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 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 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 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.
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