Monday, September 29, 2008

Another indication of conservative failure

This is interesting. The conservative New York Sun is closing down tomorrow.

One wonders what this suggests for the future of conservatism.

Today Dow Jones fell 777.68 (greatest single-day point loss ever) upon Republican refusal to pass bail out.

As bad as the bill to pass the politically modified version of the Paulson Proposal is, the failure to pass it is worse. The Conservative Republican refusal to support the bail out has immediate effects.
The Standard & Poor's 500 (SPX) index lost 8.8%, its seventh worst day ever on a percentage basis and the biggest one-day percentage drop since the crash of '87, when it lost 20.5%. The Nasdaq composite (COMP) fell 9.1%, its third worst day on a percentage basis and also its worst decline since the crash of '87.

Stocks tumbled ahead of the vote and the selling accelerated on fears that Congress would not be able come up with a fix for nearly frozen credit markets. The frozen markets mean banks are hoarding cash, making it difficult for businesses and individuals to get much-needed loans. (Full story)

Republican conservatives put ideology above the clear needs of the American people.

But that is always the case. Conservative ideology - as idiotic and self-centered as it is - will always be more important than real problems faced by real people. That's true even when those real people include conservatives working on Wall Street.

From Steve Benen. As of today, the Dow Jones is lower now than it was the day Bush took office in 2001.

Conservatives ignore the Rule of Law when they swear to support the Contitution

Conservatives have no real difficulty swearing to support the U.S. Constitution. They simply ignore the Rule of Law. Without the application of the Rule of Law, the Constitution is meaningless.

The Constitution is a set of principles that are supposed to guide American law. It is the basic law of the land. But no "law" matters if individuals do not apply it in their behavior. It is that process of applying law in behavior that we call "the Rule of Law." The courts are merely an administrative process for applying the set of principles that are embodied in the Constitution.

The American conservatives are happy to swear to support the US Constitution. They simply don't want to apply the Rule of Law.

The House votes against the bail out

The bail out bill went down in the House this afternoon. The vote was:

YesNo% Oppose

Since the Democrats weren't going to pass this administration bill five weeks before the election without cover from the Republicans and then have to run on their support of George Bush, the 67% opposition by the Republicans killed the bill.

A key problem with the Paulson Proposal and its progeny is that no one trusts the Bush administration or the Congressional Republicans. They simply do not work well with others.

As for the Republicans, they are blaming a speech by Nancy Pelosi in which she said (from the Guardian):
"[W]hen was the last time someone asked you for $700bn? It is a number that is staggering, but tells us only the costs of the Bush administration's failed economic policies — policies built on budgetary recklessness, on an anything-goes mentality, with no regulation, no supervision, and no discipline in the system."

"Democrats believe in the free market, which can and does create jobs, wealth, and capital, but left to its own devices it has created chaos."

"Democrats insisted that legislation responding to this crisis must protect the American people and Main Street from the meltdown on Wall Street. The American people did not decide to dangerously weaken our regulatory and oversight policies. They did not make unwise and risky financial deals. They did not jeopardise the economic security of the nation. And they must not pay the cost of this emergency recovery and stabilisation bill."

"Today we will act to avert this crisis, but informed by our experience of the past eight years with the failed economic leadership … We choose a different path. In the new year, with a new Congress and a new president, we will break free with a failed past and take America in a new direction to a better future."
Gee. I guess the House Republicans got their feelings hurt so they will retaliate by damaging the entire United States.

With Congressional Republicans it's always Party over Country and ideology over the welfare of the people. No surprise from such narrow minded ignorant idiots as the conservative Republicans, is it? They've proven it once again today. But don't ever call them on it. They'll get their feelings hurt.

Sometimes I really think we need to send every Republican a copy of the book All I Really Need to Know I Learned in Kindergarten by Robert Fulghum. Maybe they could learn something. Here is a quick summary.
  • Share everything.
  • Play fair.
  • Don't hit people.
  • Put things back where you found them.
  • Clean up your own mess.
  • Don't take things that aren't yours.
  • Say you're sorry when you hurt somebody.
  • Wash your hands before you eat.
  • Flush.
  • Warm cookies and cold milk are good for you.
  • Live a balanced life - learn some and think some and draw and paint and sing and dance and play and work every day some.
  • Take a nap every afternoon.
  • When you go out in the world, watch out for traffic, hold hands and stick together.
  • Be aware of wonder. Remember the little seed in the Styrofoam cup: the roots go down and the plant goes up and nobody really knows how or why, but we are all like that.
  • Goldfish and hamsters and white mice and even the little seed in the Styrofoam cup - they all die. So do we.
But probably not. Conservatives start out as failed human beings and they do everything possible to avoid admitting that.

The roll call of who voted which way can be found here.

Speaker Pelosi's speech can be found here in this transcript. This is the video (16.16 minutes):

Here is the Republican House leadership blaming Democratic Speaker Nancy Pelosi for the way the Republicans voted. As you watch them speak, remember - these are the guys who brought the political aspects of the current uniquely American economic and financial collapse to the rest of us.

They didn't want to vote for this bill to begin with, and they were looking for every possible way to blame the Democrats for their refusal to deal with the crap their ideological attitudes have caused the American economy and banking system to collapse.

Just remember - the current economic problems are the direct result of the Reagan Revolution and the ideology of the conservative movement. The entire Republican House leadership is a strong supporter of the Reagan Revolution! They will NEVER admit that the Reagan Revolution and the conservative ideology has failed! So they will never admit that the current economic problems are the direct result of the conservative ideology they were elected to support and which they have applied.

To avoid that admission, they will always search for someone else to blame. Today that "blamee" is Nancy Pelosi. But it will always be someone who is not one of them. That is what you are watching in the video above.

Sunday, September 28, 2008

How to live with a "free market?"

Peter Bernstein, a financial consultant, economic historian and the editor of the Economics & Portfolio Strategy newsletter, asks that question in an article in the New York Times. Then he avoids any effort to answer it.

He does make the obvious point that the current credit crisis would never occur in a planned economy. He doesn't address that point any deeper, however. "Everyone knows" that a centrally planned economy makes the central planners responsible for whatever works or fails in the economy, but it does so in large part because the central planners cannot be aware of local economic conditions in a manner that permits them to take advantage of those conditions. The need to collect information and provide it to the decision-makers in a planned economy get bogged down in the bureaucracy that is the nature of ALL large organizations, making them quite inflexible and unable to deal with rapid market changes or with wide varieties in local markets.

The alternative, then, must be the "free Market." Individuals who collect local market information and who are able to acquire the needed capital to exploit the local conditions should not have to wait for approval from higher up in a bureaucracy. That individual is labeled an entrepreneur. That is clearly the nature of the free market. But does that mean that the entrepreneur is totally free of any regulation on his behavior? Not really.

Some products are illegal to sell, and there are many business practices which are properly prohibited by law. It is illegal to sell faulty products that injure the customers and it is illegal to sell numerous chemical products we call illegal drugs. It is illegal to lie about or misrepresent the products you sell. It is illegal to sell stock or borrow money based on fraudulently prepared financial statements. Companies cannot sell life or health insurance if they are financially unable to pay off in the event of loss. There is, in fact, a broad range of business practices that are not permitted under the Uniform Commercial Code. There are also a number of government bureaucracies that are established to enforce these laws, including the Securities and Exchange Commission (SEC), the Food and Drug Commission (FDA), The Fair Trade Commission (FTC), and a whole host of other similar organizations. Mostly they are government organizations because to have the regulated organizations fund them leads invariably to the funding organizations taking over the regulators.

Every one of the government regulator organizations have been created to prevent an existing failure of the regulated organizations to deal fairly with customers, suppliers, competitors or with the society around them. These are not organizations created for the purpose of expanding government power as the conservative free markets would have you believe. All exist to "patch" problems that the unregulated market have previously displayed. Nor do those regulator organizations work to install a centrally planned economy. Instead they each operate to regulate some element of the process of the free market in ways that both customers and most honest business people expect the businesses to operate.

With those regulatory agencies in place free market organizations are able to operate more freely than without them. For example, without the assurances provided by state insurance regulators, few individuals would risk buying life insurance from companies which they had no way of knowing could every pay off in the even of the death of the insured. The assurance provided by the state regulator greatly expand the life insurance market.

Those regulatory agencies are not central economic planners. They are instead crucial elements of the free market system. Without the assurances provided by effective regulators, many buyers would not trust the sellers enough to buy from them.

So what has happened to create the current credit crisis in which bankers do not trust other bankers to be sufficiently competent or honest to repay loans they take out?

The bankers trusted each other to be sufficiently aware of the risks they were taking in the loans they made to be reasonably sure they would be repaid for money they lent out. It turns out they were not properly evaluating the risks they were taking and there was no regulatory agency with the power to question them. The bankers trusted each other, not realizing that they were all blind to the risks they were taking. Then following the herd instinct, they did not even ask the embarrassing questions like "Are you really competent to make the kinds of decisions you are making?"

Then the loans that the mortgage bankers were making were bundled up and sold to investors world-wide, so when they were revealed to be loans that would not be repaid they could not be specifically identified and separated from the loans that would be repaid. Mortgages generally and all the bundles of investments made up of mortgages became suspected of being toxic. They are now unpricable. Not only will banks not buy the Collateralized Debt Obligations from each other, many of the banks have so many in their inventory that they cannot repay the other loans they have received.

What has happened is that the bankers lost control of the risks they were taking when they loaned money for mortgages, and the banking industry was not aware that was happening. A banker who loses control of the risk of lending is simply bankrupt.

Much of this occurred because of banker's hubris. They knew they were so smart that they did not need some regulator looking over their shoulder as the made loans and made new and different types of loans. But they were not asking each other the questions that a good regulator should have been asking, either.

Then when Alan Greenspan and his Federal Reserve lowered interest rates and expanded the money supply there was no one to question how long the party represented by the Housing Bubble Greenspan created could last. Greenspan also refused to regulate the mortgage brokers who were fraudulently faking documentation and encouraging borrowers to lie about income that got bad mortgages past the screening (what little there was of it) performed by banks before they issued a mortgage loan.

Top executives in both retail and investment banks got most of their income from bonuses. No one gets a bonus from saying "No!" to a deal. So questionable deals proliferated in part because top executives got a lot more money by pushing them through the system.

At the level of the Collateralized Debt Obligations, there was no one to blow the whistle on rating agencies who were competing with each other to offer the highest ratings for collections of junk mortgages. The bankers themselves didn't want to blow the whistle because they were making good money on every transaction they shoved through. The bankers at every level were fiddling the data that described the overall real risk of each loan, and no one was questioning that risk. The result was that the unmeasured risks were spread throughout the banking system. Unfortunately, the banking system is now globalized, so the toxic waste of bad loans was spread world wide.

Peter Bernstein discusses "Moral Hazard" - the threat that if the government will bail out banks that fail the very offer to bail them out will lead them to take on greater risk.

Then there is the failure of the SEC to properly regulate financial reporting. The SEC Chairman admits that they were trusting bankers to honestly report their own flaws, and that trust was misplaced. Not too surprising, that. Voluntary regulation only works with businesses that don't need to be regulated. The ones that do need to be regulated will not be honest. That's the first risk he discusses. But we are currently facing his second risk. Here is his discussion of that risk:
My second issue goes to the foundations of the economic system in which most Americans believe and take for granted. Though we sometimes give it more lip service than respect, it is rooted in individual decision-making in free markets. In theory, at least, the less government intervention, the better; the mantra is that markets know best.

We often hear this refrain, and history confirms its importance in the most profound issues of economic policy. It justifies our revulsion with Communism, our philosophical distance from the current Chinese system, and our distaste when politicians, not markets, try to shape our system.

Faith in free markets made icons of Ronald Reagan and Margaret Thatcher, who made deregulation a policy cornerstone. An echo in our own time was the 1999 repeal of the Glass-Steagall Act, legislated in 1933 to separate investment banking and commercial banks. Its repeal was a key contributor to the calamities now gripping the banking system.

TODAY’S crisis thus emerged from a combination of disasters operating in free markets, but wreaking ruin as they developed. The subprime mortgage mess, the huge leverage throughout the system, the insidious impact of new kinds of derivatives and other financial paper, and, at the roots, the vast underestimation of risk could not have happened in a planned economy. A superjumbo bailout is the inescapable result, but at some point we must confront its more profound implications.

As we move into the future, and as the crisis finally passes into history, how will we deal with this earth-shaking blow to the most basic principle of our economic system? I do not know how to answer that question. But we need to ask it.
It is clear that Bernstein is blinding himself to the need of free markets to provide for appropriate regulation. No one is proposing a centrally planned economy. Such economies simply don't work well. But at the same time, the effort to do away with all regulation is exactly what has led to the current credit crisis.

A free market has to have some appropriate regulation. An unthinking mantra of "No Regulation!" is as bad for an economy as is a centrally planned economy. History is a guide to what regulations are necessary. An ideological mantra is not history.

History clearly shows that food and drug products must be regulated. The current credit crisis and the failure of all the separate Wall Street investment banks because the were allowed to avoid leverage regulations shows one level of regulation that was needed. And so on. Regulations are especially required when banks try to conduct business secretly. Most banking transactions need to be transparent because banking transactions are not real transactions. Lenders and credit card companies need to fully and clearly disclose true lending rates . Consumers should be able to more easily, cheaply an more frequently be able to determine theirwhat their credit ratings are. Ans so on. But these things ensure that businesses treat customers and suppliers fairly. They do not direct businesses to produce specific products or services as a centrally planned economy would do.

As to what precise regulations banks should have to undergo that should be carefully considered based on the current history of the credit crisis. But it should now be clear that the ideological mantra to eliminate government regulation was much too risky to apply to banks.

That's not a direction Peter Bernstein wants to consider, but in it is the answer to his question. "[A]s the crisis finally passes into history, how will we deal with this earth-shaking blow to the most basic principle of our economic system? I do not know how to answer that question. But we need to ask it."

The battle of the bail out has only just started. It will be a feature for the next decade or more

The Congress is nearing an agreement to pass the $700 billion dollar [*] bail out for Wall Street, with a bit of tinkering added to meet the Democratic objections to making the Wall Street Executives even richer because they have destroyed the banking system, and with a fig-leaf voluntary insurance “plan” to meet the objections of the House Republican no-nothing caucus. Something is going to be passed, but it will not be very good and it will have to be revisited frequently for a long, long time.

Does the bail-out have to be passed right now? Probably. Paulson and Bush have set up the apparent urgency so that if it is not passed very quickly (right before the election) then Wall Street and world-wide bankers are going to panic. Of all the Bush administration power grabs, this is the most audacious.

This huge giveaway is designed stop the next president from being able to successfully act to alleviate the problems of the recession. The money will be gone, the problem will be growing and there will be fewer tools available to adequately stimulate the economy.

Is the bail-out going to work? Well, it’s marginally better than no action at all (the preferred response of the idiotic House Republican Caucus and John McCain), but the economist with the best record for predicting what was going to happen next over the last couple of years, Nouriel Roubini, does not think it is likely to do very much. The plan has been written without consulting economists who know what they are doing. It is essentially a political plan, not an economic plan.
Specifically, the Treasury plan does not formally provide senior preferred shares for the government in exchange for the government purchase of the toxic/illiquid assets of the financial institutions; so this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the firms; with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession.

The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.
The next President, if he has any economic smarts (McCain does not), will have to spend money on infrastructure and alternative energy to stimulate the economy by creating jobs, while reforming health care to take the cost burden off of businesses and reduce overall expenditures. Nothing else will alleviate the problems the recession is going to cause. Unfortunately, actually solving the problem is anathema to the conservative Republicans. They are already performing the rituals which will call on the magic of the market to somehow change things. That is a prescription for a long, deep recession much like the one that started in the late 1920’s.

The argument needs to be made right now that the government will have to spend a lot of money to keep the economy from continuing its downward movement. If the argument is not made right now, then this bailout of Wall Street – which ignores Main Street - is going to be the only shot allowed. John McCain has already started his talk that government is spending too much money and can't afford to spend more no matter how bad the need. He said it Friday night during the debate when he called for a freeze on government spending in the face of the recession. That’s the conservative Reagan Revolution Herbert Hoover small government argument. It is also the prescription for a long and much deeper recession. When McCain loses this Presidential election he is going to go back to the Senate and lead the Republican obstructionists. They are going to be doing everything in their power to prevent the government from doing what has to be done to save the economy – spend money.

The battle of the bail-out will not end this week, although a bill will be passed. It has only just started, and it will be a major feature of American politics for the next decade or more. It’s one more element of the legacy of disaster willed to America by George W. Bush.

[*] Just the way the $700 billion dollar number was arrived at tells you how bad the bill is going to be. The Wall Street Banker Henry Paulson knew that his home, Wall Street, had to be bailed out. The number that was being bandied around was $500 billion dollars.

But the problem as Paulson saw it was that bankers needed to be convinced that the government was going to be serious about bailing them out, so Paulson took the $500 billion dollars and increased it by an amount he felt the Wall Street bankers would consider a serious number. The new number was $700 billion.

He had planned on using the typical Bush administration steamroller tactics to get the Paulson Proposal passed, which is why it gave no details about what was going to be done with the money and allowed no oversight by anyone.

Only Paulson overlooked the fact that the new number, big enough to awe the bankers, was also big enough to shock the Congress and the American people. Suddenly he and Bernanke found themselves facing serious questions, and they had to come up with explanations for things they had not yet thought of. It turned out that no one was willing to write the blank check Paulson had initially demanded without at least some discussion, even if (like the mortgage bankers who caused the credit crisis in the first place) no one was asking for serious documentation.

Unfortunately the shocking number - $700 billion dollars, remains the base number to work from. There is no real consideration of the fact that is is a number literally pulls out of Paulson's ass one Thursday night to present to Congress the following day.

By now, no matter what the final bill looks like, it is going to be built on this legacy of ignorance, deceit greed and stupid power politics instead of economic and financial rationality.

Saturday, September 27, 2008

McCain used curse word during debate last night

I missed this on TV, but right after about 4:30 into this NBC video it is clear that John McCain said "horsehi...." I don't think we got the "t" because someone was able to cut his mike in time to stop that last vowel.

(If the embedded NBC video doesn't work, here is a link to it.)

That ramps up the suggestions that McCain was acting very contemptuously toward Obama. McCain is not a Maverick. He is someone who has no respect for other people.

Here is MSNBC discussing McCain's refusal to look at Obama.

As this curse word, combined with the McCain's refusal to even look at Obama during the debate, become more widely recognized by the media they will become the equivalent to Al Gore's sighs when debating Bush 43 or Bush 41's glancing at his wristwatch wishing the debate was over.

Addendum 3:10 pm CDT
John Cole describes the reaction to McCain's contempt and anger, comparing it to the reaction that Al Gore got after his first debate in 2000.

Laura Rozen explains why the Paulson summit meeting blew up without an agreement

We are all aware by now that John McCain got George Bush to call a meeting Thursday in the White House to do something to move the Paulson Proposal through Congress. The meeting included Bush, McCain, Obama, Paulson and Bernanke, Harry Reid, Nancy Pelosi, Mitch McConnell, Barney Franks and representatives of the wild-eyed crazy "conservatives" who have dominated the Republicans in the House of Representatives since Gingrich took control in 1994 and then was replaced in 1998 by the even more extremist Tom DeLay. Similar but less publicly visible extremists have replace Tom DeLay since he was required to step down from the position of Majority Leader upon being indicted for money-laundering.

The purpose of the Thursday meeting was to break up the logjam in congress and get a bill passed to bail out Wall Street before the U.S. collapses into a Depression. On Wednesday when the meeting was called it was clearly to complete the final stages of an agreement everyone in congress had signed on to but which still needed some final tweaks to get everyone on board to pass it. Then on Thursday the deal blew up in everyone's faces. Laura Rozen explains what happened.

Bailup Blowup. More from my Hill friend:

Let's be clear about what happened. I heard David Wessel on NPR talking about typical congressional gridlock. That is not it at all. The most conservative faction of Republicans - the faction whose extreme ideology helped get us here and that dominates the party - blew up the deal at the last moment, with the help of their equally irresponsible presidential candidate. I thought Pelosi was in for a nasty surprise when she tried to take the plan to a vote with the Dem caucus. But Dem opponents had no seat at the table in crafting the plan, and have made their dissatisfaction well known. The conservatives have captured the Republican party and were represented in the negotiations. Yet they waited until the last moment and then blew it up. In the name of a ridiculous sketchy alternative that doubles down on their discredited "ideas". It would be like Dennis Kucinich - or Abbie Hoffman - running the show. The Republican Study Group (Hensarling, Cantor, Ryan, the lot of em) are clowns. They had a seat at the table and they conducted themselves in the most irresponsible manner possible. Let their beloved market give them all the credit that is due them.

These are the same extremists who push to financial deregulation ideology and support the corruption that got Wall Street into the mess it is currently in. They also own the Republican party in the House of Representatives, so if they don't accept any agreement it will not be passed.

They are using their position of power to veto the workable solution that had been proposed. They are willing to take America into a Depression in order to defend their failed ideology. Think not? Here is what one of the crazies said:
According to one GOP lawmaker, some House Republicans are saying privately that they’d rather “let the markets crash” than sign on to a massive bailout.

“For the sake of the altar of the free market system, do you accept a Great Depression?” the member asked.
These are the ideological crazies who did the political heavy lifting to get Wall Street to its current position of collapse, and rather than work to solve the problem they created, they are ready to take America into a new Depression. It's not rational. It's religious belief with them.

That's the American conservative movement. They are ready to let the nation die to achieve their vision of the Reagan Revolution.

McCain camp: working the refs or out of touch with reality

You really have to wonder what the McCain camp is reading when the New York Times publishes an article by Times reporter Patrick Healy that says - contrary to the polls that show the public thinks Obama can better deal with the economy - "Obama is struggling to connect with the public on economic issues." This is how the New York Times is somehow, as Steve Schmidt puts it, "'150 percent in the tank' for Senator Barack Obama."

Go read Jamison Foser to see how totally unrealistic Schmidt's whine is.

Are the McCain people working the refs or are they out of touch with reality? I vote for out of touch with reality much as John McCain himself is.

Comments on last night's Presidential debate

Today in blogdom there is going to be a lot of discussion about the debate last night. The debates are aimed at influencing the undecided voters, and I made my decision long ago, so what I am trying to get from the debate is a better feel for who the two debaters are. There are only a few points that I consider worth discussing.

Dealing with the recession and government deficit

One thing that McCain said really jarred me. Here we are clearly going into or already in a Recession, and his "solution" is going to be to cut government spending, enact a freeze on government spending and shrink government. A better description of the "Herbert hoover" approach to dealing with an economic downturn would be hard to find. McCain was right when he said he doesn't know much about economics. It would be impossible to take a more destructive and wrongheaded approach to handling an economic downturn.

Iraq, Afghanistan, Pakistan and al Qaeda

Another thing that McCain either does not realize or refuses to acknowledge is just how much to cost of the unnecessary war in Iraq has contributed to causing the current credit crisis. Last March Nobel Prize-winning economist Joesph Stiglitz was describing The Three Trillion Dollar War and explained even then how much the cost of Iraq was contributing to the credit crisis. Stiglitz was correct then, and the problem has clearly gotten much worse. The unneeded Iraq war is not the only cause of the current credit crisis, but it is a major reason why it is as bad as it is and still getting worse. McCain, in his economic ignorance, does not seem to put the credit crisis and the unexpectedly high fiscal costs of the unnecessary Iraq war together. Obama clearly does. Obama recognizes that to deal with the credit crisis will require closing out the Iraq War as quickly as possible.

But Obama clearly places security for America above cost. The threat to America is from al Qaeda in Afghanistan and Pakistan. Obama recognizes the security priority and plans to move the troops to the theater where they are needed. McCain sees the withdrawal of troops from Iraq as an emotional issue. He defines leaving Iraq as somehow "losing." So he will commit troops to Iraq no matter what the real priorities are for American security. McCain is applying fragmented emotional thought rather that coherent priority-based decision processes like Obama is.

Russia and the U.S.

The very different thought processes Obama and McCain apply to foreign policy were also clearly displayed in this debate as the two discussed how America should deal with Russia. Tristero has an excellent analysis. Obama was focused, rational, cool, consistent and well-informed, focusing on what actions are in America's self interest and how to best achieve what America needs from Russia. The contrast to McCain could not be more stark. John McCain was emotional, even paranoid, unfocused, inconsistent, incoherent and enamored with his own personal experiences. He seemed unaware of what America's foreign policy towards Russia needs to be about. Then he was dismissive of Obama as "naive."

How each candidate thinks

Of the two debaters it was clearly Obama who was thinking in the real world while McCain mistakes his years of association with people who made major foreign policy decisions for "experience" and "understanding." In a complex, dangerous and threatening world, Obama offers cool, focused rationality and an understanding that decisions are made with American self-interest as the first priority. McCain clearly is not even aware that kind of thinking exists.

Lehrer's moderation of the debate

Generally I thought that Jim Leherer did a good job of moderating the debate. But one thing I found jarring was when he repeatedly pressed to get either debater to discuss which of his planned programs would have to be scrapped when the the proposed economic bailout was enacted and $700 billion was scooped up to save Wall Street. Lehrer was off base there - not in initially asking that question and perhaps not in asking a follow up, but he was off base pressing both candidates three times to answer it. It's not a question either candidate should have answered last night. Hillary Clinton would have dismissed it as a "hypothetical." No one really knows what the final deal is going to look like, nor does anyone have a good idea of how much it will really cost. Then no one knows how effective whatever the results will be. Until those things are known, neither candidate should be publicly passing judgment on the bail out or its fall out.

Both candidates should currently have teams discussing exactly how to deal with the fiscal impact of the proposed Paulson bailout. But until Congress decides what the bailout is going to really look like, it would be irresponsible to announce policy decisions based on it. The third time Lehrer asked the question was a waste of debate time.

The effects of the debate

The instant polls suggest that the result of the debate was either a tie or that Obama won by. That's unfortunate for McCain. John McCain needed a significant win to counter his recent drop in the general polls. He didn't get what he needed.

I don't think that McCain's Prima Donna actions (requires sitting through 10 or 15 second commercial for access) of "suspending his campaign" and canceling the debate followed by reversing that decision at the last moment helped him a bit. It certainly gave an example of what his campaign manager meant when he told the media that they were going to make the McCain campaign about "character" rather than "issues." I guess the definition of "character" is to have McCain perform frequent media stunts that say "I'm the Great John McCain! Look at Me! Look at Me!"

The McCain disaster that is the Sarah Palin decision

In the aftermath of the debate it is clear that the McCain camp does not dare attempt to let Sarah Palin speak to the media. Her interview with Katie Couric this week was an undiluted disaster. The fact that Palin cannot be allowed to speak to the media emphasizes what a disastrous decision John McCain made when he chose her as his running mate.


Essentially the debate last night allowed me to better understand the different ways of thinking represented by Obama and McCain. Other than that, since I have followed the campaign rather closely the only thing that is really important is how it impacts the undecided voters. That is going to take a while to determine.

At the moment it looks like it will be a net positive for Obama. That suggests that the McCain camp will be conducting some more panicky and wacky public relations stunts in the near future. That's my best bet, anyway.

Rewritten 11:33 am CDT

Addendum 4:46 pm CDT
For an excellent analysis of last night's debate and its effect on the campaigns, go read James Fallows On strategy and tactics at The Atlantic dot com.

James Fallows concludes:
For years and years, Democrats have wondered how their candidates could "win" the debates on logical points -- that is, tactics -- but lose the larger struggle because these seemed too aggressive, supercilious, cold-blooded, or whatever. To put it in tactical/strategic terms, Democrats have gotten used to winning battles and losing wars. Last night, the Democratic candidate showed a far keener grasp of this distinction than did the Republican who accused him of not understanding it.
Go read his post to see what leads him to this conclusion.

Friday, September 26, 2008

McCain and the bail out

John McCain has exposed the inner secret of his campaign this week. Contrary to the widespread belief that he is an honorable man driven by ideology and a strategy to become President, it is now clear that every decision he and his campaign staff have made is based on short-term tactical considerations with no thought to the long-term implications.

Jonathan Chait has given up trying to figure out the deep strategy driving the McCain campaign. McCain's efforts to torpedo the bail out legislation were the last straw.
McCain seems to have made no effort whatsoever to bring the bailout legislation to closure. Indeed, he may possibly have sunk the whole thing. On the radio this morning, I heard David Corn of Mother Jones speculate that McCain may be settign himself up to rail against the bailout onm populist grounds. But McCain and his running mate have already stated publicly that a bailout is needed to avoid a depression!

And now, after insisting it would be unpatriotic to campaign and debate before bailout legislation had been completed, is debating anyway, even though a deal is further away than it was when he suspended his campaign.

So I'm abandoning my assumption that McCain had some grand method behind his campaign suspension gambit. I don't see any method at all.

The bail out bill is a bad one. It's time for Congress to walk away.

Do we really need a bail out deal? Not according to economist James K Galbraith.
President Bush and his Treasury secretary, former Goldman Sachs chief executive Henry Paulson, have warned of imminent economic collapse and another Great Depression if their rescue plan isn't passed immediately.

Is that true?

"It's more hype than real risk," said James K. Galbraith, a University of Texas economist and son of the late economic historian John Kenneth Galbraith. "A nasty recession is possible, but the bailout will not cure that. So it's mainly relevant to the financial industry."
It's sort of a strange crisis. The banks will currently lend to credit card customers and to consumers, but they won't lend to other banks. So Henry Paulson is asking Congress to tax every American over $2,000 just to bail out the wealthiest bankers in the world. But those superwealthy bankers are in trouble because their fellow bankers are either so stupid or are are such disreputable crooks that other bankers don't trust them enough to loan them money.

Henry Paulson presented "the Paulson proposal" to Congress in his own name because Bush is so unpopular that presenting it as the Bush Proposal would be a major strike against it. But Henry Paulson is the ex-Chairman of the last of the five largest financial banks, Goldman Sachs to disappear since this Spring. Paulson is not an economist. He has a Harvard MBA. He's primarily a securities salesman. His job has always been to make deals. Someone else was the analyst who explained the overall system. (I know it's not "either/or", but Paulson is still primarily a deal maker.) Paulson is watching the investment banks which have been his career disappear. Sure he wants them saved. But should the rest of American society have to pay to save them? Those banks haven't added that much value to the American economy. $700 billion dollars? And that's just the down payment?

Buying the bad mortgages from the banks simply does not address the central problem. Millions of families have signed crappy mortgages in order to severely overpay for homes. Now Bush/Paulson demand that the taxpayers buy those crappy mortgages at the inflated prices to keep the banks from having to take the loss that was built into those mortgages when they were issued. Making the taxpayers buy those crappy mortgages does not address the core problem! It just removes those mortgage contracts from the banks that created them and forces taxpayers to buy them. That allows the banks to avoid taking the loss that was built into the overpriced mortgages when the banks first issued them.

The banks do not want to take the loss when home prices drop to realistic levels. That's why the bankers are calling the proposal that Bankruptcy Judges be allowed to rewrite mortgages to realistic interest rates, realistic payments and total values that reflect what the market will pay for the property. This is a power that the judges already have for second homes and yachts, but the banks consider that provision a deal-breaker for any Congressional bail out legislation.

The core economic problem causing the credit crisis and the bank failures is that the housing bubble (created by Alan Greenspan's Federal Reserve) caused massive overpricing in homes and real estate loans. That real estate was financed by loans that banks made to individuals and businesses who were not going to be able to pay them if the housing bubble burst. When Greenspan raised interest rates after Bush was reelected in 2004, he burst the housing bubble he had created by lowering interest rates and encouraging bad loan underwriting before the 2004 Presidential election.

A banker who lends money to someone who can't pay it back deserves to fail. Instead those bankers are being allowed to foreclose on the overpriced property, regain ownership and then resell it. But the bankers can't finance that operation unless the other bankers lend them more money, and the other bankers have decided that they don't trust the ones who want to borrow money enough to lend anything to them. Apparently these bankers have suddenly gotten "banking religion." They won't lend money to other bankers who don't look like they can pay the loans back. If the mortgage bankers had been competent and acted the same way, there would not have been a housing bubble! No housing bubble, no credit crisis. There is the cause of this whole mess.

So now the Bush administration wants to tax all of us to bail out the crooked and stupid bankers because if the government won't kick in the money, the bankers themselves don't trust the other bankers enough to lend them money.

Now we get a tag-team match of Henry Paulson going to Congress to tell them "This is a limited time offer! If you don't buy it NOW I can't guarantee your safety tomorrow!" while George Bush went on TV and told the American public "Get Congress to pass this bill NOW or the disaster cannot be prevented!" That's a tag-team match between a salesman, Paulson, urging everyone " Buy now!" and a habitual liar and fool, Bush, saying "Trust me!"

There is going to be a recession. There already is one, but I suspect that the economic statistics published by the Bush administration have been "adjusted" or "fudged" to look better than they really are. No matter what legislation passes, the Recession is going to be a bad one. But the warnings of an economic meltdown are excessive.

Congress needs to take its time and get the bail out legislation right. Most importantly, the bankers who caused this credit crisis must not be rewarded for their stupidity and greed. Especially they must not be rewarded out of taxpayer funds. Any time a sales person/scammer says "You have to buy this NOW or you will lose it!" the best decision is always to walk away.

If there is a decent deal to be made, the salesman will come back to make a reasonable deal. If there is not a reasonable deal to be made, then walking away is the right solution.

Thursday, September 25, 2008

Government siezes WaMu; Sells assets to JP Morgan Chase

The long expected takeover of Washington Mutual Bank occurred today. This is the largest bank failure ever in the U.S. JP Morgan Chase will take over the assets of WaMu. WaMus branches will reopen Friday as branches of JP Morgan Chase bank.
The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which acquired Bear Stearns Cos. last March, also said it would sell $8 billion in common stock to raise its capital position. [Snip]

The government measures bank failures by an institutions's assets; Seattle-based WaMu has roughly $310 billion in assets. The previous record was the failure of Continental Illinois National Bank in 1984, with $40 billion in assets when it closed. IndyMac, seized in July, had $32 billion.

WaMu was searching for a lifeline after piling up billions of dollars in losses due to failed mortgages; it has seen its stock price plummet 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse. [Snip]

In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states. JPMorgan Chase said it plans to close less than 10 percent of the two companies' branches; the bank has not yet decided which to close.

In March, the bank acquired the failing Bear Stearns in a deal brokered by the government. It paid $2.3 billion for the company and its stock, bringing its expenditure on both Bear Stearns and WaMu to a total of $4.2 billion.
According to the FDIC list of failed banks, this is the 20th bank to fail in 2008.

McCain's credit crisis behavior - the man is panicking

It seemed pretty weird when McCain announced that he was "suspending his campaign" (but apparently not suspending the advertisements in swing states), canceling the Presidential debate Friday, and flying back to Washington, D.C. to lead Congress in resolving the credit crisis.

Of course, McCain hasn't done anything in the senate since April and economics "isn't his thing," so there is some doubt regarding what he could do besides wait for the real Congressional leaders to come up wits some kind of legislation and then step out to the media and take credit for it. But it got even more weird. Here is a collection of video that starts out with McCain begging off the Dave Letterman show to fly back to Washington and then going down the street to give an interview to Katie Couric. Dave is quite properly incensed.

Senator Boxer then points out that John McCain was basically curling up in his corner with a blanket wrapped around him because there were too many things to handle.

OK. Cancel the Letterman show. Try to cancel the Friday debate and reschedule it in place of the Vice Presidential debate, which the interview Katie Couric had with Sarah Palin clearly showed Palin will simply not be able to deal with. Here is Dave Letterman when he found out that McCain had lied to him.

McCain convinced Bush to call both him and Obama to Washington to meet with Congressional leaders to try to push through the Paulson Proposal.

Only it didn't work. Instead of working to get legislation through Congress, McCain did whatever he could to scuttle the work that had been done. (Some leadership!)

So what we have is a floundering prima donna Presidential aspirant who has no interest in either economics or legislation to begin with who uses the Wall Street credit crisis as an excuse to bail out of previous commitments on the campaign trail which he knows he cannot deal with well, then he flies into Washington and works to scuttle the Congressional legislation that was painstakingly worked out in his absence because if it passes he can't take credit for it.

What it comes down to is that John McCain is doing his best to make sure no one resolves the Wall Street credit crisis without involving McCain front and center. Since the Democrats aren't going to vote a party line vote for a Wall Street bail out that McCain votes against and let McCain and the Republicans use that vote against Democrats in the November election, McCain can prevent any deal from occurring. He may not be able to get a deal, and it begins to look like he doesn't want one, but he can prevent any Wall Street bail out.

It's not a case of McCain putting "Country first." It's John McCain first, last and always and no one better misunderstand that or he'll make sure no one gets anything done. Some fracking leadership!

Addendum 7:51 pm CDT
The pundits are not impressed by McCain's attempt to "suspend" his campaign.

McCain always follows up a failed (or stale) gimmick with another, one equally outrageous. I wonder what the next one will be. I'm pretty sure we can count on at least one in the last two weeks before the election, but that's a long way off. There will be another in the intervening period.

Will voters focus on the economy or on McCain's personality?

The economy and Wall Street has overshadowed the Presidential campaign between Obama and McCain. John McCain does not like being overshadowed, so he is reacting. Harold Meyerson looks that McCain's reaction in the Washington Post today.
Slipping in the polls? Concerned that Americans may be paying more attention to the declining economy -- and even supporting economic regulation again -- than to your own stellar leadership abilities?

What's a Republican presidential nominee to do?

If you're named John McCain, the answer became apparent yesterday afternoon -- make the solution to the economic crisis all about you. Suspend your campaign. Pull out of tomorrow's debate -- a trivial exercise merely allowing Americans to judge the two candidates side by side. Change the terms of the nation's economic discussion from the course we should take, and the defects of the laissez-faire model that got us here, to the indispensability of John McCain, leader of leaders.

(Besides, if tomorrow's debate goes on as scheduled, it will doubtless focus on the economy as well as foreign affairs, its announced topic. McCain sees foreign policy as one area where he can outshine Obama. Only by rescheduling the debate after the crisis has passed can he be sure he will have his moment in the foreign policy sun.)

Yesterday's Post-ABC News Poll showed Barack Obama opening a nine-point lead over McCain, chiefly because of the economic anxiety flooding the nation and the belief of most Americans that Obama is more in touch with economic realities than McCain is and has a better sense of how to navigate both the current crisis and America's long-term economic challenges. But the McCain plan for victory this November never counted on Americans picking McCain on the basis of the issues.

As his strategists saw it, they had to confine the discussion to a comparison of the character of the two candidates. Alas for McCain, reality intruded over the past week, distracting the public from McCain's stellar attributes as a decisive leader with news of an impending economic collapse. So the task for his managers has been to diminish this new story to just one chapter in the ongoing saga of John McCain, the man who rides to the rescue.

Can McCain pull this off -- persuading the public to forget how he and his fellow Reagan Republicans changed the nation's economic rules in ways that allowed Wall Street to run amok, and refocusing its attention on his decisiveness at this moment of crisis? I doubt it. [Snip]

He cannot win on the strength of his positions. He can only win on the strength of his character. Problem is, McCain's character, as we have seen in his selection of Sarah Palin as his running mate, is heavy on decisiveness and weak on judgment. In this, despite his campaign's protestations, a McCain presidency would be very much an extension of George W. Bush's. The president helped McCain out last night by inviting both candidates to Washington today to put their imprimatur on a deal that seemed near completion. At the risk of making McCain's gesture look less heroic, he also made it look less self-absorbed.

But self is McCain's selling point. He is either the man on horseback riding to the rescue, or he is nothing -- or, more precisely, the loser come November. Obama, Lord knows, has his flaws, but he does not seem to believe that the nation's crises are primarily about him.
So the big question for the next six weeks is whether the voters will be concerned more with the economy than with McCain's personality.

That's a Narcissist's dream, isn't it?

McCain prepares ground for legislative double-cross

The honorable John McCain has just refused to restate the very principles he urged Congress to accept as late as last Tuesday. Can a political double cross be far behind? Kevin Drum also expects a McCain double cross.

If you don't think McCain is setting up a political double cross then you really believe that Lucy will hold the football for Charlie Brown to kick this time.

From Krugman: Paulson solution is to throw money at the problem without understanding it

Paul Krugman suspects that Paulson and Bernanke had no idea what to do about the credit crisis except to throw money at it. The "explanations" for how the bailout will work have been dreamed up only ex post facto - after they realized that Congress wasn't going to just give them a blank check with no explanation of how it would be used and no oversight as they requested in the Paulson Proposal.

Assuming Krugman is correct, the sequence of decision-making was
1. Admit that there was a serious banking problem the private sector could not deal with which was bleeding over into the real economy.

2. Decide to throw money at the problem. Ask Congress for $700 billion. The amount was a guesstimate of what they thought was going to be needed to convince the banks that the government was going to protect them (about $500 trillion), plus a fudge factor.

3. Get the money from Congress and the taxpayer. Avoid questions by slipping Section 8 (the "No one including the courts can demand oversight or accountability provision") into the law Paulson asked for. Get the law passed without Congressional discussion.

4. Oops. Recognize that Congress is not buying the Paulson Proposal as written.

5. Dream up a rationale for how the bail out will be conducted. The cost ($700 billion) has already been published. Just dream up ways to use it.

6. Tell Congress whatever Congress will accept. Change story as needed.
Or in other words, this is more conservative Republican Bush administration "magic-based" thinking.

This isn't an uncommon form of decision-making. The second largest spending decision most people ever make is to buy a car. Most people go to the car lot, briefly talk to a salesman and look at some cars, quickly fall in love with one of them, buy it, and then, only after the real decision was made, spend several weeks researching and justifying the decision they have already made. That's the typical car-buyer's decision model, one the car salesman encourages.

Paulson is a securities salesman. He succeeds by getting someone to buy the product, not from providing a careful analysis and explanation of what he is selling. It is no surprise to find a salesman encouraging Congress to use the typical car-buyer's decision model.

700 billion dollars won't be enough

Bill Gross of PIMCO says "The banking system needs another $500 billion to survive beyond the $700 billion rescue plan being contemplated by Congress."

At last - someone with a bit of knowledge being honest. As to the additional amount needed - well, it's at least clear that $700 billion will not be enough.

McCain - impulsive gambler rolling the dice for the Presidency

McCain has decided to "suspend" his Presidential campaign and fly back to Washington to take credit for solving the credit crisis. Not bad for a guy who does not understand economics and who hasn't been working in the Senate since April 2007. As part of this gambit, he wants to put off the debate Friday night.

Yesterday's McCain gambit, aided by the Bush speech, demonstrates what it means to have an American leader who is impulsive and makes gut-level decisions rather than rational ones as the man in charge. Steve Benen has several articles this morning that shed light on what McCain has attempted.

McCain has a regular M.O. of waiting until the rest of the politicians have done all the hard work and negotiating to hammer out a solution to a problem. Then, as the final deal is being worked out, McCain parachutes in, joins the crowd that has decided what to do, and then steps out to face the cameras and take credit for the solution.

Why does McCain act that way? Steve Benen points to McCain's gambling style. Benen quotes Slate's John Dickerson discussing McCain's normal decision-making style:
Whether McCain's crazy gambit is seen as desperate or brilliant, it doesn't matter. Either way, it's probably not the last. The beneficial effects of the Palin Hail Mary lasted only a few weeks, and another adrenaline injection was needed. If this one doesn't work, that's OK -- in due time they can try another razzle-dazzle play. And if it does work, that's great -- in due time they can still try another razzle-dazzle play. It all makes the prospect of a McCain White House very exciting. So exciting, he might want to schedule periodic suspensions of his presidency to get anything done.
Much like both George Bush and Sarah Palin, John McCain has little interest in the hard work of negotiating and working out political solutions to real problems. McCain wants the limelight and credit for the solutions, but has little to really offer in achieving them. Instead he is a glory-hog.

Once a solution is worked out, McCain is adept at stepping out in front of the press and taking credit for the solution others have achieved. On the way, he is similarly adept at avoiding situations in which he will look bad - like the debate he has decided to duck tomorrow night. On the debate, he has decided to make a twofer of his avoidance. He wants it rescheduled to replace the Vice-Presidential debate that Sarah Palin's interview with the lightweight Katie Couric last night showed she is totally unable to deal with.

John McCain has rather clearly demonstrated during his Presidential campaign that he has no idea what America's problems are, what solutions might be put into place, or how to achieve them. Instead McCain has demonstrated that he is a glory-seeker who wants the job of President for his own personal satisfaction. Since he does not do hard, slogging work to achieve such glory, he has been running an opportunistic campaign that consists of a series of dramatic stunts. He knows he is a long shot candidate, so he is rolling the dice to try to luck into the job.

McCain has also shown that he is completely unsuited to the job of President. His election as President would, if anything, be worse than the disaster that George bush has been.

Wednesday, September 24, 2008

Economic Disasters and Stupid Evil People

Mark C. Chu-Carroll explains how utterly stupid the Wall Street bankers have been in simple language. It's rather long, but Mark has much of the story wrapped up.

I've written about a lot of it, but I have not explained how insurance got mixed up into the rather fetid mess. This, however, it the kind of thinking that you can expect from investment bankers to whom the only thing that matters is how much the traffic will bear. The problem was that there were no regulators reviewing the banking system and pointing out the fact that securities being sold as safe investments were not and could not possibly be safe.

Mark starts out explaining how investors world wide wanted safe, secure investments that paid a decent return. So the investment bankers took mortgages (which home owners will do almost anything to pay first to keep their homes) and repackaged large numbers of them as big money securities. But there weren't enough mortgages to meet the demand, so the bankers lowered the standards for who could get mortgages so that the number of mortgages to securitize got larger. That worked so well they lowered the standards even more. The bankers needed more mortgages to meet the demand and lowering the standards for who could get a mortgage gave them more product to sell. Alan Greenspan had the authority to regulate the mortgage industry, but as a Libertarian banker he refused to do so.

The adjustments in standards might have caused the investors to question the safety of the mortgages, so the bankers creating the massive securities got other companies to provide sham insurance against mortgage default and then paid security ratings agencies to rate them as high grade secure investments. Of course, since the rating agencies got paid only when they provided a rating, they competed with each other to provide the highest possible ratings. Why not? The rating agencies had no skin in the game if the ratings were too high. Then they broke the securities up into what are called "tranches" - groups of mortgages of similar risk levels - which they sold separately from the overall security. The finance experts convinced the investors buying the tranches that they were getting safety through that magic financial word "diversification."

Then, operating on the theory that they were buying safe, secure, insured, highly rated investments, they began to leverage the purchases. The investors put up a small amount of money themselves and borrowed a lot more to buy these safe, secure investments. As long as the interest they paid was lower than the interest on their loons, they made ungodly amount of money and got equally ungodly bonuses every year.

Then they repackaged the loans they had bought with largely borrowed money and sold those packages to other investors who also borrowed money buy the new securities. Bear Stearns was borrowing $33 for every $1 of their own, and Lehman Brothers were also leveraged at 33 to 1. No regulator would have allowed that degree of leverage.

But the mortgages at the base of all this structure were not as secure as they were alleged to be, the ratings agencies were rating them too high, and the companies who sold the default insurance did not have the needed money to cover the losses if the defaults built up. This one paragraph summarizes the last two years of Wall Street as the wheels came off the entire set of scams.

Most of the people in the game were stupid. A few know what was going on and were simply evil. Most of the Wall Street people were too involved in their own little worlds and accepted what they were told about the security of the mortgages and the securities based on them. Some clearly knew how bad the information was - probably at the rating agencies and at the companies selling insurance. But there was not overall regulator responsible for seeing how all the pieces fit together, and no one who was selling those products could have kept their (extremely well-paid) jobs if they had told the public or their customers the truth.

Stupidity, greed, and a great deal of evil intent pushed the ideology of the free unregulated financial markets which was adopted by the individuals in the Reagan Revolution. That ideology was sold as offering a route to great prosperity, a route not offered by merely working hard and building products and businesses. But it's an ideology that inevitably leads to economic boom and bust, with each boom and each bust larger than the previous ones. That led to the bank and security regulations put into place in the 1930's after the Great Depression showed the failure of an unregulated financial industry.

But a lot of financial sales people with a lot of money found themselves frustrated by those regulations. Libertarians like Senator Phil Gramm worked to remove those regulations and the regulators (leading to among other things the collapse of Enron after a great deal of illegality and corruption.) And they have brought their inevitable financial disaster back to America and around the world. Again.

Among other things, America has specialized in banking while underpaying and underrating engineers and technicians who build and maintain real products.

Think anyone will get the message that conservatism is bad news?

[ H/T to Digby ]

Bush to speak tonight; will preempt the TV show "Criminal Minds"

Bush is to go on TV tonight to try to convince the American public to support the Paulson Proposal.

It seems incredibly ironic that Bush is going to use the time slot normally filled by the TV show "Criminal Minds."

"Real reform now - or nothing!

What happens to the Paulson Proposal in Congress depends on trust. But there isn't any. First, listen to Marcy Kapture.

Paulson has walked in to Congress and dropped the Paulson proposal and demanded that they pass a bill that gives the Secretary of the Treasury $700 billion dollars to spend as he wishes with no oversight. But they don't trust him.

Supposedly Paulson is going to buy the bad mortgages from the banks so that they can recapitalize themselves and start lending again. This won't work unless the government overpays for the mortgages, of course, and if it is done, then the bankers go right back to getting richer than before. The taxpayers lose by paying higher taxes. A major problem is how much the government pays for the toxic loans that the bankers created and which are now preventing the banks from lending them more money.

Here's the problem with buying the loans The economists call it information asymmetry. Again, Congress quite rightly doesn't trust the Wall Street banks that have caused the current credit crisis.

Whether it is true or not that the banks themselves cannot tell right now which mortgages are the bad ones and which are the good ones, I will guarantee that by the time they start selling mortgages to the government they will be able to tell the difference. Data mining? Some other computer technique? The data is sitting there in their computers and the profit is all the incentive they need. The government buyers will not have access to the information, of course.

Once the banks can tell which mortgages are toxic and which profitable, guess which ones they will be selling to the government? Call it a "Gresham’s Law of mortgage sales." Bad mortgages will drive out good. Those will be the only ones the government buys.

The government is going to get screwed out of a lot of taxpayer money and a lot of Republican bankers will make millions, just as happened with the Resolution Trust Corporation.

We taxpayers don't trust Congress any more than we do the Bush administration. We taxpayers are going to be taxed so that the money can be handed to some of the wealthiest individuals in America. As David Kay Johnston stated in his very revealing book, Free Lunch, that's not new. What is new is the scale of the fraud and the way it is being perpetuated in the last months of the extremely crooked Bush administration.

In the meantime, Congress totally distrusts the Bush administration. Every time they tried to trust the administration they have gotten screwed. The Iraq war is only one of many such events. But there there is the way the Bush Secretary of the Treasury presented the skimpy Paulson Proposal. The phrase to remember is "This is a limited time offer. You have to buy it now!" The Paulson Proposal is a scam you have to decide on now or Paulson claims he will not be responsible for the disaster your delay will cause.

Anyone who has ever been scammed can see this one coming. The Bush administration is no better than the Wall Street banker, the Gypsy or the beggar when any of them tell a sad story and asks for money. It's a scam designed to tax our money out of our pockets and put it into the pockets of some of the wealthiest and most immoral men in the U.S. - Wall Street Bankers.

This lack of trust also effect Senator McCain. The story I have heard is that this lack of trust puts John McCain into the position of determining what Congress does. If Congress presents a bailout bill and he votes for it then the Democrats can also vote for it because he will not be able to use their vote against them in the November election. If McCain votes against a bailout bill, then so will the Democrats because of the election. No one trusts what McCain says. They will vote whichever way he does so he cannot use their vote against them in the upcoming election.

One thing that the Marcy Kaptur video that started this article made very clear - the Democrats are very aware of where the power of Congress comes from. It's not from the power of logical debate or from the vote of the sovereign people. It comes from Congress' ability to say no to the Executive when the Executive is in a hurt and asking them for help. That means Right Now, not next year.

Right now the Congress cannot trust the executive, so the Paulson Proposal is dead. No one can trust anyone to make a deal now that they will honer later. So Marcy Kapture has it right - it's either real reform now, or nothing now.

It all comes down to distrust.

Presidential campaign tidbits

This morning Steve Benen points to recent polls that show voters strongly prefer Obama to McCain to change Washington by strong margins (58% to 33%) and that by good margins they consider Obama more honest and trustworthy than McCain (47% to 36%). Since in mid-July the same questions showed the two candidates essentially tied, this is good news for Obama.

Steve also points out that Sarah Palin has learned the Bush technique for refusing to answer questions about scandals. She won't talk about "Troopergate" because a state investigator asked her not to answer questions.
"He has asked to keep things confidential, so we will respect those wishes," campaign spokeswoman Meg Stapleton told reporters.
Yep. Crooks of a feather flock together and learn each others bird calls. The fact that Palin's campaign staff is made up of individuals who previously worked in the Bush White House clearly shows.

Forty-five minutes before Steve Benen posted the article just above, he posted another in which is pointed that Obama has taken the lead in Presidential polls as the convention bounce fades. The big reason is the economic turmoil, but other influences are the recent sharp increase in Sarah Palin's unfavorable ratings, the reemergence of the "enthusiasm gap" "62% of Obama supporters are "very enthusiastic," while 34% of McCain's backers said the same," and a shift in preferences of independents towards Obama (53% for Obama to 39% for McCain.)

I have to wonder if Steve Benen even takes a deep breathe between ending one post and starting another. Forty-five minutes before he posted the article just above this one, he posted another on the Rick Davis scandal in the McCain Presidential campaign.
Hilzoy summarized the latest revelations about McCain campaign manager Rick Davis last night. The news is hard to spin away -- Davis not only lobbied to shield Fannie Mae and Freddie Mac from federal regulations, but we now learn that Davis' lobbying firm was picking up $15,000 a month from Freddie Mac, right up until it was taken over by the feds.

Let's pause to fully appreciate the big picture here.

John McCain argued last week that the crisis on Wall Street "started in the Washington culture of lobbying and influence pedaling." Oops.

John McCain insisted, on national television, just a couple of days ago, that Davis had had no involvement with Freddie Mac for the last several years. He added, "I'll be glad to have his record examined by anybody who wants to look at it." (Davis adopted the same line on a conference call with reporters on Monday, arguing that he's been completely detached from the housing lending giants.)

John McCain told voters last week that Barack Obama having tenuous relationships with former officials at Fannie Mae and Freddie Mac is scandalous, worthy of attack ads, and enough to cast doubts on Obama's judgment.

Given all of this, it's hard to see how McCain keeps Rick Davis on as campaign manager.

So did Rick Davis mislead McCain before they told the nation he was not taking money from Fannie Mae and Freddie Mac recently, or did they not do their homework? In either case, Rick Davis cannot be trusted or he is not competent - or both. He needs to be fired.

Here's another good one, this time from Digby. The conservatives have figured out who is at fault in the current credit crisis. Is it the bankers selling junk bonds and "innovative financial products" that even they don't understand? No, the real problem was caused when Liberals convinced bankers to try to sell homes to "Black People!" Don't believe me? This is from Mark Krikorian at the bible of the right wing, The Corner.
we're in this mess, ultimately, because our political elites thought it was good social policy to encourage banks to give mortgages to uncreditworthy people, resulting in what Sailer months ago called the "Diversity Recession" (if this doesn't work, make that the Diversity Depression).
Racism and White Supremacy is alive and well in the American right wing Republican Party.

Ron Paul abandon's Libertarianism for theocratic anti-semitic racist Constitution Party

Ron Paul has shown who he really is. From Ron Chusid :
"Ron Paul has now endorsed Chuck Baldwin, the candidate of the Constitution Party as opposed to Bob Barr, the Libertarian Party candidate. Paul’s statement is available here. Bob Barr differs significantly from Ron Paul, especially in not expressing the racism in Paul’s earlier writings, his repudiation of the support of racists and other extremists which Paul actively solicited, and in not engaging in the nutty conspiracy theories which Paul and Baldwin believe in. While Paul’s decision was based partially on Barr’s refusal to attend his recent third party press conference, It came as no surprise to me to see Paul endorse the Constitution Party based upon the similarity in their views."
Ron Paul has been a fraud since he entered politics, and remains one. His support of the Constitution Party, the vehicle that the Nazi supporter Pat Buchanan threatened to run for President with in 1996 of Dole Chose a pro-choice running mate, makes perfect sense.

Tuesday, September 23, 2008

There's some hope for Congress - not so much for the Paulson Proposal

Treasury Secretary Paulson, Federal Reserve Chairman Bernanke and Chairman of the SEC Chris Cox testified before the Senate Banking Committee today to try to get the Paulson Proposal passed. No joy.
WASHINGTON — Treasury Secretary Henry M. Paulson Jr. received an angry and skeptical reception on Tuesday when he appeared before the Senate Banking Committee to ask Congress to promptly give him wide authority to rescue the nation’s financial system.

Mr. Paulson urged lawmakers “to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don’t have broad support.”

The Federal Reserve chairman, Ben S. Bernanke, who appeared with Mr. Paulson, said the financial system “continues to be very unpredictable, and very worrisome,” and that inaction could lead to a recession.

But after hours of back-and-forth, the committee’s leaders said explicitly what had seemed clear all day: that they rejected the administration’s plan. “What they have sent us is not acceptable,” the committee chairman, Senator Christopher J. Dodd, Democrat of Connecticut, told The Associated Press.

The panel’s ranking Republican agreed. “We have to look at some alternatives,” Senator Richard C. Shelby of Alabama told The A.P.

One after another throughout the session, senators from both parties said that, while they were prepared to move fast, they were far from ready to give the administration everything it wanted in its proposed $700 billion plan to buy up and hopefully resell troubled mortgage-backed securities.

On the House side of the Capitol, the mood was apparently similar after Vice President Dick Cheney met with Republican members. “Hardly anyone in that room has decided yet how they’re going to vote on this,” Representative Phil Gingrey, Republican of Georgia, told Bloomberg News.
The weekend was not kind to the Paulson Proposal,nor should it have been. Besides, who trusts either Wall Street bankers or the Bush administration these days? Even Bush's hoped for replacement, John McCain, has had to run against the incompetence and corruption of the Bush administration.

The New York Times is also running this article: News Analysis: Experts See a Need for Punitive Action in Bailout.
The common denominator to many reactions is a visceral discomfort with giving Treasury Secretary Henry Paulson Jr. — himself a product of Wall Street — carte blanche to relieve major financial institutions of bad loans choking their balance sheets, all on the taxpayer’s bill.

There are substantive reasons for this discomfort, not least concerns that Mr. Paulson will pay too much, thus subsidizing giant financial institutions. Many economists argue that taxpayers ought to get more than avoidance of the apocalypse for their dollars: they ought to get an ownership stake in the companies on the receiving end.

But an underlying source of doubt about the bailout stems from who is asking for it. The rescue is being sold as a must-have emergency measure by an administration with a controversial record when it comes to asking Congress for special authority in time of duress.

“This administration is asking for a $700 billion blank check to be put in the hands of Henry Paulson, a guy who totally missed this, and has been wrong about almost everything,” said Dean Baker, co-director of the liberal Center for Economic and Policy Research in Washington. “It’s almost amazing they can do this with a straight face. There is clearly skepticism and anger at the idea that we’d give this money to these guys, no questions asked.”
Then there is the problem as seen from the point of view of retirees.

Also from the New York Times: Retirees Filling the Front Line in Market Fears .
“There’s a terrified older population out there,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “If you’re 45 and the market goes down, it bothers you, but it comes back. But if you’re retired or about to retire, you might have to sell your assets before they have a chance to recover. And people don’t have the luxury of being in bonds because they don’t yield enough for how long we live.”

Today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the last week of turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute, an industry-sponsored group in Washington.

“This really highlights the new world of retirement,” said Richard Johnson, a principal research associate at the Urban Institute in Washington. “It’s a much riskier world for retirees, because people don’t have defined-benefit plans. They have pots of money and they have to worry about making it last.”
Don't forget. Retirees vote at very high rates. Congress has clearly not forgotten this.

Also don't forget - Congress wants to go home at the end of this week to campaign for reelection. Something is going to be done, and they will have to answer to the voters about it immediately.

Don't just throw money to the bankers. Take control of the failed banks

The biggest problem with Paulson's proposal is that the solution offered is to simply buy the bad loans from the banks, leaving them in position to again start functioning is banks and make the bankers rich. Essentially the bankers gambled with their own money, lost it, and are now going to tax the American taxpayers for a $trillion so they can go back into the game.

Paulson thinks the problem can be solved by just having the government buy the bad loans from the banks with taxpayer money. Of course, the banks know which of their loans are bad and which might recover, so all they will sell to the government is the garbage. In fact, Paulson's proposal doesn't work any other way. If the banks can't convince future suppliers of capital that they retained only the good loans, they can't get the capital suppliers to supply more capital.

And what do the taxpayers get? Screwed, that's what. The taxpayers will transfer good money for bad loans, the majority of which will never be worth what the government will pay. On top of that, Paulson's proposal is carefully written so that no one even has the right to question what the secretary of the treasury does with all that money.

Sweden was in a similar situation in 1992, but they solved the problem a lot better.
Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”
The only result Paulson's proposal should get is loud cries of No Blank Check! This legislative game from the Bush administration is not new. They create a crisis, then present a set of legislative plans that turn control of the government over to the (incompetent) Bush administration and say "Take it or the results of the crisis are yours!"

Not this time. Lucy is going to yank a way the football again. This time it's No Blank Check!

The bailout needs to be carefully thought out, with consideration of what the new banking system is going to look like. My analysis of Nouriel Roubini's discussion suggests that the new banking system will be all regulated banks with the government operating as the lender of last resort.

That's going to be expensive. The bankers need to pay the costs, and only government equity in the banks will allow that to happen.

Along with the government taking ownership of the failed banks (voluntarily on their part, of course. They can choose bankruptcy if they want), Chris Dodd's proposals are beginning to look very good.
Summary: Dodd Legislative Changes to Treasury Proposal
September 22, 2008

The breadth of the Treasury proposal is extraordinary: the Department is asking for $700 billion to purchase any asset without any transparency as to the process; without any oversight by any court or administrative agency; and without any commitment to helping homeowners with troubled mortgages. Senator Dodd has offered a number of proposals that will address these concerns, as follows:

Transparency and Accountability

1. Establish an Oversight Board: We intend to establish an oversight board to make sure that the Treasury Secretary is not acting completely alone.

2. Require Program Transparency: We would require the Treasury to lay out its program, policies and procedures to ensure that the new authority is not used on a completely ad hoc basis. The Congress, the markets, and the American people deserve to understand how the Treasury is using these funds.

3. Significantly Improve Reporting Requirements: We add a strengthened reporting provision to require monthly rather than semi-annual reports to Congress regarding the exercise of authority under the Act. The provision requires financial statements describing all agreements and transactions entered into. Again, transparency is good for the markets and the economy.

4. GAO Audit: In order to ensure proper use of funds, and prevent waste, fraud, and abuse, we add a new provision to require the Office to annually issue financial statements prepared in accordance with generally accepted accounting principles and to require the Government Accountability Office to annually audit the Office and to assess internal financial controls.

5. Warrants: In the case of AIG and the GSEs, the government took warrants in the companies in exchange for our assistance. We include a provision to ensure the federal government gets warrants from companies that sell their bad assets to us.

6. Minimize Conflicts of Interest: Treasury intends to hire large asset management firms to organize the purchases of the “toxic” assets as well as their sale. However, many of these firms, such as PIMCO and Blackrock, have large positions in the same assets. Those positions could be affected by the way they manage the federal government’s portfolio. The Treasury proposal largely ignores this issue. We would add a provision to require the Secretary to issue rules on conflicts of interest that may arise in connection with the administration of the authorities provided in the Act. The conflicts include, but are not limited to hiring contractors or advisors, management of assets, bidding or purchasing of assets, and employees leaving the Office to work for an institution that has benefitted from the program.

7. Integrity of Deposit Insurance: This week the Treasury Department announced that it was offering temporary, unlimited deposit insurance for funds in participating money markets. This has caused considerable concern among banks (especially smaller banks) that it will precipitate a run on the banks by large depositors, who can now access unlimited deposit insurance in money markets. We add a provision to create parity between banks and money markets in terms of insured deposits during the period in which Treasury offers the insurance.

8. Executive Compensation: We add a provision to require the Secretary to have executive compensation standards for entities that seek to sell assets through the program. Such standards shall include limits on incentives and severance and a requirement for a claw-back provision.

Assistance for Homeowners

1. Court-Supervised Loan Modifications: After a year of efforts to get servicers and lenders to modify loans, the industry’s voluntary HOPE Now program has fallen far short of what is needed. This is because of the extreme complexity surrounding the securitization of mortgages. The only way to really help homeowners keep their homes is to allow borrowers to get the mortgages on their first homes reduced to the market value of those homes through bankruptcy. Second homes already have this benefit. We expect that very few homeowners will actually have to go into bankruptcy; however, this provision will finally give homeowners and servicers some leverage so that real modifications can move forward.

2. FDIC-Management of Mortgage Assets: The FDIC has shown a commitment to modifying mortgages both to ensure long-term affordability and to protect the taxpayer. FDIC staff estimate that performing loans are worth about 87% of par, while non-performing loans are worth only about 36% of par. Modifying loans to ensure affordability increases the value of the loans. For that reason, we would require the Treasury to shift the whole mortgages and residential MBS it purchases to the FDIC to manage, and add the requirement that the FDIC modify those loans where possible. We also require other federal agencies that hold or control mortgages or residential MBS to modify whenever possible. In addition to FDIC, this includes FHFA, which controls Fannie and Freddie’s portfolios, and the Federal Reserve Bank of NY, which owns a portfolio of mortgages acquired from Bear Stearns.

3. Affordable Housing Funds: The Housing and Economic Recovery Act of 2008 (HERA) created two important housing funds – the Affordable Housing Fund and the Capital Magnet Fund. These entities were to be financed by the GSEs. Given the uncertainty of that source, we include a provision that requires that 20% of the profit of any assets purchased and sold by the Treasury through this program go to these two funds.

4. Expansion of HOPE for Homeowners: The HOPE for Homeowners program passed as part of HERA should help about 400,000 families keep their homes. However, it includes some restrictions that narrow the eligibility for the program. We propose to loosen the criteria modestly, so that more distressed homeowners can participate
It is clearly established now that the current banking problems are a result of both greedy bankers and lack of adequate oversight and regulation. Paulson and the Republicans are the politicians who inflicted the problems on America. They cannot be the ones to try to solve them. They simply don't accept that their greed and deregulation attitudes are what have caused the problems.