democrats are better for the economy than are Republicans. If Pelosi and Obama are able to rally the party to respond responsibly to this crisis, to not simply rubber-stamp yet another Bush power grab, and to represent the interests of the vast majority of Americans rather than just the privileged few, we finally may be on to something. This could be an historic turning point, as Democrats finally remember why they are Democrats. This week will be about much more than how this current crisis is dealt with. It could be about the beginning of the beginning of the salvaging of what is left of our republic.

    UPDATES:

    Bush balks at anything that would punish irresponsible execs, or help struggling homeowners. Think Progress has the story.

    Marc Ambinder reports that McCain may be preparing to lead Republican opposition to the bill. Horrendous cop, merely terrible cop?

    Turkana :: 2:41 AM :: Comments (37) :: Digg It!