October 2, 2008
It was the opportunity for a “game-changing move” in the 2008 Presidential campaign. Just as John McCain was dropping back in the polls, providing Barack Obama the chance to “close the deal” even more decisively than he did with Hillary Clinton, McCain missed the opportunity to turn the game around. Last week, he arrived in Washington (after the pseudo-suspension of his campaign) on a mission to save us all from the crisis declared by Treasury Secretary Henry Paulson. After McCain arrived, he found a number of both Republican and Democratic members of the House of Representatives opposed to the revised, 110-page, economic “bailout bill” (the Emergency Economic Stabilization Act of 2008). At that point in time, McCain had the opportunity to break with the unpopular Bush Administration and band together with the 133 Republican and 95 Democratic House members (who eventually voted against the bill) to form a “coalition of mavericks” (oxymoron, non-sequitur or both?) resisting this bailout of the big banks and other “fat cats” on Wall Street. He didn’t. He chose instead, to copy whatever Barack Obama was doing. Besides, his move dovetailed well with the pseudo-“bipartisan” duet he had been playing, throughout the entire campaign, with Joe “The Tool” Lieberman. Had McCain stood with those 133 young Republican members of the House and the 95 Democrats (many of whom consider themselves conservative, “Blue Dog” Democrats) he could have re-ignited his flatulent campaign. (Is it really safe to do that? — Let’s ask Johnny Knoxville.)
Howard Fineman provided an interesting retrospective of this phase in the evolution the economic “bailout bill” at the Newsweek website on September 30:
The Paulson Plan is not great. Some two hundred academic economists have ridiculed it, and so have the House Republicans, by a 2-1 margin. Public opinion (and not just the angry phone callers) is turning against the measure—to the extent that anybody understands it.
But the consensus is that Washington has to do something, and that the current version is far better than what the lawmakers started with.
McCain made a show of returning to Washington to try to jam the original measure through. He deserves credit for the instinct. An old Navy motto is: Don’t just stand there, DO something! That is McCain to the core, and so much the better for it.
But when he got to town, he realized something that no one had bothered to tell him, apparently: the grassroots of his own party (the grassroots that has never really trusted him) hated the Paulson Plan. They weren’t about to support it and risk their own necks. McCain worked the phones, but fell back in the ranks.
When the second revision of this bill (at over 400 pages) finally made it to the Senate floor for the vote on Wednesday, October 1, there were 9 Democrats, 15 Republicans and Independent Senator Bernie Sanders of Vermont, voting against it. McCain again missed the opportunity for a truly bipartisan resistance to this measure. Such an act would have demonstrated genuine leadership. He could have rejoined his old buddy, Wisconsin Senator Russ Feingold, as well as Florida Democrat Bill Nelson and rising Democratic star, Maria Cantwell from the State of Washington, all of whom voted against this measure. Such a move would have emboldened resistance to the “bailout bill” in the House of Representatives, where the term of office lasts only two years. (The short term results in greater accountability to American voters, who are believed to have notoriously short memory spans.)
Is this bill really necessary? On the October 1 edition of MSNBC’s Countdown with Keith Olbermann, Paul Krugman, Economics Professor at Princeton University, admitted that:
… it will be relatively ineffective, although rejecting it will cause a big run on the system. Then we will come back and do it right in January or February …
When Keith Olbermann asked Krugman about the likelihood that nothing consequential would happen if this bill did not pass, Krugman responded by saying that such possibilities have “shrunk in the past week”. Krugman went on to claim that “the credit crunch has started to hit Main Street”, using, as an example, the rumor that: “McDonald’s has started to cut credit to its franchisees.” McDonald’s has issued a press release stating that this was not the case. What is really happening is that the banks are acting like spoiled children, holding their breath until the government gives them what they want, using the threat of unavailable credit as a gun to the head of Congress.
Public opposition to this bailout was best summed up by Peggy Noonan, when she appeared on The Daily Show with Jon Stewart on October 1:
But we are in a real economic crisis and the American political establishment said we must do A, B and C to deal with it and the American people … said: “No. We don’t trust you to handle this. We don’t trust you to do the right thing.”
John McCain had the opportunity to stand with those people, as well as the 133 House Republicans and 15 Senate Republicans, to do “the right thing”. He decided to forego that opportunity. Barack Obama said, on the Senate floor Wednesday, that it was not worth risking the American economy and the world economy by challenging this bill. John McCain decided that it was not worth risking his Presidential campaign on such a challenge. That’s too bad for him. The gamble probably would have paid off.
The “Bad Bank” Debate
January 29, 2009
The $700 billion Troubled Assets Relief Program (TARP) doesn’t seem to have accomplished much in the way of relieving banks from the ownership of “troubled assets”. In fact, nobody seems to know exactly what was done with the first $350 billion in TARP funds, and those who do know are not talking. Meanwhile, the nation’s banks have continued to flounder. As David Cho reported in The Washington Post on Wednesday, January 28:
The continuing need for banks to unload their toxic assets has brought attention to the idea of creating a “bad bank” to buy mortgage-backed securities and other toxic assets, thus freeing-up banks to get back into the lending business. Bloomberg News and other sources reported on Wednesday that FDIC chair, Sheila Bair, is pushing for her agency to run such a “bad bank”. Our new Treasury Secretary, Tim Geithner, has also discussed the idea of such a bank (often referred to as an “aggregator bank”) as reported on Wednesday by Reuters:
The idea of creating such a bank has drawn quite a bit of criticism. Back on January 18, Paul Krugman (recipient of the Nobel Prize in Economics) characterized this approach, without first “nationalizing” the banks on a temporary basis, as “Wall Street Voodoo”:
Krugman scrutinized Sheila Bair’s earlier explanation that the aggregator bank would buy the toxic assets at “fair value”, by questioning how we define what “fair value” really means. He concluded that this entire endeavor (as it is currently being discussed) is a bad idea for all concerned:
Krugman is not alone in his skepticism concerning this plan. As Annelena Lobb and Rob Curran reported in Wednesday’s Wall Street Journal, this idea is facing some criticism from those in the financial planning business:
Billionaire financier Geroge Soros told CNBC that he disagrees with the “bad bank” strategy, explaining that the proposal “will help relieve the situation, but it will not be sufficient to turn it around”. He then took advantage of the opportunity to criticize the execution of the first stage of the TARP bailout:
Former Secretary of Labor, Robert Reich, anticipates that a “big chunk” of the remaining TARP funds will be used to create this aggregator bank. Accordingly, he has suggested application of the type of standards that were absent during the first TARP phase:
However, Reich’s precondition: “Until the taxpayer-financed Bad Bank has recouped the costs of these purchases through selling the toxic assets in the open market” is exactly what makes his approach unworkable. The cost of purchasing the toxic assets from banks will never be recouped by selling them in the open market. This point was emphasized by none other than “Doctor Doom” himself (Dr. Nouriel Roubini) during an interview with CNBC at the World Economic Forum in Davos, Switzerland. Dr. Roubini pointed out:
What is Dr. Roubini’s solution? Face up to the reality that the banks are insolvent and “do what Sweden did”: take over the banks, clean them up by selling off the bad assets and sell them back to the private sector.
Nevertheless, you can’t always count on the federal government to do the right thing. In this case, I doubt that they will. As David Cho pointed out at the end of his Washington Post article: