September 29, 2008
This is the question on everyone’s mind as they ponder the new “bailout bill”, officially known as the Emergency Economic Stabilization Act of 2008. It is available for everyone to read on the Internet (all 110 pages of it), but most people are looking for answers to the most important questions: Will it pass and will it work?
Just after midnight on Monday morning, David Rogers, of Politico.com, reported that the bill (which goes to the House floor on Monday and the Senate floor on Wednesday) was still facing resistance from both the right and the left, despite the support voiced by both Presidential candidates. Republican Congressman Chris Shays of Connecticut was quoted in the article as saying that: “For this to pass, a lot of people are going to have to change their minds”. The following passage provided more light on the view of this bill from those House Republicans providing resistance to the measure:
Yet a closed-door party meeting Sunday night illustrated all the problems anew. The session ran for hours, and while Minority Leader John Boehner (R-Ohio) said he would vote for the bill, he could not predict the number of votes he would have for it, and he famously referred to the measure as a “crap sandwich” before his rank and file.
Jackie Kucinich reported for TheHill.com that earlier in the day, Congressman Mike Pence of Indiana had sent out a letter to his fellow Republicans in opposition to this bill:
The decision to give the federal government the ability to nationalize almost every bad mortgage in America interrupts this basic truth of our free market economy … Republicans improved this bill but it remains the largest corporate bailout in American history, forever changes the relationship between government and the financial sector, and passes the cost along to the American people. I cannot support it.
The opposition to the bill from the Democratic side was discussed in another Politico.com article: this one by Ryan Grimm. Grimm’s article discussed an “intense” Democratic Caucus meeting. He quoted Minnesota Congressman James Oberstar as describing resistance to the bill coming from across the complete spectrum of Democratic opinion, from liberal to conservative. California Congressman Brad Sherman had met with Republican Darrell Issa before the meeting. Sherman’s contribution to the Caucus discussion was described this way by Ryan Grimm:
Sherman spoke out against the bill during the caucus meeting, arguing that billions of dollars would flow to foreign investors, that oversight was lax and that limits on executive compensation were too weak. Rep. Joe Baca (D-Calif.) said he was leaning toward a no vote, too.
The House vote on the bill is scheduled to take place after a four-hour debate, beginning at 8 a.m. on Monday.
Whether or not this bill will ultimately “work” is another question. Paul Krugman, Economics Professor at Princeton University, wrote in the Sunday New York Times:
The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing. But it’s not what you’d actually call a good plan, and it won’t end the crisis. The odds are that the next president will have to deal with some major financial emergencies.
Steve Lohr’s report from the Sunday New York Times, discussed the outlook for this plan, as voiced by Robert E. Hall, an economist and senior fellow at the Hoover Institution, a conservative research group at Stanford. Lohr observed:
There was no assurance that the bailout plan would work as intended to ease financial turmoil and economic uncertainty.
Lohr’s article then focused on the opinion of Nouriel Roubini, an economist at the Stern School of Business at New York University:
The $350 billion to $400 billion in bad credit reported by the banks so far could eventually exceed $1.5 trillion, he estimated, as banks are forced to write off more bad loans, not only on more housing-related debt, but also for corporate lending, consumer loans, credit cards and student loans.
The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government’s role to move it along instead of coddling the banks if the financial system is going to return to health.
A more unpleasant perspective appeared in an editorial published in the September 25 edition of The Economist:
If the economics of Mr Paulson’s plan are broadly correct, the politics are fiendish. You are lavishing money on the people who got you into this mess. Sensible intervention cannot even buy long-term relief: the plan cannot stop house prices falling and the bloated financial sector shrinking. Although the economic risk is that the plan fails, the political risk is that the plan succeeds. Voters will scarcely notice a depression that never happened. But even as they lose their houses and their jobs, they will see Wall Street once again making millions.
Whatever your definition of “success” might be for this plan, the experts agree that things aren’t going to return to “normal” for a long time, if ever.
Summers Solstice
November 27, 2008
We are now approaching the winter solstice (December 21 – the time at which the sun is at its most southern distance from the equator during the year – a/k/a: “the shortest day of the year” for those of us in the northern hemisphere). President-elect Obama’s appointment of Larry Summers as Director of the National Economic Council reminds me of another definition of the word “solstice”: a turning point. For all his faults (most notably, his infamous remarks as President of Harvard University, about the involvement of women in the study of science) he is no longer considered so much of a “supply sider” as a centrist in the world of economics. Summers has apparently passed a turning point in his economic philosophy.
For those unfamiliar with Larry Summers, David Leonhardt’s article, “The Return of Larry Summers” in the November 25 New York Times is worth reading. I’ve been hearing reverberations of Leonhardt’s commentary throughout the mainstream media lately. Here is an important observation from Mr. Leonhardt’s piece:
The “thought leader” remark came up in the following context when Barack Obama announced his appointment of Summers to the National Economic Council post on November 24.
Looking back to June 10, 2007, we find another article in the New York Times written by David Leonhardt, entitled: “Larry Summers’s Evolution”. As we revisit this commentary in light of our current economic crisis, the pronouncements made by Summers seem almost prophetic:
That essay inspired The Economist to post a piece on its Free Exchange blog on the following day, entitled “Has Larry Summers Gone Soft?”
Nevertheless, conservative writers such as Kevin Hassett of Forbes still think of Summers as an opponent to increased capital gains taxation and hence, an advocate of “supply side” economics. Conservative writer, David Harsanyi of the Denver Post exhibited similar enthusiasm about the appointment of Summers. However, in the November 24 National Review, Larry Kudlow saw Obama’s appointment of Summers as a move to the center:
At this point, many pundits are attempting to “read the tea leaves” for hints as to whether President Obama will act to reverse the Bush tax cuts or let them expire in 2011. The consensus suggests that he may simply let them expire. This has drawn some anxious criticism from the left. On the November 25 broadcast of the program, Democracy Now, author Naomi Klein made the following remark about Obama’s appointment of Summers: “I think this is really troubling.” However, on that same program, economics professor Robert Kuttner (the chief economics adviser to Rep. Dennis Kucinich) explained that he was “less pessimistic” than Ms. Klein about the Summers appointment:
The influence of Larry Summers on the Obama Administration’s economic policy will be a continuing saga for the next few years. At this point, the “change you can believe in” seems to absorb more than a little input from the center.