Bail Out Down

Well the Bailout failed. Why? Enough people were feeling the heat from the people at home that they feared for their jobs. This is about the worst reason ever for a bill like this to fail. I was not a big fan of the bill as it was written because all the things dems fought for were so weak as to be mostly useless. The oversight and spending restrictions were a joke. However, that does not excuse people who voted against this for political reasons.

I wrote yesterday about the political implications of voting for this bill. The point of my article was not that people should vote against a bill if it comes up for a vote but that it should not have been put up. there is a major complicating factor in putting a bill like this up for a vote and having it fail. The failure destroys the confidence of the market. The market was holding based on the idea that something was coming down the pipe. No we have nothing. Putting it up for a failure was worse than putting up nothing and continuing to work.

The next step is fairly obvious, but it probably wont happen. Congress needs a swedish model bill that buys the equity stakes in the banks. Before they do this though they need to get the people on board with the bill. Look for a change in terminology and a major switch in marketing. The pols need to shift the media story line on this from something tax payers wont like but have to accept to something that portrays this as actually working for them. The biggest way is through some real punitive measures.

People will get on board with revenge in this case. Throwing the ibankers on their ass while helping Homeowners is a bill that could pass. Put together the best bill for homeowners possible, target it so that people feel like they are getting something in the bill and make the republicans vote against an overwhelmingly popular measure. If you want to destroy their political cover you need the public on your side.

Is this going to happen? No. I expect that they go back and throw more bones to the reoublicans, get a worse bill and get slaughtered in 2010 or even 2008.

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The Bailout dereves a 12(b)(6)

The federal rules of civil procedure has a motion that a defense attorney may make before a trial has begun. If granted this motion throws the suit out of court. It is referred to as a 12b6 or a "failure to state a claim for which relief may be granted". If the bailout does not meet that criteria i dont know what does.

Ok so it might be a slight mistake to say that the alleged collapse of the world financial market does not demand relief. Maybe i should have went with directed verdict. However my basic point is that the government, Bush-Paulson-Pelosi have failed to make their case to the American people on this thing. It is obvious that the general public believes, rightly so given what information we have, that this is a total giveaway. the congress clearly gets this that why they are having to scrounge for votes,

Republicans, under pressure from the democrats to deliver 70-100 votes from their side, were scouring the ranks and focusing on the two dozen Republicans who were retiring this year.
"It is a good number," said Representative Ray LaHood of Illionois, one of the Republicans leaving Congress this year.

Mr. LaHood said he had suggested to the leadership that they convene the departing members to get them to make the case to wavering Republicans.

Both parties were also scouring the political map to identify lawmakers who face little or no opposition for re-election in November, knowing the would be more willing to vote yes.

Democratic officials said that despite controlling both chamers in Congress, they were far from having a majority sufficient to pass the measure just from their ranks. And they also warned that Democrats in potentially tough races could not be counted on to provide the votes to put the package over the top when, and if, it reaches the floor.

One of the biggest problems with this is that congress is moving as fast as possible without taking the American people along with them. They are not even trying to make a case with real data and real experts to back it up. Instead you get people like Krugman and Roubini who either think this plan is barely above awful or just crap. How do you expect to get support with reviews like that?

As i wrote yesterday congress and the dems are going to be feeling this one for a long time and it more than likely wont be pretty.

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Give Away is the New AUMF

Andrew Sullivan promoted this from Pethokoukis, on his blog,

Newt Gingrich said voting for the bailout will break against candidates in 2010 and beyond when voters see how destructive it is to the economy. And that's the thing. While the bailout, if Paulson and Bernanke are to be believed, may prevent a financial meltdown, it will not by itself return America to prosperity. The labor market is clearly weakening, and is the last thing to turn around once an economy does regain momentum. So there's a good chance that a perturbed public, currently down on the bailout, will view it as an expensive flop by the time the midterm elections roll around. They will hold its supporters accountable.

The basic thinking here is that the give away becomes the AUMF vote. That 2010 will look very similar to 2006 when the country was so tired of the incredible violence in iraq that it revolted and severely punished the party in power. This is getting at something important that has been brewing in the liberal blogosphere since the inception of the Paulson Plan, Digby's THE TRAP. While Digby is applying this more towards the current election and the possibility of McCain running against the bail out to beat Obama the long term implications are there.

We will see the rebirth of the phony fiscal conservative image before our very eyes as our brave POW hero, John McCain, takes on the great malefactors of wealth while the soft, liberal elites behave like toadies to the rich. It's a neat trick for a man who owns seven houses and thirteen cars, but in America, you can be a multimillionaire and still be a man of the people as long as you drink a beer the right way.

Kilgore concludes that the Democrats must demand Republican votes in congress including John McCain's. But I don't see the mechanism for doing that. After the campaign he's run, I don't think we can rely on his "honor." So, the Dems can ask, but the Republicans will find a reason to do what they think will benefit them politically. And that is to sufficiently separate themselves from Bush and the congress that they can realistically be perceived as the real change agents.

The GOP and its ideology has failed in governance. Conservatives like to think Bush is not a real conservative but really he is just a natural extension of Reagan without the speaking skills. Given this problem what they need is a reset. They need a catalyst that can return them to their roots, a puritinization. The possibility exists that this bail out proposal could be that event.

The first thing to note is that it fits with preconceived notions about the worst of democratic party excess on spending. A traditional complaint that conservatives have against dems is that they spend too much money on the people who dont deserve it. If any one ever deserved to be bailed out less than the ibankers who knowingly too huge risks with instruments they could not even understand they probably committed a war crime. It looks like the dems are just throwing money at a problem, wasting it.

That no one actually seems to think this will work is also a problem. How can the dems line up behind something people said would not work? At least with iraq people were being told it would go great. Here it is all based on a "slap" mentality. Slap the markets and they calm down and somehow start to properly value their paper. People are not going to get behind that idea.

Opposing a big give away would be inline with traditional gop rhetoric. Ideologically the GOP should be against doing anything. Their position is that the free market is the best instrument to make economic decisions. The government should have a minimal role in the economy. 700 Billion is not a minimal role. Because it is so inline with traditional gop rhetoric it will not be a hard sell to the american people that the gop philosophy was the correct one. If the bail out flops it would be used as evidence that the republican ideology in its true form is right and that bush did indeed pervert it somehow. It would be seen as the republicans coming home to principle after the Bush years, they have seen the light etc. It worked for McCain with the Keating 5 right?

Another major point is that this is not the first time Dems are led into a disastrous policy by their own political cravenness. Iraq already happened. It is a classic case of fool me once shame on you foll me twice shame on me. Fool me three times and im an idiot. The country has an extremely low opinion of Bush. The country trusts him about as far as the distance between the nucleus of an atom and its valence shell. Still, the dems are willing to proceed in linking to him and following his dictates without revealing exactly what information they are acting on. The country will not tolerate that. In legal terms this is a minimum of negligent legislation. A reasonable person would know better.

When i say that the dems are linking themselves with Bush i should probably assert that they are also making this bill their own as much as they ca without scrapping it and starting over. They want to tack on all the provisions they can but the core is still the bush plan that pulled 700 billion out of nowhere. If you want to make it easy to run against you put your brand all over this bill.

The other consequence of this bill that is coming to light is that it should prevent any democratic agenda spending agenda should Obama win. That is the new media narrative that has begun to permeate the discourse. Much like '92 the dems are supposed to be the responsible ones and to hold off on the things like health care or education or SCHIP because the country just cant afford it. It is a perfect story for the GOP to run on should the dems actually try to do anything. Everything will be too expensive after the Dems irresponsibly spent all the money on the bail out.

The issues with this bail out are many and the up side is miniamal. given these conditions does it really even make sense to do this? I know the dems are trying to get some minimal cover from the GOP but really everyone will label them the driving force behind this in 2010.

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When Both Sides Hate Something

Then there are two interpretations. One is that whatever it is is good because it favors neither side. Two is that whatever it is is so bad that everyone agrees it is terrible. Which of these do you think the bail out is?

Conservatives also see the light.

"After reviewing the administration's proposed bailout plan, I believe it is completely unacceptable," [South Carolina Sen. Jim] DeMint, chairman of the Senate Republican Steering Committee, said in the statement. "This plan does nothing to address the misguided government policies that created this mess and it could make matters much worse by socializing an entire sector of the U.S. economy."

"This plan fails to oversee or regulate the government failures that led to this crisis," DeMint added.

Treasury Secretary Henry Paulson has pressured congressional leaders to approve the bailout as soon as possible to prevent panic from spreading across the U.S. and world financial markets.

But Paulson’s ambitious schedule may become derailed because of growing opposition from conservative Republicans and rank-and-file Democrats.

"This plan will not only cause our nation to fall off the debt cliff, it could send the value of the dollar into a free-fall as investors around the world question our ability to repay our debts," said DeMint. "It's also very likely that this plan will extend the cycle of bailouts, encouraging other companies to behave in reckless ways that create the need for even more bailouts, triggering an endless run on our treasury."

This is exactly what responsible dems are saying. That conservatives should think this was actually supposed to be a given because of their ideology but was uncertain because of the corporate ties. If people really dont like this plan it should not get passed in its current form. here is hoping that the dems get a spine and issue no blank chack. maybe they can get a spine from the fiscal conservatives?

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Bail Out...Here Comes the Cave Again?

$700 billion. $.7 Trillion. It is a lot of money. It might be a little early but i suspect that this financial crisis will come to be one of the most important events in any presidential election. It will also have a major impact on America and the economy for the foreseeable future. Exactly how this bail out goes down will be crucial for everyone. From reading the reaction of people i trust around the net the current proposal looks like a major fail. Right now the proposal and its possible consequences are being reviewed in democratic offices and i cant think they like what they see.

There are several issues with the proposal in its current form. The biggest issue is that we are not getting anything for this. I mean that the tax payers are shouldering all the burden and receiving no potential upside. Krugman explains,

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

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.

Do not reward the undeserving. That is the GOP line on every social program in existence. Cant help people who might not deserve it. With them, somehow it always ends up that no one deserves it. Now the roles are reversed as it is responsible liberals who want to make sure that the people who dont deserve it, the people in charge of the companies, are not rewarded by their massive failure.

Krugman is not the only economist who looks at this thing and gets major warning bells. Those bells are going off everywhere. Three other articles are available that think this is not the right way to go. One in the WaPo by Sebastian Mallaby, one by Douglas W. Elmendorf at the Brookings Institute, and one by Luigi Zingales and Robert C. Mc Cormack of the University of Chicago each are hounding on the point that this deal makes no sense for the tax payers.

The articles all say that we need to do this some way where the people who created this mess are not getting off free. Rajan and Zuniga,

The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition. The appeal of the Paulson solution is that it taxes the many and benefits the few. Since the many (we, the taxpayers) are dispersed, we cannot put up a good fight in Capitol Hill; while the financial industry is well represented at all the levels. It is enough to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs alumnus. But, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in.

The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists.

That encapsulates it right there. These are people in the know and they think this deal sucks for america. I cant comment on how well their proposal to, "cram down a restructuring plan on creditors, where part of the debt is forgiven in exchange for some equity or some warrants". would work but it certainly makes more sense to a layman that the treasury plan does. The Elmendorf proposal is similar in that it focuses on a debt for equity swap as opposed to a straight buying of the debt.

An alternative to the government buying certain types of debt from financial institutions is for the government to make equity investments in a wide cross-section of such institutions. For concreteness, suppose that the government offered to make an equity investment in every firm regulated by a federal or state banking regulator equal to 10 percent of the market value of the company as of September 1st in exchange for a 10 percent equity stake in the company. (The 10 percent figure is illustrative. As with the first approach, a judgment about the appropriate total amount of government funds would need to be made.)

With this approach, the government would not need to determine the appropriate prices and quantities of individual mortgage-related securities, it would not be providing a greater reward to companies that have made the worst investments, and it would gain the opportunity for taxpayers to receive a higher return if the financial system recovers more strongly.

These proposals deal with the problem of the proposal of buying up the debts on its merits as an economic idea. They dont even address the other big problem that has been exposed with the proposal, unlimited power to the treasury secretary. Matt Yglesias summed it up,

To give the regulatory authorities who failed to prevent this crisis carte blanche to hand out money to the financial institutions who caused the crisis while doing nothing for ordinary people would be outrageous.

So the basic situation is that we have Bush and the GOP including John McCain who wants to create an institution to buy up the bad debt from the banks in just they way the economists oppose on one side. On the other side we have the dems and Obama and the economists. Obama has yet to make a strong statement for or against the proposal. Nancy Pelosi is on record with the insightful,

“Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes.”

Ms. Pelosi said Democrats would also insist on “enacting an economic recovery package that creates jobs and returns growth to our economy.”

I wrote a couple days ago that this occasion was the textbook occasion for the implementation of the shock doctrine. Either the dems could do it putting in place a policy that would reign in the excess and make sure that if the tax payers were asked to bear this burden they at least had the potential for some upside. I think this is still true. Opinions on the plan are in flux and the public has not been swayed one way or another on the the plan. Unfortunately the dems are now a step behind because the base proposal is gop style shock doctrine.

The public is not going to wait long for action on this thing. They understand that this could be very very bad and action needs to happen quickly. This puts the dems in a bad spot because the GOP will be taking every opportunity to claim they are playing politics with the relief effort. The dems have talked about taking on a lot of pork projects but imo that is a loser. fighting this battle on the merits of the proposal will be hard enough without handing the gop a weapon to use against the bill.

A fight is being set up here because the dems are going to have to work really hard to get this proposal to be anything other than a give away to the bankers. This gets me pretty worried because well, the dems have no spine. Even Obama has not shown a marked willingness to lead a battle on anything like this. He was not there when we needed him on fisa. Maybe this will turn out different.

What we really need is a concerted effort by everyone we can get to fight this an get something for the taxpayers. We need to get oversight, the elimination of golden parachutes and ridiculous ceo pay. this deal cannot stand as is.



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