What Message To Obama and The Democrats?
This post is largely an attempted response in the form of a summation to the long comment thread Lambert"s "Roubini" post of yesterday continues to produce. I have used so many tags because this crisis is the sum total of all the Bush/Republican/Rightwing shit we've lived through for the past eight years, and the similar shit stretching back to Nixon and Reagan.
Across the liberal blogisphere a consensus has been building that what Paulson is asking for is unacceptable. How to frame why it is unacceptable has been the on-going question, and how to best bring some kind of pressure on the congressional Democrats, but also on Obama to show leadership, presidential leadership, right now, when it'sneeded, to keep both the tax payers and liberal progressive ideas from becoming implicated in yet another disaster not of their making.
"Peter" seemed to feel, in that comment thread, that Lambert and others were failing to understand that there is a real problem in the economy.
No one doubts that. In fact, all kinds of progressives have been insisting that no one was paying attention to the fundamental instability which the housing bubble was creating, appeals to sanity which were ignored. In fact, even after the initial bailouts, this administration and Paulson had done nothing to stave off the freezing up of liquidity which happened last week. I believe it took them by surprise. But I also agree with Lambert that their instinctive reaction is precisely the one that Naomi Klein has been pointing out - to use the crisis to continue to advance the same policies that created the crisis.
What Paulson is asking for is a two year blank check that the taxpayers of this nation are being asked to guarantee, with no strings attached, with no transparency, no oversight, i.e., an unregulated unconstitutional transfer of the power of the purse from the legislative to the executive branch. PLEASE NOTE: they are not asking for it only until the end of the Bush term, they are asking for an authorization that will run on into the first two years of the next presidency and the next congress.
All this in the name of bringing confidence to the marketplace. Well, what about the confidence of ordinary citizens, both in their government, and in the financial sector of the economy? There are going to be further failures. What happens if there start to be real runs on regular banks? In January and February? What if we find ourselves plunged into a deep recession, with a mountain of debt in the form of these bailouts, piled on top of the mountain of debt incurred already because of Bush policies, i.e., the Iraq war, which isn't even on the budget, and the debt incurred by ordinary Americans as they attempt to protect their middle class and working class standards of living in the face of falling wages, rising prices, and the failure of our health care system?
What do we want Democrats to do? Lambert is focused on the HOLC. I agreed with his post yesterday that something like an HOLC is a vital part of any long-term answer to the economic challenges we face. But thinking it over, I don't think there is time, in the crisis atmosphere that is being generated by Paulson, with the help of our noddle-headed SCLM, to do anything but to enunciate the kind of long-range principles that are contained in both Hillary's and Barnie Sander's statements. HOLC is too complicated to explain, and doesn't speak directly to the liquidity problem to make it some kind of lodestone for fighting the Paulson/Bush bill, which essentially gets around the unconstitutionality issue by pressuring congress to give up their constitutional mandate by handing it over, no questions asked, to the executive. And for two years, yet. And don't think that if Obama wins he can just ask a Democratic congress to overturn what is agreed to this month. There are still going to be congressional Republicans, and we know they won't hesitate to use a filibuster, if necessary.
From the reading I've been doing, seems to me that Paulson is trying to use the liquidity problem to also address the solvency problem, or perhaps we should call it the capitalization problem, at terms that are entirely favorable to the people who caused this crisis, and entirely unfavorable to the taxpayers.
Krugman has a new post up this morning, which helps those of us who still wonder why we can't print as much money as we want to (count me among this cohort) to sort through what's happening by clarifying it's four stages. Go over and read it and then come back.
The key passage for me is this one:
Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.
Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.
Of course it's the real plan; that's why there can't be any oversight, that's why they are insisting on no questions asked. Look, no one knows what this bundles of securitized highly leveraged mortgages are worth. How will the price be established? I'm guessing by letting the holders state what they think it's worth.
And yes there is a plan that would make more sense:
So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.
It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?
This is also the suggestion coming from the not-really-that-liberal Brookings Institute. Yglesias's pithy formulation of this talking point strikes me as especially useful:
Under the Paulson Plan, in exchange for public money the taxpayers will get distressed assets. In a better plan, in exchange for public money the taxpayers will get equity in the bailed out firms:
Note also that Paulson's plan assumes that there is some economic recovery on the horizon, and that housing prices will stabilize, and possibly even regain some value. Huh? Here, from a NY Times analysis is the rationalization of "the plan" if it works as advertised:
If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.
Sorry, if houses are overpriced because of the bubble, then they are overpriced. This idea that people are not buying houses that cost $300, $400, $500, $600,000 because banks can't lend them the money is just preposterous! Even if a bank can lend the money, they can't lend the money because TOO FEW PEOPLE MAKE ENOUGH TO QUALIFY. The other day I showed that you have to have an income of $12,000 a month to buy a low-end house in the San Francisco Bay Area.
The idea that you can stop housing prices from falling back to where they should be is like the idea that you could have stopped the stock of golfballs.com from falling after the dot com bubble.
One final point before I get to suggestions about what and how to communicate to Obama and the Democrats: Paulson's plan depends on the notion that the worst has struck, and that his plan will mend what is wrong. But what if this isn't the bottom? Or what if the worst has indeed struck, but what the bottom of that "worst" is isn't yet clear?
Here's how the dilemma is summarized in a remarkable "Open Letter To Congress" that was first published as a comment in a comment thread at The Agonist, by one "Numerian," who appears to speak from deep experience working in finance and with derivates and gives permission to anyone to republish it or send it to congress, a letter that has also been reproduced by Cernig at Newshoggers, and which I think should be published at every blog in the liberal blogisphere:
It is also very likely that acutely dangerous systemic risk already exists, not merely from direct lines of credit among the banks, but especially from credit default swaps, which if activated by more than one large bank default would probably bring down many others. Remember, though, that this systemic risk is highly concentrated in the top 25 or so banks in the world, and does not jeopardize the 6,000 other community banks in the U.S.
Third, it is also highly probable that as this recession worsens, and as housing values continue to sink, forcing more foreclosures, the large banks will be even closer to collapse.
Having worked for many years in the banking industry and been closely involved with risk management and derivatives, I can tell you that it looks like catastrophe is already here.
What Sec. Paulson wants you to believe is that catastrophe is approaching, but it can be averted if only Congress acts urgently to give him the extraordinary authority he is requesting. The implication is if you don't give him $700 billion in borrowing authority within a week, markets will collapse and it will be all your fault.
We've seen this drill before, with the Patriot Act and with the Iraq War authorization. The scare tactics, the urgency, the implied threat of blame for any failure - this is what the Bush administration does. Some of you in the Senate were able to stand up to this pressure, and that type of strength is desperately needed now.
If insolvency is here now for the big banks, the last thing you want to do is throw $700 billion of money that is not yours at bailing out the banks who created this disaster. You'll need every bit of that money to protect the taxpayers and their deposits in these banks when these financial companies are thrown into the bankruptcy courts. You'll need that money to make sure consumer deposits are protected with insurance, and you'll need it to keep the healthy parts of these banks that deal with consumers and businesses functioning until they come out of bankruptcy.
And forget about comparing Paulson's plan to the RTC. These L3 assets aren't homes, condos, or commercial real estate that can be easily sold at the right price. They are bits of paper giving the bond holder the right to some small portion of thousands of mortgages, a right that is shared with all the other investors, who are required to agree on what is done with foreclosed properties in the pool. This is one of the reasons no one wants to buy this stuff, and no one will for many years until it is crystal clear what the final losses will be.
Once you give Paulson the authority he seeks, he will buy these securities at 65 cents/dollar, then quietly auction them off at a nickel each. It will be "unfortunate but necessary" to revitalize the banking industry, even though you will discover the banks won't be lending after this is all over to any but the finest credits. You will have rewarded the banks for their calamitous decisions, stuffed the taxpayers with huge losses, squandered your remaining ability to shore up the FDIC, not prevented the big banks from collapsing anyway, done nothing to help the community banks that will constitute the new banking system in this country when these problems are solved, and in the end made the situation much worse.
I know that is a long quote in an even longer post, but, as I say, if any of you have the time I'd love it if someone would post the entirety in a separate post, or in the sidebar. It formulates the dangers attached to giving into Bush/Paulson as nothing else I've read.
Numerian also has a suggestion:
If you want to do something practical, require the SEC to go into these banks, open up their L3 holdings to public scrutiny, auction off a sampling of these securities, and apply those prices to the L3 portfolios of all the banks. In this way we will know which banks are insolvent. You won't need to go through this charade of having the Treasury take ownership of these assets, because the core of the problem is not that these assets are clogging up bank balance sheets, as Paulson says (which is tantamount to saying, by the way, that no one will buy them). The core of the problem is that there is no transparency about these portfolios and their real worth. Congress doesn't need $700 billion of our money to create that transparency, and if it shows as I suspect that many of these banks are insolvent, that's why we have bankruptcy courts. You can certainly protect the banks from bank runs while they are in bankruptcy.
So we are back where we started: how to pressure Democrats.
On Monday, and all day long every congressional office needs to hear from ordinary citizens that we are highly skeptical of Paulson's plan. But we need bullet points, too, repeatable talking points.
What I've been hearing from the best of the Democrats strikes me a problematic, because they are talking about longer-range solutions, and getting to the structural problem, but the fact is, the only real emergency that has to be addressed is the liquidity problem. In fact, I've heard that Pelosi is trying to include a second stimulus package as part of the deal - i.e., extension of unemployment benefits, help of mortgage holders, etc. I think it could be dangerous to approach this as a regular package.
Might not it be better to use the sense of an emergency being created to focus on reshaping the Paulson plan until it isn't that anymore.
There is a place for government intervention in the liquidity problem, but the answer is not a blank check given to those who created this crisis, with no strings attached. The administration and the Republicans are calling that a "clean" bill. Yeah, just like everything else, the names the Bush administration gives to all its initiatives have to be turned inside out to understand them. The clean Paulson plan is about as dirty a political ploy as anything I've ever seen.
The Democrats can offer a genuinely clean bill - one that deals with the immediate problem, just not the plan that gives a blank check to the Bush administration. Does anyone think that position would be unpopular with the great majority of Americans? I don't.
I think Democrats would do better to concentrate on the immediate demand and tie the kinds of strings to it that will protect the Federal Treasury, and protect the political viability of the Democratic Party. Bringiton rightly points to the pressures of an election year. But in this case, good policy and good politics overlap.
And yes, the AUMF is the perfect analogy. As much as Democrats tried to add nuance in their speeches to indicate their "yes" votes were not meant to be a vote for war, only a vote to pressure Saddam, they need to remember how fruitless it has been to try and point that out after the fact. This mess happened on Bush's watch; he and the Republicans are responsible for it. There are alternatives to writing a blank check to Bush et al, all failures of which will be blamed on Democrats.
As to the pressure Bush/Paulson and the press is bringing to bear on Democrats to be bipartisan, does anyone in the congress actually think that "any limit on executive compensation is a poison pill" is a good talking point for Republicans? And if it is a poison pill, then it isn't the kind of emergency Paulson keeps claiming it is.
We need to slow down the process by which this is happening. I don't think we can slow it down enough to get at the fundamental problems, i.e., restructuring the financial sector, creating an HOLC, but we can force Democrats to ask the right questions and make the right demands, IF THEY HEAR FROM US - THE AMERICAN PEOPLE, THE AMERICAN VOTERS.
As I've said, phones in congressional offices need to ring off the hook. Piles of emails have to sent to those same offices.
My own talking points would be something like:
1. No blank checks without oversight, close intense oversight.
2. Absolute limits on executive compensation.
3. Absolute transparency, in particular in regards what is being purchased and at what price and who and how the price has been determined.
4. A quick hearing inviting Economists to testify about other options, like buying shares of banking entities.
5. Any authorization must be time-limited to the next four months, by which time there will no a new administration and a new congress who will have to reauthorize based on what has happened during those four months. If the markets scream that they want a longer window to feel more confident, make it six months, but that's all.
As to Obama, Lambert mentioned that he'd created a page at Obama's website. He didn't offer a link, but I'd like to see Correntian go over and urge Obama to lead. I'd love to see Ian Welsh's "Obama's FDR Moment" at the top of the page, kept there as a kind of friendly challenge.
The rest of the page would be comments from bloggers and readers urging Obama to lead the Democratic opposition to the kind of plan we now see that Paulson had in mind - yet another example of their way or the highway.
The Dean Baker links I left in my comments to CD's post yesterday might also be useful.
God knows there are plenty of links all over posts here at Corrente and across the blogisphere to be left for Obama and staff to look at.
Maybe Numerian's letter should also have a place of pride that stays on the page.
I won't be able to do much more myself because of the looming deadline for other work the completion of which other people are depending on me.
I know this is a damnably long post, but I thought it might be helpful to pull all this information together.
Go to it my friends. I'll check back later.