Why isn’t John McCain (or Barack Obama or anyone else for that matter) demanding that President Bush fire Henry “Captain Crisismaker” Paulson?  Or for the resignation of Ben “Wingman” Bernanke?

Christopher Cox may have been culpable in helping create the conditions for this mess, but given the fact that we’re facing a crisis of confidence in liquidity, not liquidity, most of the blame falls on the Bailout Twins.

Related posts

• The Margin Call
• Bailout Blues
• A Crisis in Confidence, Not Liquidity
• Music for Bailing
• Morning Haikus

Nancy partisan?
Republicans are angry!
Those whiny dillweeds.

;

Boehner or McCain. . .
Who is the bigger dillweed?
Best to pick them both.

;

Could Bush be any
More inconsequential?  No!
Worst prez ever?  Yes!

;

Bernanke, Paulson
Believe the sky is falling.
Confidence plummets.

Related posts

• A Crisis in Confidence, Not Liquidity
• Thought of the Morning
• The Margin Call
• The Bailout Bill: A Threat to Constitutional Rule
• Music for Bailing

The House has rejected the bailout bill:

In a moment of historic drama in the Capitol and on Wall Street, the House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry.  The vote against the measure was 228 to 205. Supporters vowed to try to bring the rescue package up for consideration against as soon as possible.

Stock markets plunged sharply at midday as it appeared that the measure would go down.

House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail.

We’re about to find out whether Bernanke and Paulson’s “sky is falling” approach was more than scare tactics.

Almost from the beginning, I have felt that this was a crisis of confidence, not liquidity, and that Paulson and Bernanke’s panic only exacerbated a difficult situation.  As a result, the immediate response is, of course, panic.  The Dow Industrials, as of this writing, is down 530 points (6.5 percent), and NASDAQ is down nearly 130 (5.9 percent).  The TED spread is 3.37, up from 2.92 at the start of the day.

One of the big questions I have about this is whither the two Presidential candidates?  Both had backed this iteration, but this throws the door open again for one of them (most likely McCain) to seize the growing populist backlash against any bailout.  That could be dangerous for the country and the economy, especially since a McCain Administration is highly unlikely to implement the kinds of regulations needed or utilize the government’s resources to help Main Street.

I haven’t had a chance to look at a breakdown of how the House voted, but I’m guessing progressives and ultra-conservatives united to block the bill.  Given their different agendas, the House leadership has to decide which it wants to satisfy.  I can only hope it’s the latter, and that, despite some rough waters in the short run, the end result of today’s vote will be a much better bill.

Related posts

• The Bailout Bill: A Threat to Constitutional Rule
• Morning Haikus
• Live Blogging Dubya on the Bailout
• A Crisis in Confidence, Not Liquidity
• Thought of the Morning

I took some time to review the latest iteration of the bailout bill last night.  I’m neither a lawyer nor an economist, and I’m not going to pretend to understand the entire bill.  I’ll leave that to far more capable analysts.  I recommend starting with Hilzoy, who, among other things, reminds us about what is at stake here.

But one thing did stand out.

Section 104 of the bill establishes the Financial Stability Oversight Board, which is supposed to monitor the Secretary of the Treasury’s implementation of the bailout.  Section 104(b) defines the Board’s membership:

(1) the Chairman of the Board of Governors of the Federal Reserve System;
(2) the Secretary [of the Treasury];
(3) the Director of the Federal Home Finance Agency;
(4) the Chairman of the Securities [and] Exchange Commission; and
(5) the Secretary of Housing and Urban Development.

So let me get this straight.  The vaunted oversight function, which has been one of the Democrats’ main arguments in favor of the revised bill, is going to include Henry Paulson, the man the board is supposed to monitor and Ben Bernanke, the man who has been his wingman throughout this exercise in destroying boosting market confidence.

Who are the other three members?  James B. Lockhart III (FHFA), Christopher Cox (SEC), and Steve Preston (HUD).  Let’s take a brief look at excerpts from their official biographies:

Christopher Cox is the 28th Chairman of the Securities and Exchange Commission. . . . For 10 of his 17 years in Congress, Chairman Cox served in the Majority Leadership of the U.S. House of Representatives. He. . .served in a leadership capacity as a senior Member of every committee with jurisdiction over investor protection and U.S. capital markets, including the House Energy and Commerce Committee (as Vice Chairman of the Oversight and Investigations Subcommittee); the Financial Services Committee; the Government Reform Committee (as Vice Chairman of the full Committee); the Joint Economic Committee; and the Budget Committee.

James B. Lockhart, III, is the Director (CEO) and Chairman of the Oversight Board of the Federal Housing Finance Agency, regulator of Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. He assumed that position with the signing of the Housing and Economic Recovery Act on July 30, 2008. He remains the Director of OFHEO, which is now part of FHFA. . . . Mr. Lockhart co-founded and served as managing director of NetRisk, a risk management software and consulting firm serving major financial institutions, banks, insurance companies and investment management firms worldwide. He has an extensive background in financial services management including insurance, investment banking and pensions.  He has served as Senior Vice President, Finance, at National Reinsurance, Managing Director at Smith Barney, Treasurer of Alexander & Alexander, and as Assistant Treasurer of Gulf Oil in Europe and the U.S.

Steve Preston was sworn in as the 14th Secretary of the U.S. Department of Housing and Urban Development (HUD) on June 5, 2008. . . . Secretary Preston has an extensive financial and capital markets background. Prior to overseeing SBA, Secretary Preston was Executive Vice President of The ServiceMaster Company, where he also served as chief financial officer during a period of expansion, restructuring and significant change in the regulatory environment. During the first half of Preston’s private sector career, he was a senior vice president and treasurer of First Data Corporation, and an investment banker at Lehman Brothers.

So the five people providing oversight of Paulson are Paulson himself, the guy who has backed every move Paulson has made (Bernanke), a man who, by his own admission, preferred “voluntary regulation” of the investment banking industry (Cox); a former banking and insurance industry consultant (Lockhart), and a former employee of Lehman Brothers (Preston).

This is like appointing the Central Committee of the Communist Party of the Soviet Union to undertake a performance evaluation of Stalin.  Or choosing ZANU-PF to monitor human rights abuses committed by Robert Mugabe.

It’s not merely a case of the fox guarding the hen house; it’s aksing a pack of foxes to monitor a fellow fox as he guards the henhouse.

One more thing:

The chairperson of the Financial Stability Oversight Board shall be elected by the members of the Board from among the members other than the Secretary.

How much you want to bet it’s going to be Wingman Bernanke?

This is the oversight we were promised?

I remain deeply skeptical that this bailout is the one we need.  Given Paulson’s own admission he could not spend more than $50 billion a month and given the fact that we are less than 120 days from a new President and even fewer than that from a new Congress, why give these shmucks anything more than $200 billion?

If things start to slide faster than that, Congress could come back into session to authorize more, or we could determine that we have bigger fish to fry than bailing out Wall Street.  Either way, I don’t see why $250 billlion, followed almost immediately by another $100 billion is necessary now.

Screen shot:  YouTube

Related posts

• Thought of the Morning
• The Margin Call
• The Bailout Bill: A Threat to Constitutional Rule
• Music for Bailing
• Morning Haikus

Who knew Henry Paulson had a band?

And the reviews are pretty good:

“Paulson is doing some crazy neo-prog-dance-indie[-bailout]-punk stuff that no one else is even close to [understanding]. Four [trillion] stars!” - Alternative Press

“Unforgettably melodious…[Bail Them Out] All At Once is one of those [bailouts] that’s so good it’ll make you want to keep [the money] all to yourself. But you’ll crack. And before you know what you’re doing you’ll be [giving money to anyone who asks].” - [Ben Bernanke]

“The songs the band creates are too good to be limited to the [pockets] of thousands [of bankers]–they seek the company of [tr]illions [of dollars]. There aren’t many times where I’ll sing the praises of [a bailout] and declare that it is readily consumable by [all my fat cat buddies on Wall Street], so take note: Paulson is the real deal.” - [George W. Bush]

“A beautiful blend of wonderfully dark melodies and [massive amounts of cash]… Do yourself a favor and pick up the first (and probably last) undiscovered [economic hit job] of this year. 8/10″ - [Goldman Sachs]

“Whiny indie crap, [but I'm still gonna vote for it.]” - [John McCain]

Okay, I might have, um, enhanced the reviews a bit.

It’s amazing ol’ Hank finds time to tour between all the panicking testifying he’s been doing lately.  Come to think about it, if you squint, he kinda sorta almost looks like former Midnight Oil lead singer (and current Australian Environment Minister) Peter Garrett.

With profound apologies to the real band — they’re actually pretty great.  Go buy their albums.

Images:  Band: Their MySpace page.  Their, ahem, lead singer: via Wikipedia, using a GNU Free Documentation License.  Peter Garrett:  Official Midnight Oil website.

Related posts

• Thought of the Morning
• The Margin Call
• Morning Haikus
• Bailout Blues
• A Crisis in Confidence, Not Liquidity

It looks like there will be a bailout.

[L]awmakers in both parties said that few substantive differences and no major obstacles remained. They said the bill would authorize the full $700 billion requested by President Bush, but that Congress was intent on disbursing the money in installments.

One plan under consideration would release $250 billion immediately, with another $100 billion available at the discretion of the president.

They also said that there would be limits on pay packages for executives whose firms seek assistance from the government and a mechanism for the government to be given an equity stake in some firms so that taxpayers have a chance to profit if the companies prosper in the months and years ahead.

I still think this is a bad idea.  The deal they reached is far better than the Paulson plan, but why authorize all $700 billion?  Yes, it’s good that they put it in installments, but given that even Paulson said he saw a disbursement of no more than $50 billion a month, why not authorize $150 billion through the end of the year, with maybe another $50 billion contingency fund?

Sigh.

In the end, no one — not Bush, not McCain, not Obama, not Congress, not Paulson or Bernanke — had the political courage to stand up and say “Slow down, we don’t need to panic.  We only need to have contingencies in place by Monday.  Let’s wait for the new guy to come in before we give away the store.”

So much for leadership.

Related posts

• Thought of the Morning
• The Margin Call
• A Crisis in Confidence, Not Liquidity
• Snapshot: Politicians and the Bailout
• Prosecuting Those Responsible for War Crimes

Three observations about the current mess.

1.  Last night, Bush looked scared, lost, and out of place.  As my wife Molly put it, he was reading words put into his mouth rather than expressing his own thought.  For all our mocking of Al Gore as Mr. Roboto eight years ago, no President has ever looked as wooden as Bush did last night.

But it was not merely a question of performance.  Bush looked small — a sad little man out of his depth, more Willy Loman than Atticus Finch.  It was a pathetic exercise in ass-covering and special pleading.  Where others have risen to an occasion, Bush sank into the depths of his own failure.

2.  It is easy to regard our current mess as a question of insufficient liquidity.  Although the past two weeks’ event are clearly the product of the current Administration’s disastrous economic policies, what we’re really facing is a crisis in confidence.  That’s why the Paulson-Bernanke decision to turn this into one of the biggest crises in American history was so devastating:  it created the conditions for a collapse of confidence in the American economy.

If bankers continued to believe the economy was sound, they would lend.   If foreign investors still thought the United States as a good place to put their money, the failure of a few large firms would do no more harm to our economic prospects than the Chrysler bailout, the collapse of the savings and loan industry, or the Enron meltdown did.

Credit isn’t drying up because there’s no money; it’s disappearing because people are afraid — scared to lend, scared to buy, scared to do much of anything at all.  In the end, the Paulson plan (or the Dodd plan or any other proposal for that matter) will succeed or fail not because it pumps money into the system, but because it restores confidence.

What is required of leaders in times like this is not merely policy prescriptions, but also reassurance.  Think about 9/11.  For all we may despise him now, Rudy Giuliani — not Bush, I would note — demonstrated that kind of leadership.  For about a week, Giuliani became almost a second President, offering Americans the comforting words they so longed to hear — words that Bush, whether unwilling or unable, never himself got around to saying.

In the current crisis, we have yet to see anyone play a similar role.  Bush has been a disaster.  McCain’s abrupt decision to “suspend” his campaign looked more like political panic than economic stewardship.  Obama has been so cool, calm and collected that he looks detached.  Paulson and Bernanke have turned into the Panic Twins, and no one in Congress has stepped to the plate.

3.  I could not help contrasting Bush’s speech last night with one delivered during  an even greater crisis.  On March 4, 1932 (the official date of Inauguration Day had not yet been moved to January), Franklin D. Roosevelt gave his First Inaugural Address, three years after the Great Crash of 1929 had plunged the United States into the Great Depression.  It was a desperate time, far worse than what we face now (at least as of now), the country teetering on the edge of chaos, despair, and the collapse of democratic government.

In response, Roosevelt gave what is one of the greatest inaugural speeches in American history (surpassed, perhaps, only by Lincoln’s Second), helping to calm American fears and start the long hard road back to prosperity — a process that lasted until the end of  the Second World War, nearly sixteen years after the Great Crash.

Despite the fact that it would take over a decade for the United States to recover fully, Roosevelt’s speech that day was a turning point, if not in terms of economic growth, then in terms of Americans’ willingness to bear down and try to fix what was ailing the country — and in terms of saving our democratic form of government.

In this environment of fear and political posturing, I think it would be useful to recall what real leadership looks like.  The following are excerpts; you can read the entire speech here.

I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our people impel. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper.

So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.

In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.

In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. . . . Yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it.

Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. . . .The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.

Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, on unselfish performance; without them it cannot live. . . .

If I read the temper of our people correctly, we now realize as we have never realized before our interdependence on each other; that we can not merely take but we must give as well; that if we are to go forward, we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because without such discipline no progress is made, no leadership becomes effective. We are, I know, ready and willing to submit our lives and property to such discipline, because it makes possible a leadership which aims at a larger good. This I propose to offer, pledging that the larger purposes will bind upon us all as a sacred obligation with a unity of duty hitherto evoked only in time of armed strife.

With this pledge taken, I assume unhesitatingly the leadership of this great army of our people dedicated to a disciplined attack upon our common problems.

Action in this image and to this end is feasible under the form of government which we have inherited from our ancestors. Our Constitution is so simple and practical that it is possible always to meet extraordinary needs by changes in emphasis and arrangement without loss of essential form. That is why our constitutional system has proved itself the most superbly enduring political mechanism the modern world has produced. It has met every stress of vast expansion of territory, of foreign wars, of bitter internal strife, of world relations. . . .

For the trust reposed in me I will return the courage and the devotion that befit the time. I can do no less.

We face the arduous days that lie before us in the warm courage of the national unity; with the clear consciousness of seeking old and precious moral values; with the clean satisfaction that comes from the stern performance of duty by old and young alike. We aim at the assurance of a rounded and permanent national life.

We do not distrust the future of essential democracy. The people of the United States have not failed. In their need they have registered a mandate that they want direct, vigorous action. They have asked for discipline and direction under leadership. They have made me the present instrument of their wishes. In the spirit of the gift I take it.

So how about it Senator Obama?  If John McCain does not show up tomorrow night, it’s your chance to give a speech that could reassure the nation, one that would match if not surpasses the best you’ve given in the past.  It might do more to restore confidence than anything that’s happening in Washington.

And if that isn’t enough incentive, it also just might win the election for you.

Related posts

• The Margin Call
• Thought of the Morning
• Morning Haikus
• Bailout Blues
• The Bailout Bill: A Threat to Constitutional Rule

I really don’t want to do this.  I’d rather be kicked in the head.

9:02  “Our entire economy is in danger.”  And whose fault is that?

9:03  Apparently it’s all about jobs and Americans getting credit

9:03  Bush appears nervous.

9:04  “How did our economy reach this point?”  Uh, because you’ve been President for the past eight years.  Apparently he’s blaming it on foreigners liking to invest in the United States.  Silly foreigners.  Too much easy credit led to excesses and bad decisions.  Now it’s the lenders fault.  Now it’s borrowers fault.

NO NO NO.  IT’S YOUR FREAKING FAULT YOU JERK.  YOU AND YOUR GANG OF IDIOTS.  I can’t take much more of this — I just want to scream at the screen.

9:05  Having Bush explain economics is like having Hu Jintao explain human rights.

9:06  You know, when Bush addressed Congress after 9/11, he demonstrated courage and leadership.  He stepped beyond politics and acted like a President.  Compare that performance to this one.  This isn’t about leadership:  it’s all about covering his ass and that of his cronies.

9:07  Oh, it was his decision to intervene?  Where has he been for the past week?  It was the Ben and Hank show.

9:08  Good to know his capitalist principles are intact at the very moment he’s having the government buy a trillion dollars of crappy mortgages and other bad debt.

9:08  Molly just asked a good question:  “Why do I get the sense he’s reading without understanding what he’s reading?”

9:08  “It is difficult to pass a bill that commits so much of taxpayers money.”  Uh, could that be because it’s a horribly bad bill?

9:09  Molly says she prefers robot Bush to real Bush — he doesn’t get under her skin as much.

9:10  He outlined something closer to the Dodd plan than the Paulson plan, then said he had introduced the Paulson plan.  Does he have any idea what he’s saying.  And what’s making that scraping noise?

9:11  He asks how this is going to affect our future at 9:11 pm.  Oh the irony.

9:12  I’ll say it again.  He looks scared to death.

9:12  McCain talking point:  21st Century financial system governed by outdated 20th Century laws.

9:12  He’s really talking up Paulson.

9:13  Heh — Democratic capitalism — yep, that’s exactly what we need you sad sick excuse for a leader.

9:13  Blame it on partisanship.  Of course.  “In times of trial,” we have real leaders.  No we don’t — we have him.

Okay, that was absolutely nothing new.  No leadership, no new ideas, no reassurance.  He wasn’t presidential — and he has failed this country tonight just as he has over the past seven years.  As Chris Dodd just said on MSNBC, bad behavior and predatory lending that was left unchecked by federal regulators for far too long.  The Administration didn’t do its job and now we’re paying the price.

Related posts

• The Margin Call
• The Bailout Bill: A Threat to Constitutional Rule
• Morning Haikus
• A Crisis in Confidence, Not Liquidity
• Thought of the Morning

Okay, not really.  But if you, like me, did not have the chance to watch today’s Senate Banking Committee hearing, C-SPAN 2 is showing them right now.

Not only is it a must see, it’s compelling — far better than anything else on the tee vee right now.  At the moment, Richard Shelby — Richard Shelby! — is ripping Barnanke, et. al. to shreds.

Related posts

• The Margin Call
• Where’s Colin Powell When You Need Him?
• Torture, Bailouts, and the Theory of a Unitary Executive
• Today’s Political Haikus
• Thought of the Morning

Is it me, or is the proposed bailout (whether the Paulson plan, the Dodd plan, a hybrid, or another version we don’t know about yet) sound increasingly like a really, really bad idea? I’m getting this queasy feeling in the pit of my stomach, like nobody — not Paulson or Bernanke, not Bush or Dodd or Frank or Shelby, not even McCain or Obama have any freaking clue what to do.

Lindsay Beyerstein over at Majikthise has many of the same doubts I’ve been having.

I’m troubled by the instant bipartisan consensus that the the government must bail out the investment banks. It reminds me of the run-up to the Iraq war when every discussion was framed in terms what should be allowed to happen before we invaded, not whether overthrowing Saddam Hussein could solve anything.

Remember that the Democrats are just as beholden to the financial services sector as the Republicans. It’s not coincidental that the options on the table all involve bailing out these companies. At this point, the Democrats are arguing for a bailout, plus executive pay controls, mortgage-related bankruptcy reforms, and maybe an economic stimulus package.

My question is this: What if the government were to take the $700 billion to $1.5 trillion set aside for the bailout and put that money into programs to help those hardest-hit by the meltdown and Americans in general[?]

For example, progressives often note that pension plans would be decimated without a bailout. If that’s the worry, why not invest in retirement security for our people directly? An extra $700 billion in the Social Security trust fund would cushion a lot of retirements.

These are our tax dollars. We can either invest them for our future, or we can buy a lot of worthless paper to bail out reckless banks. Ultimately, bailouts just set us up for more crises by proving, once again, that the government will cover the losses of big business.  Maybe a bailout is necessary, but I troubled that no one seems to be articulating the case explicitly or considering alternative options.

I don’t want this country’s economy to collapse, but do we have any guarantees that the bailout will prevent that?  Yesterday we had some indication of what might happen if the bailout does go through — oil had it’s biggest one-day jump ever, gold also went up significantly, and the dollar declined to a level close to its all-time low against the Euro.

If I’m not mistaken, those numbers were not the product not of jitters over a bailout not happening, but rather over fears that a bailout will happen. If we print $1 trillion in new money to fund the Paulson plan (and let’s not kid ourselves, that’s what we’re talking about here), we would seriously cut into the value of the dollar.  That in turn means that the price of commodities would skyrocket.  In other words, serious inflation.

But if we don’t pursue a bailout, the economy collapses, credit disappears, and, I presume, trillions of dollars of value disappear overnight.  That probably will bring on massive deflation, a run on banks, and the biggest economic crisis since the 1930s.

But wouldn’t the latter option at least leave us with the capital to try to restore the system?  Wouldn’t that $1 trillion then be available to fix the systemic problems in a way that dropping it into the black hole we’re calling the bailout can’t?

We have no guarantees that the bailout will solve the problems we face.  The people telling us it will are the same ones who, six months ago, went on national television and assured people, post-Bear Stearns, that the economy was sound.

I had hoped today to attend a meeting put together by Steve Clemons that is looking at these questions.  Unfortunately, some obligations on the consulting side of my life prevented me from doing so.  One of the people I wanted to hear was my friend Leo Hindery, one of the smarter guys around on these issues and an economic advisor to the Obama campaign.  Yesterday, Steve released a portion of what Leo plans to say today:

As we all know, the Bush administration is asking Congress to let the government buy $700 billion in troubled mortgages, which would raise the statutory limit on the national debt to $11.3 trillion from $10.6 trillion. This $700 billion is over and above the $85 billion already committed to AIG, the $29 billion related to Bear Stearns, and the very conservative $25 billion associated with the bailouts of Fannie Mae and Freddie Mac.

The solutions being proposed are the most expensive combined bailout in the nation’s history and will sharply curtail the ability of the next president to push for tax cuts or new spending. And yet I believe they are not nearly enough, since they do not adequately cover the exposure associated with leveraged loans and, especially, the credit-default swaps market which has ballooned to a nearly unimaginable $45.5 trillion, from $900 billion in 2001.

This credit-default swaps market, which was developed by financiers who hired the best lobbyists they could to keep regulators away, is essentially nothing more than insurance on debt, but because there are now many more credit-default swaps outstanding than there are bonds for them to cover, it could potentially be a black hole of distress at least as large as the sub-prime mortgage crisis. Tens of trillions of dollars ago these swaps became nothing more than a way to gamble with almost no money down.

Leo clearly thinks that $1 trillion is little more than a shot in the dark  We’re standing on the edge of a cliff, throwing a rope over the edge, and hoping that it’s long enough to get us to the bottom.  But we really have no idea whether that’s true.

About eighteen months ago, I had dinner with Leo, Steve and a few others.  I told Leo that, sooner or later, we as a nation were going to face the equivalent of another margin call — some event that would demonstrate just how much trouble we were in.  Here’s a good short description of what that meant in 1929:

Margin calls played a role in the Great Depression. Speculators used leverage to play the market. They borrowed money, bought stocks, and put the stocks up as collateral. This only works when the stocks do not lose in value, so their price better go up. If it goes down, the value of the collateral will eventually fall below that of the loan. This is when the bank gets worried and sends you a margin call so that you close the gap.

Sound familiar?

Eighteen months ago I said that something would happen to produce a similar result.  I didn’t know what it was going to be  — an end to the real estate buble, a collapse of the dollar, another terrorist attack, China calling in its marker — but something was going to catch up with us and we would face real trouble when it did.

I think we’re there.  This is our margin call.  Not literally, of course, but the impact on the economy is going to be essentially no different from what happened in 1929.

If Paulson and Bernanke are wrong — again — and Hindrey is right, dropping $1 trillion now isn’t going to make a difference.  We would still have a meltdown, except we won’t have that $1 trillion available to fix the underlying structural problems that have caused this mess.

In addition, we would have a dollar worth considerably less than it is now.  We would still be dependent on foreign oil that now will cost much more than it does now.  We would still be stuck paying for a war in Iraq that is in the process of sucking an additional $1 trillion out of the economy. And we have no money to fix all the other problems we face — like a crumbling infrastructure, health care, a failing educational system, and social security and medicare insolvency, to name just four.

In other words, if the bailout fails to prevent the crisis, we would face an even worse scenario than what we do now:  massive inflation, a collapsing economy, and no way to fix it.  We’re talking Zimbabwe, Argentina, Germany in the 1920s.  That way lies madness and most likely dictatorship.

I’m not an economist, but it sure seems like we’re between a rock and a hard place here.  Tell me I’m wrong.

Tell me that these guys — the same guys who got us into this mess — know what they’re doing.

Tell me that we’re better off bailing these crooks out than we would be putting the money into saving social security and pension funds, investing in clean energy, fixing our infrastructure, developing a better health care system, and all the other things that are going to fall by the wayside if we use this good money to chase after bad.

Tell me.

I’ll try to believe you.

Photo: via Wikipedia, photo in the public domain

Related posts

• A Crisis in Confidence, Not Liquidity
• Thought of the Morning
• Bailout Blues
• The Bailout Bill: A Threat to Constitutional Rule
• Music for Bailing

By now my fellow bloggers have spilled plenty of bytes on the serious problems with the Administration’s bailout proposal.  I have nothing new to add to that discussion, but I do want to some thoughts on one provision of the bill that many people have overlooked.

If the current bailout proposal passes unamended, Congress will have just given Henry Paulson a degree of power that no Cabinet Secretary — or President for that matter — has ever had.  This is Section 8 of the bill as it now stands:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

This language represents nothing less than the institutionalization of the Cheney-Addington concept of an all-powerful, unitary executive that cannot be checked by either Congress or the courts.  It would represent the single greatest expansion of Presidential power in American history.  As written, not even the Supreme Court would have the authority to overturn it as unconstitutional:

As Congress prepares to act speedily on the grant of power to the Treasury Secretary to buy up $700 billion worth of bundles of bad mortage loans, the Supreme Court may watch in fascination, but it would have no power to second-guess the “bailout,” if enacted.  Given the sweep of the authority that would go to the Secretary, it might raise some constitutional questions. But there would be no way to test those in court.

According to press accounts, when Barnake and Paulson went up to Capitol Hill to brief Congressional leaders last week, they painted a terrifying portrait of economic collapse.  They warned lawmakers warned that we are teetering on the edge of a precipice, and that Congress needed to take urgent action to prevent a disaster.  Congressional leaders emerged from the meeting looking like they had been hit by a bus.

Sound familiar?  The Bush Administration used similar language to convince Congress to pass post-9/11 restrictions on civil liberties (most notably the Patriot Act); to authorize the invasion of Iraq; and to adopt both the Military Commissions Act (including the provision exempting CIA agents from laws banning torture) and the recent FISA bill.

To put it another way, every time this Administration has convinced Congress to adopt laws that expand executive power or erode civil liberties, it has scared Congress into going along it.  This time the threat is not terrorism but economic collapse.  But don’t kid yourself:  Section 8 could mark the beginning of the end of the separation of powers and the rule of law.

To me, all the other questions about this highly problematic bill pale in comparison.  Congress must not agree to this bill as long as Section 8 remains. If it does, it might as well pack up and go home.

Related posts

• The Margin Call
• Morning Haikus
• Live Blogging Dubya on the Bailout
• A Crisis in Confidence, Not Liquidity
• Thought of the Morning

Too bad Henry Paulson and Ben Barnanke weren’t around when Carly Fiorina ran Hewlett-Packard, because the American people could have taken control of HP for a song.

Related posts

• Compare and Contrast: Obama and Paulson on Economic Crisis
• Today’s Political Haikus
• The Margin Call
• Bailout Blues
• Thought of the Morning

Here’s part of what Barack Obama said today about the problems plaguing Wall Street:

The situation with Lehman Brothers and other financial institutions is the latest in a wave of crises that are generating enormous uncertainty about the future of our financial markets. This turmoil is a major threat to our economy and its ability to create good-paying jobs and help working Americans pay their bills, save for their future, and make their mortgage payments.

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren’t minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

Now here’s part of what Treasury Secretary Henry Paulson said today:

We’re working through a difficult period in our financial markets right now as we work of some of the past excesses, but the American people can remain confident in the soundness and resilience of our financial system. . . . We’ve got excesses we need to work through and we need to work through them as quickly as possible, and I think we’re making progress.

I appreciate the fact that Paulson is, along with Bernanke, doing his best to prevent a total meltdown of the economy, and I recognize that both men are largely trying to fix problems created by their predecessors.  But come on — who exactly does Paulson think was responsible for the “excesses” that brought about this mess?  Or is the Bush Administration going to try to do what they did with 9/11: blame it on the Clinton-Gore team?

The reality is that for the past seven (nearly eight) years, the Bush Administration has allowed the rich to play with everyone else’s money in ways that has left many Americans exposed to real risk.  In the process, it also has failed to fix many any of the other problems the country is facing — a weakened industrial base, an eroding infrastructure, a blooming debt, a growing climate crisis, a continued dependence on foreign oil, and a declining dollar, just to name the first six that come to mind.

I do not discount the role played by people who bought houses they could not afford.  But who allowed the market to exist in the first place?  Who ignored the problems we faced until it was too late?  Republicans’ arguments that this is all somehow the fault of people who took out sub-prime loans is little more than blaming the victim.  That is so typical of Republicans:  blame the middle class and the poor for the fat cats’ mistakes.

Should things really go south, there really isn’t a safety net capable of preventing the slide.  Face it:  we’re broke.  As a government, we’re no different that Lehman Brothers:  our debits exceed our assets.  Do people really think that the Chinese are going to continue to bail us out, especially now that they’re beginning to find other markets for their goods?  (For the Chinese perspective, read between the lines of this piece.)

Large segments of the world would like nothing better than to see the United States economy crash and burn.  Yes, there will be some short-term impact on global markets, but the reality is that the rest of the world will quickly find that it can live quite well with a weakened United States.

This is, in many ways, even worse than the Depression, even if the final economic consequences prove not to be as dire (something we are not yet assured will be the case):  this time, the government doesn’t have the ability to turn this around.  Unless, of course, à la Zimbabwe, we start printing worthless money (but of course that just creates a new set of problems).

I don’t know whether Obama or McCain or anyone can reverse this slide.  I do know that an Obama administration would be far more likely to convey the reality of the situation than a McCain administration.  An Obama administration would be able to work with a Congress more likely to act on his prescriptions.  But that doesn’t mean that what he wants will work.

In my gut — and that’s all it is at this point — I can’t help believing that this isn’t merely the start of another recession/depression.  It feels much more like the beginning of America’s slide off the top of the pyramid.  I hope I’m mistaken.

In the meantime, you might want to go back and take a look at this James Fallows piece from 2005.  He gets some of the details wrong, but I think he’s scarily on target in terms of the big picture.

Related posts

• The Margin Call
• Bailout Blues
• Twenty Questions for the Debate Tonight
• Today’s Political Haikus
• Thought of the Morning