September 22, 2008
BUSINESS/POLITICS: Monday Bailout Roundup
I tried over the weekend to do a more serious post with my analysis of the credit crisis and the bailouts, but basically there's just no way for me to get into this further without running afoul of my day job. At this juncture, given the limits on what I can write, the best I can offer my readers on the whole Wall Street/bailout issue is a roundup of links and what I can see and hear going around the political side of things:
*Newt Gingrich, who is always worth reading even when he's wrong (and when Newt is wrong, he's often spectacularly wrong), has some very good questions about the big bailout, the $700 billion, no-strings-attached, no-oversight debit card being handed off to Treasury to create what blackhedd calls the First National Bad Bank of the United States. Blackhedd has his own questions and cautions about doing nothing here (more from McArdle on how close we came last week to a complete unraveling). I was on a call with McCain's economic advisor Douglas Holtz-Eakin last week and from what I can tell, McCain appears to be pushing a solution that doesn't involve Uncle Sam actually buying the underlying investments, although his proposal is likely to be moot once some version of Paulson's plan gets passed into law. There's no Obama proposal on the table to compare that to. Here is McCain today on the Paulson plan:
I think it is clear that Congress must act and must act quickly. I laid out my plan and my priorities last Friday. I spoke to Secretary Paulson over the weekend, and I've been looking at the plan the administration has put forth. I urge Congress to study this proposal carefully as they consider the remedy for this crisis.
As for me, I am greatly concerned that the plan gives a single individual the unprecedented power to spend $1 trillion - trillion - dollars without any meaningful accountability. Never before in the history of our nation has so much power and money been concentrated in the hands of one person. This arrangement makes me deeply uncomfortable. When we are talking about a trillion dollars of taxpayer money "trust me" just isn't good enough.
We will not solve a problem caused by poor oversight with a plan that has no oversight. Part of the reason we are facing this crisis is an antiquated regulatory system of uncoordinated agencies that haven't been doing the job.
I believe we need a high level oversight board to impose accountability and establish concrete criteria for who gets help and who does not. They must ensure that throughout this crisis, the government is a careful steward of the taxpayer's dollars. The oversight board should be bipartisan and have qualified citizens who have no agenda but the protection of taxpayers and the financial markets. People like: Warren Buffet, who supports my opponent, Governor Romney, who supports me, or Mayor Bloomberg, an independent.
*From a political perspective, Ruffini thinks Hill Republicans should take a hard line against the $700 billion bailout. The word I'm hearing is that the deal is being negotiated mainly between the Administration and House Democrats, and the GOP on the Hill is playing wait and see depending on what emerges, especially on the crucial issue of how much stuff the Democrats try to tack on. The 28% approval rating for the $700 billion bailout is not encouraging to anybody on the Hill who is contemplating supporting it.
*Kevin Hasset of AEI offers a good nutshell summary of the view, increasingly popular on the Right, of how Senate Democrats fed the flames by defeating a McCain-sponsored reform in 2005. McCain goes hard after Obama on the same line of reasoning. The Obama camp's counter-effort against Rick Davis is not much of a response, given that nobody can finish the sentence of "and that's why McCain...."
*Maguire is skeptical of efforts to blame mark-to-market accounting. Which side of that debate you are on depends on whether you think the current market prices are realistic, or whether they represent a 1-2 punch of illiquidity and irrational panic. If the latter, it makes more sense to suspend or ditch mark-to-market. Reasonable minds can and do differ on this. Relatedly, whether the underlying redemption value of the debt securities at issue is or isn't greater than current market value will go a long way to determine whether that $700 billion outlay by the Treasury actually ends up turning a profit, which is far from inconceivable.
*NR on Gramm-Leach-Bliley, including Ramesh's question about whether the bill's critics actually want to repeal any particular provisions thereof. More here in the same vein from Megan McArdle.
*Of course, whenever you feel good about McCain, he goes and does something like recommend Andrew Cuomo for SEC Chair. There are more than a few reasons why McCain could scarcely have chosen a worse example for his bipartisanship shtick.
As I noted last week, the good things about McCain in a situation like this are that he's not prone to panic or freeze up in a crisis and that, having faith in the American economic system, he's likely to choose less draconian and counterproductive solutions in the long run than Obama. Nobody saw the whole current crisis coming, but as noted above McCain does get some credit for foreseeing and trying to head off parts of the problem. The bad news is stuff like this Cuomo nonsense, which I think he does just to butter up the mainstream Beltway press. Unfortunately, the current political climate makes it impossible for anybody who truly understands the problem to get elected, but other than Reagan I'm not sure we've had a president in modern times who really understood the economy, and the high-finance stuff was over Reagan's head too. The core advantage McCain has over Obama is that there are, in Reagan's memorable phrase, fewer things McCain knows that are not true.
*Obama's answer to the collapse of the housing market: "rebuild" one of the nation's fastest-growing cities!
*Now this, this is calm, mature governance, I tell ya.
UPDATE: The Blogometer rounds up blog reactions to the bailout, which represents the death of the free market, of fiscal conservatism, and/or of liberalism, depending who you listen to. The Club For Growth lines up against it.
I'm beginning to see this "Bad Bank of America" as a necessary evil, the success or failure of which, from what I gather, is whether it gets the valuation right. If it does, the taxpayers ultimately profit as the MBS' become due and the moral hazard is (hopefully) avoided.
Blaming Mark to Market accounting for Wall St's woes when these firms were leveraged at 30 to 1 ratios, is like a drunk driver blaming the telephone pole.
If I were advising Barack, I'd tell him that to announce there will be a job for Henry Paulson in his administration. He's like the anti-Bush - qualified, tireless, accountable.
Considering Bloomberg had a large hand behind the scenes in this, I can see Treasury being his if Obama wins. Or McCain too for that matter.
Are you constrained by the job from talking about whether you are for or against the TARP? Even the basic "let's give the Treasury Sec $700B and let him do his best".
Obama pulled presenting his alternate plan because he knows it doesn't matter. McCain never bothered to put a price or details on his almost-identical-to-Paulson's MFI for the same reason, and was pretty clearly calling for Gov purchases by the end of the week. And regardless of what was up last week, now it's Oversight+Board. http://ap.google.com/article/ALeqM5jld3VILFDbEY6uciu_lp_YgBnGqwD93BTDR80
But really, oversight was obvious as soon as the plan came out, as was some sort of executive compensation/buyback/dividend limitation. The foreign bank allowances are just nuts, but hey, that's why UBS hired Phil Gramm.
Personally I'm guessing both will end up not approving/having problems with it and not voting on it, so they can pick and choose responses based on how the winds go/audiences.
You have to wonder if the Democrats in Congress are just going to wander about for a bit and vote, or if they're going to say something obvious like - "OK, but we want to see 40 R in the Senate and 150 in the House, otherwise no deal". Economic stimulus ended up with ~380 in the house and ~80 in the Senate? I can't believe this would happen without something similar.
"is like a drunk driver blaming the telephone pole. "
It's not MTM, SOX, CRA, too lax regulation, the GSE leverage, the SEC leverage rule changes, Gramm-Leach-Bliley, Greenspan pushing low low rates like crack, or a 6 year policy of running deficits with no real room to maneuver, outright Wall Street greed, Bush's inability to see big obvious problems or a dozen other ideas.
Sadly you can find all these reasons and more written up in the past 5 days, for personal profit or just the desire to blame someone else. Instead of recognizing that it's a combination of all of these things, all of which can be addressed, it's much more important to blame the other guy!
Though for a bit of humor if you can spot the parallels: http://www.marginalrevolution.com/marginalrevolution/2008/09/wont-get-fooled.html
The idea that this is the death of free enterprise, blah, blah, blah is ridiculous. Govt created the monster. Govt has to slay the monster. That doesn't mandate Govt as a substitute monster. Could happen, but doesn't have to.
Eliminate Fannie and Freddie and the CRA. Leave mortgages to the market just like car loans.
For now, at least, if I try to get into where I am on the bailout, I'll end up in places I shouldn't go.
Our political system isn't designed to process the idea of an event with multiple causes, not on the eve of a national election. Naturally that means both sides have to compress the narrative to focus on the one or two best arguments they have for avoiding responsibility and, if possible, pinning it on the other side. After September 11 there was something of a holiday from all that, and it was really a few months before you got serious partisan finger-pointing. But I think Republicans recognize the urgency of getting that narrative out ASAP after the whole Katrina fiasco, when the Democrats and the media somehow succeeded in making it out as if FEMA's failures were somehow the cause of everything and effectively erased the responsibility of the actual first responders in state and local government, the role of the Army Corps of Engineers, and the successful efforts of other federal agencies like the Coast Guard - and they started that drumbeat before the storm ended.
Fortunately, this time the GOP doesn't have to rely on the Bush PR team (motto: ""), and the Administration itself can concentrate solely on the crisis while the campaigns deal with the arguments.
It sounds like you think Obama is trying to lay all of the blame for the current financial crisis at the feet of the Republicans just to win the Presidential election.
If you can't understand why, I suggest you trade-in your Karl Rove decoding ring.