Please Spread the Word: Political Disaster In Motion

xposted at election08.passtheroti.com

What would you say if someone asked you to borrow $2000 dollars or more and give it to Wall Street companies right now, and that if you waited more than a day, the world would end? That is what is happening to taxpayers in the United States- American citizens and otherwise. These are my thoughts in response, which you should note are shifting as events change rapidly and I get more educated on the politics of this. For example, drawing distinctions between "Is there a credit crisis?" and "Why is Congress in political crisis mode now as opposed to a year ago or a year from now" is important. I hadn't thought this through last week, because I wasn't aware that actually, to some extent, the Emperor Looked In The Mirror And Liked What He Saw, in addition to what I had previously written. In other words, despite that the bank collapses were a major warning economically, there is still strong cause for some skepticism about the politics of it all and the notion of "crisis" ;)

1. The bailout is the most important issue right now - in some ways it's more important than the election. There are two parts to the reasoning behind this:

a) The election is close to in the bag for Obama (1,2,3), assuming the credit crisis stays in the news and he doesn't f@#k things up and some other major disaster or war is started. Those are possibilities, but when North Carolina and Montana have gone back to being insecure for McCain, and Virginia is looking pro-Obama, it's close to endgame. Plus, if he's up in the polls around election day and, as expected, his turnout operations destroy McCain's, this makes this less of an issue.

b) What happens with the bailout is going to trap the next president one way or the other - whoever it is - to spending cuts, tax hikes, difficult and domestically unpopular negotiations with foreign countries and potentially warfare. In other words, no matter what you think Obama or McCain WOULD do, the financial bailout, if it happens, will make it impossible for them to do it. Particularly if the U.S. government comes close to defaulting on what will be an $11 trillion(!) debt or more. As a result this choice on what to do about the credit crisis is as important and will also play a strong role in influencing the actual election results (at minimum in terms of whether this stays in the news or not - the longer it does, the better for Obama). So even less Sarah Palin celebrity distractions and even more focus on this real issue, please. Yeah, she's wacky, but so are the Treasury Secretary and Phil Gramm and President Bush and John McCain- and they have a lot more power, apparently.

2.. The proposals that have been floated so far are inadequate for poor and working people and they're trying to push something through as rapidly as possible. The debate on this bailout for Wall Street brings into sharp relief what is increasingly evident - the Democrats are pro-market (ew), the Republicans are pro-small groups of their friends and will pursue policies that screw over everyone else (terrifying). **

A. I've been wondering for a long time what the final master stroke of the Bush Administration would be - I think this might be it, though they still have a couple months. The Bush Administration's proposal would be a joke if people weren't treating it as anything other than that. You have a President with about 45 days left in office who has tripled or quadrupled the size of US debt (that's trillions, friend), started several disastrous and/or unsuccessful wars, and resultingly has a 19% approval rating. In response, he has asked for $700 billion dollars with no oversight (it prohibits the courts from reviewing the government's actions!) for the government to buy dangerously bad assets from extremely wealthy firms.

The credit crisis is real, and systemic, but jokes like this are scary politically and economically laughable. They don't solve the root problem for anyone except financial capital- instead, it transfers it to the government / taxpayers and as such is wholly irresponsible. As Amy Goodman has pointed out, no one knows exactly how much bad debt the government would be taking on. If people knew the depth of the bad debt, then the market wouldn't be so worried in the first place - it's the uncertainty that's a huge part of the problem, because it makes investors and ordinary people react in fear, rather than on the basis of thinking and information.

B. Unfortunately, although the Democratic Dodd proposal is more "reasonable", it doesn't address some things. I haven't read it closely yet, so if you want to do me the favor of doing so, you can see the bill and commentary on it here at the public markup wiki site. When I looked at it, I noticed there wasn't enough emphasis on protecting working people, there's no emphasis on poor or working class people internationally (maybe that's better - the U.S. doesn't do very well when it starts interacting with those people), it has some stuff about regulating CEO compensation (which is largely symbolic and for political points in my opinion), I didn't see any information about strong disclosure requirements about exactly what the government is taking on. Mostly, though I don't think it has nearly enough broad measures like repealing the Bush tax cuts. There are many ways to pay for something like this, and the Dodd option - taking on shares of the companies so that price rises in the mortgage or the companies would yield to taxpayers - seems like half a loaf to me. Not a good starting out point for negotiations, in other words, and that's what we need (though I still fail to see the reason to negotiate with Bush - he's done - let him take the blame for vetoing a bill for once - let's see if he has the chutzpah while saying "9/11 9/11 9/11").

3. Some other proposals, which haven't taken the form of the bill and aren't being Seriously Considered - until you make them do it:

The closest I have seen to one from an American politician is Senator Bernie Sander's, which includes a 10% income tax for people earning over $500,000 and couples over $1,000,000 over the next 5 years, increased regulation of markets, etc. Read it here, and sign a petition on his website for it here. PLEASE! This is important! And yes, no mention of international victims - but it does at least reference briefly that in the U.S. there are a lot of people who are marginal and will become homeless and possibly die if a real solution to the broader problem isn't developed.

However there are other proposals being floated as well and these might start to get consideration or have elements of them work their way in if we force Congress to SLOW DOWN. The New York Times had an excellent summary of the different options floated (h/t to ravi) - I would look at the following:

A number of critics say the bailout plan pays too little attention to homeowners and to “Main Street.” Dean Baker recommended that the bailout should give priority to keeping people in their homes — i.e., reducing the amount of money people owe on their mortgages — instead of maximizing the returns the government can get from mortgage payments. Nouriel Roubini suggested creating a government body in charge of helping Americans find debt relief, modeled on the Home Owners’ Loan Corporation established during the Great Depression. Mark Thoma proposed the creation of a “worker bailout fund” for those afflicted by layoffs nationwide.

Click away.

 

4. So what can you do, now that you have a chance to actually make an effect?

None of this should be surprising given the state of both political parties in the U.S., the fear of Democrats to stand up to authority on behalf of workers (thanks B. Clinton), and the trend over the last 8 years in terms of legislation and approval by Congress. What is a little more surprising and great is the amount of outrage and resistance that this issue has received. This is perhaps because of the gravity of the situation and how close it hits home - as opposed to the Iraq War, the Patriot Act, and other issues that were a bit more abstract, at least in theory. TAKE PART IN IT.

* CALL YOUR CONGRESSPEOPLE. Or if you're not a constituent, call ANY CONGRESSPEOPLE YOU WANT. Here are your Senators and here are your House members. A) Tell them to extend the Congressional session if they have to, because you don't deal with issues like this overnight - we've seen what happens when we do that. That a bill shouldn't be passed in a hurry - urgency is the enemy of a real solution that will address the broad problem in a balanced way and IS NOT HELPFUL and was constructed by the Bush Administration; B) Tell them to create a bill in Congress from scratch instead of paying attention to what a Lame Duck president with a 19% approval rating and crazy ideas is saying - IT'S WITHIN THEIR RIGHTS and IN OUR INTERESTS; C) Tell them the bill needs to support working class people in a REAL way - that people need to be kept in their homes (not investors that bought homes to trade them up, but real people who might become homeless) that people with credit card debt need to be assisted, that unions need stronger support so that there's political pressure for better solutions, that they need to talk to people in the Global South to understand the repercussions of this $hit elsewhere over the past 20 years; and D) tell them that the bill needs to pay for itself - taking on more debt is unfair to those of us who are going to have to live another 30 years and pay for this $hit and that it's easy too - reverse the tax cuts for the wealthy that have been passed over the last 8 years, tax the make the CEOs of the companies that participate in these programmes pay a fine, support the Sanders surtax on income for really rich people, end the war in Iraq in a responsible way, continue to look for other solutions besides government intervention for this problem, and tell them that it's unacceptable that the powerful in the US refuse to take responsibility for creating a disaster that affects poor people in the U.S. and even more so in other parts of the world. E) Tell them you know a lot of other people who feel the same way, and you're not going to [insert threats here - not vote for them, not vote for anyone who doesn't support this stuff - not pay taxes, etc. - just don't get yourself arrested].

Moreover, be angry - usually people tell other people to be polite when they call Presidential offices, but even people heavily invested in electoral politics are telling us to literally yell at our Congresspeople now. And I like it :) Because the anger is warranted, and has been for a long time. If we had collectively mustered this much outrage when the Iraq War was happening, when the Bush tax cuts were happening, when the financial deregulation was happening, when the Patriot Act was happening, when Hurricane Katrina was approaching New Orleans, when the plans for afterwards were being formulated - well we would be better off today. But THIS IS THEIR FAULT.

* Again, SIGN THE SANDERS PETITION.

* And keep up with day to day events and news at Open Left - especially check out the quick hits on the side which have links to important developments and perspectives that haven't necessarily been heard, but all of the diarists are writing good stuff right now.

5. In conclusion, the urgency is false but real - they've made it and now we have to fight back against it. The crisis is real but false - there is a problem in the global financial markets, but it has to be addressed in a broad context as well as a narrow one - and this is the time to do it. Bush has no power and should be called out for it. And Congress needs to step up - particularly the Democratic Congresspeople who aren't yet doing their job to the extent that they need to and haven't for 8 years.

In other words, you need to DO something, NOW, to keep them from doing something terrible now for no reason other than what the Bush Administration wants.

Comments welcome.

---

* If you want more background, read Shock Doctrine by Naomi Klein. I haven't read the book, but here's the wiki entry. Many commenters at Open Left have referenced it and perhaps with good reason. The strategy here - wait for enormous crisis to build up and then try to get through ideological reforms when you decide or create or wait for it to explode- has been used over and over. You can see it in the Patriot Act; you can see it in India's liberalization "reforms" in 1991 which were able to go through at a centre-level because they ran out of foreign currency, more or less, and took an IMF loan. Take a look, for example, at Vanita Shastri "The Politics of Economic LIberalization", 1997, Contemporary South Asia (6:1), pp 27-56 on the amount of time, energy, and power that went into creating the liberalization policies before they were finally implemented.

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b) What happens with the

b) What happens with the bailout is going to trap the next president one way or the other - whoever it is - to spending cuts, tax hikes, difficult and domestically unpopular negotiations with foreign countries and potentially warfare. In other words, no matter what you think Obama or McCain WOULD do, the financial bailout, if it happens, will make it impossible for them to do it. Particularly if the U.S. government comes close to defaulting on what will be an $11 trillion(!) debt or more.

Here's another scenario. These securities are undervalued because there's no market for them (if we are to believe Warren Buffet, and no one has gone poor by believing Buffet), no one entity has the money to pick them up besides the US govt. So we pick them up for 700bill, 65cents on the dollar, and they return to par as soon as housing prices recover. The next president then has a huge profit with which he can shore up social security, a pyramid scheme representing the next great financial crises.

Ironically, this may save American socialism.

And here's another one: I

And here's another one: I start printing money, no one notices, and I pay off my credit card debt with it. It's possible, but not f@#king likely. But I don't know what the future is - and it does depend on what actions people take now. I find this analysis compelling:

Even if the Treasury TARP plan is implemented fairly and efficiently the US will not avoid a severe U-shaped18-month recession and a severe financial and banking crisis: the recession train has already left the station in Q1 and the financial/banking crisis will be severe regardless of what the Treasury and the Fed do from now on. What a proper rescue plan can do is to avoid having the US experience a multi-year L-shaped recession and extreme financial crisis like the one that led to a decade long stagnation in Japan in the 1990s after the bursting of their real estate and equity bubbles.

I have also argued that, in order to resolve this financial crisis it is not enough to take the bad/toxic assets off the balance sheet of the financial institutions (a new RTC); it is also necessary and fundamental to reduce the debt overhang of millions of insolvent households via a significant debt reduction on their mortgages (an HOLC program like the one that was implement during the Great Depression); and also recapitalize undercapitalized banks with public capital in the form of preferred shares (as the RFC did with 4000 banks during the Great Depression). An RTC scheme without an HOLC and RFC component would not resolve two fundamental problems: millions of households are insolvent and unable to service their mortgages; the financial system is vastly undercapitalized and needs capital to avoid an ugly credit crunch and to foster new credit creation that is needed for future growth.

That is why I proposed the creation of a HOME (Home Owners’ Mortgage Enterprise) that would be a combination of an RTC, a HOLC and a RFC. Let me flesh out this proposal and its key elements and compare it to the Treasury TARP proposal that in its current form has many flaws.

More to the point:

Congress needs to STOP now. And talk to people like this. And then write a bill.
AND
it needs to understand that there are multiple components to a systemic crisis of which liquidity is the most surface level (now) and the easiest to resolve politically given the class and ideological background of who's in Congress, but the kind of solution that Roubini suggests seems far more appropriate in its comprehensiveness and attention to different aspects of this problem - particularly the underlying debt that has been driving demand for the productive parts of the global economy.

And here’s another one: I

And here’s another one: I start printing money, no one notices, and I pay off my credit card debt with it. It’s possible, but not f@#king likely.

What I just layed out was not an outlandish possibility. When Buffet says he would buy that portfolio if he had 700bill, I listen.

The demise and bailout of Long Term Capital Management is probably the most parallel scenario, a smaller version of what's happening now, and their derivative assets were also valued close to 0, only to turn out to be quite valuable. Since you like to focus on these assets, as oppossed to the original mortgages and the role of Fannie and Freddie, check out NOVA's "the trillion dollar bet." I guarantee you, it'll actually make bond trading interesting. Fascinating even.

I'm not dismissing the

I'm not dismissing the possibility. I've heard this argument before. I also know that it serves a market-reassuring purpose, so it's unclear for what reason it's being stated. Basic facts remain however:

11 trillion debt (86% of GDP or so)
Accompanying loss of political and military clout
Economy overweighted towards financial sector
No move to meet the overall loss in demand that has occurred and will continue to occur with the demise of easy, unregulated credit (whenever it comes, whether today or next week or next year).

Not that I have the capacity to buy assets, I'm buying productive assets, not financial ones. Not until they realize they're running an economy and not just finance capital for both economic and political reasons. They can keep pulling themselves up a couple inches, but at the end of the day, they need to hit the floor of the hole they're in, one way or another. Woudl prefer if they let themsleves down slowly and started finding a way to climb out.

as well as my ideological

as well as my ideological reasons.

Well, I see you've gotton to

Well, I see you've gotton to McCain and the conservatives. Oprah and Bono curse you.

Maybe McCain is a more decent

Maybe McCain is a more decent guy than he looks like. Or maybe he's desperately trying the only strategy he has left - to make it look like he stood up to Washington and saved the economy. So far, one for two. If he does the other one, I'd be frightened from a pro-Obama standpoint, but I'll believe it when I see it ;)

Keep looking Doc...this is

Keep looking Doc...this is political grandstanding of the worst kind. Utterly ridiculous.

I agree - but the effect that

I agree - but the effect that he's had so far is to delay a passage of a terrible bill. And I will give him credit for that, because my candidate isn't doing f@#k all as far as I can tell.

And then I will vote in support of Obama because McCain would do a million things that are worse than this bailout bill. Let alone the scary thought of Sarah Palin in charge of the button.

Y\'know, 700bill is a lot of

Y\'know, 700bill is a lot of $$. But the VISA ipo was 150bill. If Buffett is right, and his word is gold to the markets, I don\'t think a Govt-organized Private Bailout is out of the question.

You have to raise a 700bill dollar fund. The ibankers work for free since they\'re being bailed out. The govt makes all profits in the fund triple tax free, perhaps puts a floor on losses. Buffet puts his prestige and some money, say 20billion, behind it. You get some of those huge foreign soverign wealth funds involved, and the rest of the market follows. if we\'re short, the taxpayers put in the rest. If excitement grows, maybe even openit up to small individual investors.

I think we can do this without much taxpayer $$$.

Y\’know, 700bill is a lot of

Y\’know, 700bill is a lot of $$. But the VISA ipo was 150bill. If Buffett is right, and his word is gold to the markets, I don\’t think a Govt-organized Private Bailout is out of the question.

You have to raise a 700bill dollar fund. The ibankers work for free since they\’re being bailed out. The govt makes all profits in the fund triple tax free, perhaps puts a floor on losses. Buffet puts his prestige and some money, say 20billion, behind it. You get some of those huge foreign soverign wealth funds involved, and the rest of the market follows. if we\’re short, the taxpayers put in the rest. If excitement grows, maybe even openit up to small individual investors.

I think we can do this without much taxpayer $$$.

So your entire argument rests on the idea that not only can investor confidence be restored, but to the point where people will be so excited that these bad investments will become profitable again? This strikes me as unrealistic. Further, the government CAN'T put a real floor on its losses in point of fact because if the market collapses, the government collapses- that is how the system is set up, barring a revolution.

They should just listen to Roubini who understands that the problem is multifacted, not just in the financial markets, and is deep. And actually solve the entire problem, and pay for it by reversing some of the ridiculous tax cuts that have been passed for really really wealthy people. And if Obama was worth his salt, he would actually say this out loud.

dr. did you ever get around

dr.

did you ever get around to reading Johann Norberg's review of Shock Doctrine? Or Will Wilkinson's thoughts on the book at Flybottle? Or Tyler Cowen's review? (Norberg's is worth reading, because he does take the time to do it seriously)
http://www.cato.org/pubs/bp/html/bp102/bp102index.html (for some reason link button is not functioning...effing chrome)

No, I haven't. I haven't

No, I haven't. I haven't gotten around to reading shock doctrine yet - and am not sure I'm going to :) I'll keep the suggestions in mind though - thanks.

So your entire argument rests

So your entire argument rests on the idea that not only can investor confidence be restored, but to the point where people will be so excited that these bad investments will become profitable again? This strikes me as unrealistic.

Well, ths is a new argument (raising a private govt-orchestrated fund). I'm basing it on Buffets analysis, since I can't analyze the securities myself, as well as his claim that he'd purchase them himself if he had the money (700bill). Buffet is about as high an authority as you can have on these matters, and when he gives his blessing to a project, it always gets done...to the point where a whole cottage industry has emerged whose whole raison d'etre is to copy Buffet.

I'm also basing it on the precedent of LTCM. One key to understanding this crises, is--unlike the Internet scandals or enron and wcom--insitutions did not try to pass these securities off to unsuspecting individual investors. Nor did CEOs sell ther shares in their companies knowing they were about to become worthless. James Cayne of Bear Sterns, for example, went down with the ship. Say what you will about him, but he's not Ken Lay.

This tells me the most sophisticated investors actually believed in these securities, but some black swan event coupled with brutal accounting rules (mark to market) made the market irrational by valuing them close to zero. They simply didn't have time to hold onto these securities intl they recovered. This is what happened to LTCM.

I find it hard to believe their financial models are that off, unless there is fraud involved, which there doesn't appear to be the case (outside of some mortgage brokers using hard sell tactics) since the institutions are the ones taking the biggest losses.

I may be wrong, but this is far from unrealistic.

I may be wrong, but this is

I may be wrong, but this is far from unrealistic.

This, I suppose, depends on whether you agree with McCain that "the fundamentals of the economy are sound." or some such thing. Where are the profits from these banks going to come from? I think there will be more and more defaults because the extension of credit has nothing to prop it up - it's not that the housing bubble popped - it's that it popped first, before some other bubble.

I think. This is speculative

I think. This is speculative (npi).

Thanks for pointing to Public

Thanks for pointing to Public Markup for the draft legislation. I wanted to inform you that we just put the Emergency Economic Stabilization Act up on Public MarkUp(http://publicmarkup.org/bill/emergency-economic-stabilization-act-2008/). We are also asking people to sign a petition to ask lawmakers to not vote on the bill for 72 hours so that Congress can actually READ THE BILL. http://bsd.sunlightfoundation.com/page/petition/ReadItFirst

We need to require better lawmaking from our representatives. They can't rush this important legislation through without reading it.

Please sign the petition and thanks so much for your support.

Nisha Thompson
Sunlight Foundation
Online Organizer and Outreach Coordinator
nthompson(at)sunlightfoundation(dot)com
202-742-1520

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