September 26, 2008
POLITICS/BUSINESS: Some Straight Talk For House Republicans: Time To Lead From The Rear
The question of the day is whether House Republicans are going to support some form of bipartisan bailout deal. The Paulson plan is pretty much the only plan that is on the table with any conceivable chance of passing a Democrat-controlled House and Senate, period. There will undoubtedly be battles over what to add on to the basic bones of the Paulson plan, or whether to tinker around the edges of its structure, but while people debate the academic merits of plans laid out by Newt Gingrich, the Republican Study Committee, and others, we need to bear in mind that none of those plans has any chance of passing this Congress.
Nobody is threatening a filibuster of the Paulson plan in the Senate, and indeed I have not seen any sign of major organized opposition among Senate Republicans. As we all know from elementary school Civics, if Nancy Pelosi can get her caucus to line up behind the bill, not a single House Republican's vote is needed to pass it. The bailout remains massively unpopular and sets many bad policy precedents, and under ordinary conditions Republican intransigence would be the right and honorable thing to do: make the majority take responsibility for doing something unpopular, present a coherent alternative, capitalize at the polls, and replace as much of the unpopular plan as possible with the alternative after the elections.
These are not normal times. House Republicans need badly to come to grips with four very unpleasant realities, and to do so ASAP - and if ever there is a time for John McCain to lead them, this is it:
(1) Congress Is Run By Cowards
As I said, the votes of House Republicans are in practical terms utterly meaningless. We have seen over the years innumerable occasions of both Democratic and Republican majorities in the House blithely bulldozing the powerless minority. But given the unpopularity of the Paulson plan at large and with the Democrats' base, to say nothing of the role of Congressional Democrats in creating this mess, Nancy Pelosi simply lacks the courage to have her caucus take ownership of the plan and vote for it. She is frozen by her fear. She cannot lead, and she will not lead. And nobody's even asking Barack Obama to step in and provide the leadership that is absent.
In normal times, her cowardice could be highlighted and run against. But today, if Congress is to act, the minority must take the wheel and lead. It's no answer to say the bailout is unpopular. Sometimes, the people need leadership, not followership; that's why voters elected leaders in the first place. If McCain and the House Republicans lead, the deal will get done. If they don't, it won't. It's that simple.
And the leadership squabble in the House GOP is precisely why we need McCain to lean on people. To understand John Boehner's posture you have to remember that
(1) Boehner's job as head of his caucus is in deep trouble anyway for reasons that predate this crisis.
(2) Pretty much everyone who is gunning for said job is against the bailout, and loudly so.
(3) They have a majority of the caucus behind them.
(4) If Boehner wants to keep his job he is not gonna get ahead of his caucus.
In other words, somebody needs to rally the GOP caucus, and it won't be its leader. You know how sometimes in children's books and cartoons and comic books, you have a character who has some really bizarre and sometimes irritating talent or superpower, and all of a sudden circumstances arise in which that character's unique talents are suddenly needed to save the world? That's where we are today. John McCain's signature talent as a legislator is his ability to get horrendous bipartisan legislation passed. Today, the nation needs some horrendous bipartisan legislation. It's time for McCain to get the House Republicans to follow him where their best political and policy judgment and their constituents are all telling them not to go.
(2) Psychology Trumps Policy
The point where I have reluctantly parted company with the Paulson plan's critics throughout this debate is the difference between looking at this as an issue of policy and looking at it as an issue of psychology. The primary importance of a deal, almost any deal, is its immediate effect on investor confidence, to prevent things like massive bank failures, a run on the money market funds and a freeze of the commercial paper markets, which would collapse the stock market and lead to Very Bad Things. Even if this might be the healthiest solution in the longest run, we are at the point of a potentially massive short-term system failure with huge real-world consequences for millions of Americans. Preventing that Worst Case Scenario by propping up investor confidence won't prevent a recession, but is nonetheless a critically important goal of national policy. Bear in mind that as the U.S. goes, so goes the world; you may recall that 1933 ushered in some developments with rather adverse consequences for our national security. In other words, the actual merits of a deal may be far less important than doing something quickly that reassures the markets. There's an old military saying that a bad solution today is sometimes better than a good one a week from now; or, as Chesterton put it, if a thing is worth doing, it's worth doing badly. Speed matters more than getting it right; and we can always push for additional pro-growth measures and scaling back of the worst add-ons later if the Democrats insist on larding the bill up with goodies. All the policy arguments in the world can't stop a herd of frightened investors from stampeding off a cliff, and will do us no good at the bottom.
(3) The Market Will Arrive Too Late To Help
The RSC and other proposals are premised on the idea that pro-growth policies can bring nervous private capital out from hiding. It's not gonna happen in time to prevent a meltdown, because people who invested in mortgage-backed securities before and ended up losing their shirts are just not going to ride in on a shiny white unicorn and start doing the same thing all over again, no matter how many tax incentives you give them, especially when so many of them are out of free cash right now. That may not be a rational answer but it's a realistic one: fear is a powerful emotion, and it can run wild for a long time before it exhausts itself.
And that means government needs to step in. Not because the market can't figure out the right prices for the MBS and related debt securities at issue, but because nobody who has enough money to invest to make the market liquid again is able to let go of the fear. Government does not invest wisely, and I have no illusions that it will do a great job of pricing the assets Paulson wants to buy. Yes, the Paulson plan is a blunt instrument that will undoubtedly proceed the way ham-handed government solutions always do. But the simple fact that government can mobilize a huge amount of cash quickly means it can fix the situation, for pretty much precisely the same reason why government can build armies and go to the moon. Government works best when what is needed is simply the unique economy of scale and the coercive power to move with great speed it brings to the table.
If you don't believe me, I suggest you spend the weekend hitting up investors for $700 billion to start your own hedge fund to invest solely in underperforming mortgage-backed securities. You may find it harder than you think.
Let me give you a rudimentary explanation of why rapid government action will work - not perfectly, but well enough to unfreeze the joints of the financial system. As anyone who has ever played Monopoly understands, the economics of the price of everything on the board changes when everybody is out of cash and in hock up to their eyeballs. But parachute one new player in who is flush, or better yet has a limitless line of credit, and that player can make serious profits in a hurry and at least temporarily keep the others on the board from going under when they hit street repairs or the luxury tax.
Paulson plans to buy up MBS (which I'm using here as shorthand) at some price that is maybe around the current market price, give or take, but in highly illiquid markets. And even if this means that the sellers of MBS are realizing their losses ASAP by selling at a steep discount, cashing out those losses and taking the charge to the balance sheet up front, that still has value that no private entity has the scale to provide on such short notice.
Let's say you are a bank. You hold $400 million face amount of MBS. Market price, to the extent there's one at all, appears to be $25, so your portfolio is worth $100 million on paper.
But you don't have $100 million cash; you have zero cash and what may or may not be $100 million worth of MBS. The paper price, however, is useless unless you can actually find a buyer at that price. If you try to sell, given how thin the market is (so few buyers that any significant increase in sales will imbalance supply and demand), the price could go down. If you and every other bank who is in the same hole tries to sell at once with no new buyers, it could go waaaaaaaay down. And really nobody out there has enough private free capital to buy it all.
Suddenly Uncle Hank comes in with his bottomless debit card and says, you know what? I bet if I buy you out at $25 I can make a profit. And to extend or perhaps mix the Monopoly analogy, Hank buys out some of the inventory of everybody else on the board too. He buys Boardwalk for $150. He buys the railroads for $40 a piece, all four of them. He buys the orange set with the three hotels for $600. And in the end - getting us back to the MBS world - he'll make a profit on some of those when they pay at maturity at $100 or $70 or $45, lose his shirt on others, and maybe earn an average return of maybe $30, so he stands a good chance of making a profit simply because he was the only guy who could afford to take advantage of good buying opportunities at such an enormous scale. Uncle Hank hasn't outsmarted the market, he was just the only guy who could afford the risk.
But even if the taxpayer doesn't make a profit, the system will be able to function again without the uncertainty of having the balance sheet tied up in illiquid assets. Because your bank now has $100 million in cash, and can get out of the business of freaking out about your MBS portfolio and trying to figure out how much of the rest of your investments have to be called in to keep a cushion in case the bank next door holds a fire sale and the price drops to $10. Bingo - you can now go back to lending money.
The private sector can do this - but not with nearly this kind of speed. Which, when you consider why that's not happening, brings us back to our original point about this being a fundamentally psychological crisis - a mental recession, if you will, but one that's no less real for being mental. The government can bear larger risk and thus proceed without the fear that keeps private capital sidelined after a traumatic experience.
(4) Life Is Not Fair
If the markets go blooey over the lack of a deal, the fact that the bailout had been unpopular will not save the lack of a bailout from being even more unpopular. And Republicans will get the blame - because the media's already blaming the House GOP, because our guy is in the White House and will get tagged as the new Hoover, because all the political contributions to Democrats in the world, and all the explanations of how bad public policy was at fault, can't break the Republicans=rich people=free market=Wall Street link in the public mind. And with just five weeks until the elections, that will mean that economic disaster is followed by electoral disaster and quite possibly the end of the free market as we know it at the hands of the winners of that election.
Republicans can grouse about this but we know in our hearts it is true. Failure to act will be political suicide for the GOP. So in the end, it's not only about putting the nation first, but saving the party's political hide as well. It's time for the minority to lead.
Given my other posts, I agree with almost all of this. The exception being your characterization of all this as being about "leadership" and "fear", which is frankly a bit of spin. As I said previously, if this plan passes, I won't heap blame or praise on any one party, as long as it gets done.
A few minor points:
Both parties have used this issue for political grandstanding and posturing, and it's been funny to see both sides try to spin all of this. The minority republicans can hardly be considered "leaders" as this probably would have passed yesterday if not for their intransigence. That being said, that statement I read by one of the dems about "the principles of Obama" being incorporated into the plan was equally laughable.
As for Pelosi, you say that "Nancy Pelosi simply lacks the courage to have her caucus take ownership of the plan and vote for it." Well, no. Pelosi isn't stupid enough to take the political hit and allow the congressional Republicans to get off easy by opposing "government intervention" in the economy. Yes, she could have rammed it through, but the dems would have paid a huge price in the next Congressional elections.
Sorry, there are no "leaders" or "cowards" here. Just politicians trying to jockey and spin a plan that everyone knows has to pass in one form or another. It's a bitter pill. Let's just swallow it, pat everyone on the back for getting it done, and move on.
If it's such a great deal then why don't the dems just pass it without the republicans. They can pass it without republicans. We all know why. The deal stinks.
The fact that 20% of this was going to ACORN would make me oppose it no matter what the political implication would be. That's 140 billion dollars going to a certified bona fide democratic campaign machine.
Chaz, I agree on the ACORN stuff. But that's the margins; if you are agreed on the framework it's more reasonable to fight over the margins.
Forget it. Trillion dollar spending plans predicated on Chicken Littles running around with their heads cut off is ridiculous. It's about time there was someone, anyone, in the Congress actually willing to stand up to yet another dumb government expansion in a time of "crisis." Why are so many afraid of the free market when it comes time to correct and flush out poorly run businesses and investors who made bad bets? That's the problem with our society and, in particular, the author.
The less pork in this bill, the better off we all are. It would be nice if they just tabled what to do with any profits until they actually realized some.
How about the profits (if any) buy down the debt? Okay, it may be a drop in the proverbial bucket, but from a public policy and general PR perspective it would look a heck of a lot better.
SFH - since you obviously don't like this plan, can you offer an alternative?
"Why are so many afraid of the free market when it comes time to correct and flush out poorly run businesses and investors who made bad bets?"
None of us in favor of this plan are afraid to let free market punish bad businesses. I'd love to see them twist in the wind personally. Nevertheless, the problem is so widespread that the allowing the bad businesses to fail would threaten the entire economy.
And keep in mind, under this plan, the government may actually recover all the money and more at the end of the day.
While I agree something need be done, the $700B pork-laden bill proposed and espoused by the Dems as an "agreed to" bill is not the right thing!
Here is a little conspiracy for people to chew on: if it is critical that this bill pass, as is, now, now, now then why don't the Dems just do it? What makes it so critical? What about that 1% going to ACORN? ACORN, the organization which has been documented time and again for voter fraud for democrats. Why is is critical to pass a bill which hands a bunch of money to a voter registration organization within weeks of the election?
Just food for thought.
It wouldn't matter who is leading or who is following, the American TAXPAYER is going to get the short straw from this deal, and it won't solve anything.
In a couple of weeks or so, we'll have another "crisis" that threatens the financial system and requires another boost to get through it.
Are we so stupid that we can see this is just like feeding a junkie "just one more fix" and he'll be alright? You know that's all it is, is giving WS another fix, until it needs another.
BTW, the boys on Wall Street aren't selective in who they are friends with or give political tribute to. The (D's) and the (R's) make no difference and the recipients don't care how much they receive, just as long as they receive.
I don't ever remember anyone from DC questioning the BILLIONS of quarterly windfall profits from WS, but when WS is on the brink of taking a hit....well "The Sky is Falling". The sad part of this mess is that the TAXPAYER doesn't even get the satisfaction of saying "foll me once, shame on you--fool me twice...", it';s going to be "Fool me, OK I'll pay"!
Every blood-sucking elected official needs to be run out of DC. Oops, that's everyone in office and everyone that wants to be in office, oh well.
If this is so important and of national importance.
Then why won't the Dems ram it through?
If this bail out is so great for Americans and the country why not ram it through without GOP support?
Because if it fails the Dems do not want to be caught looking like the fools they are.
ACORN would get 20% if this passes
We're idiots if we don't jam that ACORN thing right up their butts. Of course, I suppose that means we've heard the last of it. Friggin' ACORN. Are you kidding me?
Any realized profits--and I believe they'll be substantial--ought to go right into the SS trust fund. By the time we see any profits, that's about the time we'll need it in SS.
Why won't the Ds pass it themselves, and why are they willing to hold it hostage in exchange for, say, payoffs to ACORN? I answered that. They are cowards. Their unwillingness to pass it is hardly proof that it's not needed. Since when do any of you raising this objection think Nancy Pelosi is a wise judge of economic policy? My point is that Republicans have to do what is right for the country regardless of what Pelosi thinks.
I don't know why you insist on calling the democrats cowards on this. Every politician knows public opinion is against this plan. That is why the Congressional republicans were reluctant to support it. They know that the dems and Bush can pass this without them, so they figure they can object without blocking it and reap the political rewards of opposing it in the next Congressional election. Do you really think the Congressional democrats would stand for this? Would the republicans put up with that if the roles were reversed? Of course not.
The republicans are using this as a political football as much as the democrats, so let's call it like it is.
That being said, there is one way that the Republicans will be unfairly tarnished by all this. As I've said, the fault here really lies with the investment banks, not the politicians. But given that Wall Street is mainly associated with republicans in the eyes of the voters and the whole "free market" ideology, the republicans will pay more than the democrats.
I respectfully dissent.
1# you are correct they are all cowards that is what Mr. Frank and Mr. Dodd are counting on, they are counting on nobody willing to call their bluff to allow them to put in presents for their goodies.
The boys in power on the left are not interested in an actual recovery it is a question of power and dough, that is why the people who are most responsible for the trouble are leading and the rest of the Demorcratic caucus is not calling them on it.
#2 The isn't Psychology Trumps Policy but reality trumps fantasy. The idea that we just need to allow the markets to calm down and that passing the bill will do it, will if that was the case then we could anounce that we will work on a bill and assure the markets that the government is prepared to do some form of action as soon as we examine the books. If all that is needed is a psychological item that would do it. However if we are dealing with a reality we need an actual solution that doesn't actually encourage the behavior again, after all we remember what happened with the amminsty for illegall when the laws weren't enforced.
#3 The only reason why the market won't solve the problem is time is due to your "Psychology Trumps Policy" business, if there is no panic then the market CAN solve the problem. The reason why they are reacting is not because of fear but because of uncertainly. Remember that when the tobacco companies where hit with giant fines the companies didn't go under because they knew what was coming and planned accordingly.
#4 That's right life is not fair but that doesn't mean we use that as an excuse to be suckers. I disagree that it would be political suicide to not act. Whatever is done the media is not going to give us any credit anyways.
Anyways that's what I think
I disagree, too. If this Paulsen bill is so good, the Democrats have the majority in the House they can create and pass it as is. The House Republicans are acting responsibly. I won't even address the insane ACORN crap.
I think someone like John McCain has to come forward *publicly*, stating "I will support this bill, IF, and lay out some basic terms, and adding, "if there is a single ounce of pork, or funds for other programs, or in any way, this bill gets laden with superflous spending or pork, or money for the fraud-convicted organization ACORN, the entire republican congress will abandon it.
Leadership is necessary, but so is some frank talk. The republicans are wusses in this matter, they are letting the democrats spin this. A unified statement that people can relate to, is what they need, and soon, or they will take the blame whether it passes, succeeds, or fails. The demos are playing the PR masterfully, no one on the republican side has the balls to bring up Franks/Dodds contributions to this mess and telling them, if you don't get out of the way, we WILL politicize your blame in this.
I don't think this will pass by Monday.
The Democrats have the votes to pass this themselves. They have the President on their side. So why don't they do it.
They simply don't have the balls to take the blame on their
own if it fails. Plus Obama becomes the "Bush Man" not
McCain. Vote no Republicans. When you've been dealt a
lousy hand, some times there is only one thing to do.
Kick over the table!
Don't pass it!
Let the markets fall to where they may (Dow at 3000?).
This country needs to bottom-out before the citizens take action. It doesn't need to be a violent revolution, but there needs to be a revolution nonetheless.
Thanks, Berto. All these folks calling me a socialist needed to hear what a real socialist sounds like ;)
The good news is it sounds like they may yet have a deal and one that can get done without the giveaways to ACORN.
"This country needs to bottom-out before the citizens take action."
And do what, exactly? Head for the soup kitchens?
"It doesn't need to be a violent revolution, but there needs to be a revolution nonetheless."
Someone's living in the wrong century.
"This country needs to bottom-out before the citizens take action."
And do what, exactly? Head for the soup kitchens?
"It doesn't need to be a violent revolution, but there needs to be a revolution nonetheless."
Someone's living in the wrong century.
As good a post as I have seen on the bailout, Crank. Question: Conventional Wisdom assumes the bailout will save the day. What happens if the bailout plan is implemented to the tune of $700 bil and the markets melt down anyway? Then what?
Crank you allude to the confidence crisis on Wall St., but what I pick up reading the comments is a voter crisis of confidence with Congress. No one knows for certain how bad things will get if nothing is done, but we all know for sure we will get screwed big time with the passage of a $700 billion bail out. We know that from bitter experience. BTW I think the Monopoly analogy is a good one.
Crank, the political & philosophical differences you & I share are unbelievable.
For once, I'm a fan, and a big fan, of the REPUBLICANS who are leading the charge to stop this outrage of a bill. They're the only ones right now doing anything to prevent Paulsen and Bernanke and Bush and Cheney and Frank and Dodd (and McCain and Obama) from looting the U.S. Treasury.
This legislation is theft. THEFT.
The U.S. taxpayers are being told (not asked) to bail out large financial institutions that can, and will, survive this mess. To help insure the massive wealth of individuals at these institutions. To incentivize these guys to keep taking risks.
To let them know -- loud and clear -- that the Federal reserve's spigots are open, and that the Treasury's coffers are open and ready to be looted.
Meanwhile, we get taxed up front through . . . well, taxes. And then taxed in the rear via inflation (because the Fed will need to pump more credit, more dollars, to permit the treasury to pay off this astonishingly expensive boondoggle). Inflation that will eat away the savings and assets and salaries of those who've already been taxed.
Crank, I'm supporting the free market here. You're supporting BIG GOVERNMENT, intervention, and wealth redistribution. You can spin it however you like, but if it walks like a big government, and it quacks like a big government . . .
Does it worry you by letting these firms go under that you would be devastating the rest of the economy and affecting people who are essentially blameless?? Also, the government will be buying assets, it's not a straightforward bailout.
MVH - The economy is wrecked whether we fork over $700 billion or not.
I'll take the option that (a) avoids extra inflation, (b) tells lenders and borrowers that risky foolishness is ok, and (c) starts the process of letting the market normalize through supply & demand, not through government intervention (i.e. regulation).
Also, MVH -
1. letting these firms go under
I'm not convinced they're going under if we bail them out.
(Nor am I convinced that they'll survive if we bail them out.)
2. affecting people who are essentially blameless
Explain to me how it doesn't "affect people" when you take their money to buy garbage? How does it not affect them to saddle them with future inflation?
3. the government will be buying assets
Buying BAD assets, or bad debt technically. Why is it a good thing to take privately-held bad assets (debt) and transfer those to every American citizen? Who will have to pay for the salvation of that bad debt? We will! Through taxation and, more nefariously, massive creation of future money through the Federal reserve's monetization of that increased national debt.
Soup kitchens? I'm thinking gruel.
"and do what?"
How about take back the country from the corporations and give it back to the people.
Or how about come up with a better situation than a 2-party system both driven by the same corporate interests.
For all their supposed differences, both parties strings are pulled by the same people.
We need to bottom out! It's the only thing that will make the citizens step-up and act in their own best interest.
Let's face it. "In God We Trust" should be replaced by "Slow on the Uptake" as our national motto. (or "When the shit goes down, blame brown!"--see the National Review's blame of hispanics for the housing crisis if you want to know what that means).
BTW Crank. You make "socialist" sound scary. Granted, it didn't work in the USSR, but conservative policies have failed every time they've been tried (1890s, 1920s, 1980s, 2000s) in the US and you still back that scarier failed ideology.
Crank, you make a very good point about capital not flowing freely fast enough at this - others have suggest lowering reserve restrictions, which is terrifying in another sense.
I think this is also why Paulson wanted the $700B up front. If that first $350B come in fast, it could be gobbled up in a matter of days, which would just slow things down going back.
"The fact that 20% of this was going to ACORN would make me oppose it no matter what the political implication would be. That's 140 billion dollars going to a certified bona fide democratic campaign machine."
Just so we're all clear, this is not it. It's 20% of potential profits. Hopefully it doesn't stay in.
And it's not going to ACORN - it's going to the Housing Trust Fund or the Capital Magnet Fund. These are administered by HUD and Treasury, and they were created in July. Passed into law, signed by the President, and already funded.
Tell me - can anyone give an estimate of where these funds pay out? No - you heard ACORN, people are saying ACORN, and you think ACORN is bad.
The HUD grants (HTF) goes to states, and designates an authority to those states. The Treasury grants (CMF) goes to individual CDFI organizations, and no organization can get more than 15% - national or state rollup, I dunno.
Please don't get me wrong, I'm not saying they're not related: http://online.wsj.com/public/article/SB121745181676698197.html
But not a one of you can define the leap, how exactly these funds are going to operate (or are being set up) let alone 20% going to them vs. other organizations - say 'Ms. Foster's Homes for Battered Women'. But a Republican said it, and details don't matter.
Hiding in plain site is what caused this mess. The Middle class and above were duped into inflating the housing market with overvalued homes and bad second mortgages. The red herring is thinking this crash was caused by low income mortgages. They only make up about 10% of this mess but get 100% of the blame.