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My Take on the Paulson Plan

| Sun Sep. 28, 2008 3:09 PM EDT

MY TAKE ON THE PAULSON PLAN....Will the Paulson bailout work? Is it the really best solution to our financial problems? Before I answer, my standard caveat: I'm a semi-informed, non-credentialed amateur who has no experience in the finance world and only barely understands exactly how this crisis has unfolded. If it makes you happy, you should feel free to echo this critique in more biting and sarcastic terms in comments.

That said, I think the answer is yes and yes. The leading alternative appears to be some version of nationalization: Recapitalize failing banks, nurse them back to health, and then sell off the government stakes sometime down the road. One advantage to doing this is that it automatically forces banks that made the dumbest mistakes to pay the highest price for rescue. Sweden, which faced a financial collapse in the early 1990s that was similar in some ways to ours (though different in others) did this and it seemed to work OK for them.

And it may yet come to that. It's not a serious alternative right now because there's simply no political support for it (there's barely political support for the Paulson plan), but I'm skeptical that it's the best solution anyway. Why twiddle our thumbs waiting for banks to fail? Why prop up entire institutions when their problems are narrowly focused on a particular class of assets? Who decides which banks are worth nationalizing and which ones aren't?

The Paulson plan, by contrast, seems to have a pretty good chance of accomplishing multiple things:

  1. Thanks to falling house prices and a general panic, toxic mortgage assets are currently valued by the market at about zero. This is plainly absurd: they're worth quite a bit less than face value, but they aren't worthless. The Paulson plan, by creating a mechanism to pay some kind of reasonable price for these assets, cleans up banks' balance sheets and increases their capital base at the same time. Doing both those things is better than recapitalization alone.

  2. Creating a controlled market in these assets should help to jumpstart the public market for all the toxic waste currently on bank balance sheets, not merely the parts of it that Treasury purchases. This will help the balance sheets of every bank in the industry, even the ones who don't participate in the bailout. In this sense, we're getting a very big bang for our buck.

  3. Once prices are set, we'll have a much better idea of which banks really are insolvent — or are likely to become insolvent shortly. This is pretty useful information. It gives us a better idea of the scope of the problem, and allows us to make rational decisions about whether to let banks fail or whether we really do have to nationalize them.

  4. If it then turns out that we have to nationalize a bunch of banks, we can still do it. But the Paulson plan seems like a better first step: more focused, easier to manage, and with a good chance of unstopping the credit markets quickly and putting the finance industry back on its feet.

Letting Lehman Brother go bust was obviously a disaster. Everyone agrees we can't let that happen again. And by all accounts, Paulson drove a pretty hard bargain when he nationalized AIG, one that quite possibly will end up being profitable for the taxpayers. The same might be true for the broader bailout, especially if the plan to get contingent equity shares in participating banks is included in the final legislation — as it seems to be. So I say: let him try to make the current bailout plan work. I think it's got a good chance of working, and if it doesn't, Plan B is still available.

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McCain: No, Palin Did Not Mean That

| Sun Sep. 28, 2008 2:49 PM EDT

If you watched the debate, you know John McCain attacked Barack Obama's position on Pakistan. Here's how Obama articulates it: "If the United States has al Qaeda, bin Laden, top-level lieutenants in our sights, and Pakistan is unable or unwilling to act, then we should take them out."

McCain said at the debate that it was unwise to "threaten" Pakistan in this way, and that Obama's position was a product of his inexperience. "You don't say that out loud," McCain said. "If you have to do things, you have to do things, and you work with the Pakistani government."

But there's a problem. On a recent campaign stop in Pennsylvania, Sarah Palin was asked by a voter if American forces should move from Afghanistan into Pakistan to pursue terrorists. Palin responded, "If that's what we have to do stop the terrorists from coming any further in, absolutely, we should."

Whoops. That's Obama's position. So today McCain was in the painful position of having to retract his vice presidential pick's statement:

"She would not…she understands and has stated repeatedly that we're not going to do anything except in America's national security interest. In all due respect, people going around and… sticking a microphone while conversations are being held, and then all of a sudden that's—that's a person's position… This is a free country, but I don't think most Americans think that that's a definitve policy statement made by Governor Palin."

Translation: Just because my candidate for vice president said something into a microphone doesn't mean it should be taken seriously or that she actually believes it.

Bailout Package Almost Finished?

| Sun Sep. 28, 2008 2:24 AM EDT

BAILOUT PACKAGE ALMOST FINISHED?....The Wall Street Journal reports exclusively tonight that there was a "delivery of food from sandwich shop Cosi to Ms. Pelosi's office just before 8 p.m. EDT." Exciting!

On a more substantive note, I'm trying to figure out if there's any Republican position at all regarding the financial crisis and what to do about it. John Boehner says he's against the Paulson bailout but has steadfastly refused to offer an alternative. Richard Shelby refuses to even acknowledge that a bill is being negotiated. Eric Cantor has offered an actual policy proposal, but as near as I can tell it's one of those weird movement conservative things that doesn't even begin to make sense. It's billed as an insurance scheme to rescue an insolvent banking system, but I gather (?) that what he wants to do is assess fees on the very firms that are insolvent in order to set up an insurance pool that allows them to bail themselves out. Huh? This sounds like a bunch of skydivers forming a circle and thinking they can all pull each other up. I think you'd need M.C. Escher to illustrate it.

Despite all this, Politico reports that a verbal agreement among lawmakers has finally been reached and just needs to be "committed to paper":

The plan would likely give Paulson a relatively free hand accessing the first $350 billion of the $700 billion he sought. It was not clear when the remaining $350 billion would become available, but Treasury apparently agreed that a future Congress could block its release though a joint resolution signed by the president.

The agreement would also include much greater oversight than the Bush administration had initially proposed; an opportunity for the government to take an equity share in the companies it helps, either through warrants or options to buy stock; and a provision limiting the compensation paid to executives of those companies.

This sounds good, especially the equity share language. Unlike some of the bells and whistles that both sides have been trying to festoon on the bill, this one really does seem like a must-have. If it's structured right, it ensures that taxpayers are protected against losses due to overpaying for toxic mortgage securities and guarantees that the eventual cost of the bailout will be far, far less than the nominal $700 billion price tag.

Supposedly, this deal will get substantial support from House Republicans, though it doesn't really seem to be any different from the language that was being discussed a couple of days ago. Apparently it includes Cantor's insurance scheme, but only for future use and only on a voluntary basis — though this part is murky. It sounds like a fig leaf to me, but if that's what it takes to get them on board, I guess that's fine.

And what if they're not on board? Assuming that the rest of the oversight/comp/equity language is reasonable, Obama should support it and Democrats should stand up and pass it regardless. Yeah, it's a drag having to clean up Republican messes, but you know what? We'd better get used to it. This is just the first of many.

Pass the Effin Bill

| Sat Sep. 27, 2008 9:57 PM EDT

PASS THE EFFIN BILL....You would think that the imminent collapse of our financial system, much like a firing squad, would concentrate our collective minds wonderfully. You would be wrong. Ten days after the credit markets nearly seized up completely, nine days after Henry Paulson and Ben Bernanke finally decided to press the big red financial panic button and propose a systemic bailout plan to replace a year's worth of fingers in the dike, we're pretty much back where we started. Washington Mutual has gone bust. Wachovia is in trouble. Over in Europe, Bradford & Bingley has imploded and Fortis is on life support. The TED spread is once again bobbing around at just under 300 basis points. Solidly profitable companies trying to float bonds are having to offer premiums of 300-400 basis points just to find willing buyers.

And what's happened in the meantime? The good news is that Paulson's original bailout proposal has been improved. Hooray. The bad news is a little more extensive. John McCain decided that his campaign might benefit from gumming up the negotiations a bit, so he swooped into Washington and did just that. House Republicans, who apparently earned their high school degrees from a rack of gumball machines, decided to hold their breath and stamp their feet unless capital gains taxes were eliminated, a lunatic proposal that has exactly nothing to do with our current problems. A band of Democrats (I can only pray it was a small one), in an apparent effort to prove that idiocy is not confined to one party, decided that this was the right time to insist that all profits from the plan be plowed into housing programs. Profits! You betcha. Meanwhile, outside Congress, every pundit, academic, and blogger in the country seemed determined to prove their manhood by proposing that we ditch the Paulson plan and instead spend our time considering some shiny new idea that they insisted was way more bitchin' than anything coming from all those other guys.

Sure, why not? We've got plenty of time, after all. If a few more banks crumble, no biggie. A couple extra points of unemployment? Whatevs. A global credit contraction at just the time when our economy is teetering into recession anyway? Yawn. It probably won't affect most of us well-off pundit types anyway. But it'll sure provide plenty of opportunity for finger pointing later on, and that's what really counts, isn't it?

Look: there's now pretty broad agreement on issues of oversight, CEO compensation, and equity sharing. So how about if we concentrate on that stuff, cut all the extraneous crap, and pass the fucking bill? It's not like it'll be carved in stone. We can always take additional swings later if we have to.

Now go read Joe Nocera and Bruce Bartlett.

Quote of the Day - 9.27.08

| Sat Sep. 27, 2008 1:15 PM EDT

QUOTE OF THE DAY....From SEC chairman Christopher Cox:

"The last six months have made it abundantly clear that voluntary regulation does not work."

Manfully owned up to, Mr. Chairman. Only one thing: you need to change "last six months" to "last ten thousand years."

The First Obama-McCain Debate: Not as Telling as Real Life

| Sat Sep. 27, 2008 1:25 AM EDT

No memorable exchanges. No historic zingers. No gotchas. The much-anticipated first face-off between Barack Obama and John McCain resolved little. Neither candidate strayed from their usual briefing books. The talking points were recycled. McCain blasted Obama for being a rookie in the ways of national security. Obama questioned McCain's judgment, notably his initial support for the Iraq war.

They both played it safe. Especially when it came to the hot topic of the night: the $700 billion bailout plan for Wall Street. It was no surprise that moderator Jim Lehrer would lead off with the issue, even though the focus of this debate was supposed to be foreign policy. And in his first question, Lehrer asked each candidate to state where he stands on the "financial recovery plan." Neither would get specific. Obama cited the need to move "swiftly" and "wisely." He called for effective oversight of the plan, taxpayer protections, and guarantees the money spent would not reach the pockets of CEOs. He pointed to the current meltdown as evidence of the failure of economic policies supported these past eight years by George W. Bush and McCain. It was standard fare.

McCain noted he was heartened by the bipartisan negotiations under way in Washington. He, too, cited the need for accountability. He mentioned the possibility of adding a provision to the package that would allow the federal government to offer loans to troubled institutions rather than buy their bad paper. Neither one, though, fully endorsed the plan--or raised any objections. Asked if he would vote for it, McCain said, "I hope so." It was a strong signal he would not be mounting any from-the-right populist crusade against the proposal.

But each candidate exploited the bailout queries. Obama tried to tie McCain to Bushonomics. McCain hailed his own efforts to curtail pork-barrel spending on Capitol Hill. Obama slapped him for focusing on $18 billion in earmarks while supporting $300 billion in tax breaks for corporations and wealthy individuals. McCain accused Obama of being a tax-hiker. Obama countered--correctly--that his tax plan provides far more relief for taxpayers making less than $250,000 a year than does McCain's proposal.

It was as if they were eager to talk about any economic issue other than the details of a gargantuan bailout that may or may not work and that may or may not be popular come Election Day.

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Too Personal?

| Sat Sep. 27, 2008 12:44 AM EDT

TOO PERSONAL?....The CNN folks are saying that all the snap polls show Obama the winner of tonight's debate. There's nothing too surprising about that, but I'd sure like to know why. I've heard all this stuff so many times before that it's almost impossible for me to have a genuine reaction to either guy, so I can only guess what average viewers were reacting to. Best guess is that they thought McCain was too snarky and took a few too many personal shots. That's not presidential.

UPDATE: For the record, CNN's poll has Obama winning 51%-38%. CBS has Obama winning 39%-25%.

Strength or Condescension?

| Sat Sep. 27, 2008 12:00 AM EDT

STRENGTH OR CONDESCENSION?....So the big question appears to be this: When McCain kept telling Obama that he was "naive" or that he "didn't understand," was this a show of strength, or was it a show of condescension from an old man? I'd guess that most moderates would see it as condescension, especially since Obama pretty clearly did seem to understand the issues every bit as well as McCain.

Regardless, though, that seems likely to be the main pundit topic.

Debate Liveblogging

| Fri Sep. 26, 2008 9:59 PM EDT

DEBATE LIVEBLOGGING....Here it is. The main event. Obama vs. McCain. Is your skin tingling? Are you drunk yet?

Wrapup – Am I off base, or was this one of the most soporific presidential debates in a while? Frankly, I didn't think either one of them did very well. There was way too much rambling, and way too few sharp points. Overall, McCain was more lively than Obama, but if the point of the debate was for Obama to show that he could hold his own on national security, then count it a win for Obama. I wouldn't call him a big winner, but he certainly did at least as well as McCain, and that might have been all he needed.

Of course, within a few minutes I expect conservatives will all be telling us that McCain was simply brilliant tonight. Absolutely masterful. I expect many repetitions of McCain's talking point about Obama being naive. If they say it often enough, they figure eventually everyone will agree with them.

10:36 – McCain says directly that he thinks Obama is unprepared to be president. Was that a good move? Or too much?

10:32 – Why does Obama keep starting to make a good point and then suddenly veer off to something else? He was about to make a good point about the danger of overfocusing on Iraq, but suddenly he's off on China, then healthcare, then the economy, then veterans affairs. Shouldn't he instead drill home a point about winning in Iraq requiring that Iraqis themselves take responsibility for their own security? Or something. But finish the point, in any case.

10:29 – Obama supports missile defense? I didn't know that.

10:24 – Todd Gitlin notes that Obama looks at McCain and reacts to him, but McCain stares rigidly ahead and refuses to make eye contact with Obama. Weird.

10:22 – McCain is really driving home two themes: (1) He's visited everywhere and met everyone, and (2) the world is full of threats, threats, threats. Will his constant repetition of these things wear on people? Not sure.

10:17 – Obama had some opportunities to drive home his point on preconditions, but I'm not sure he did. Conversely, McCain's little burlesque about sitting across the table from Ahmadinejad while he insults Israel was demagogic, but it might have been effective.

10:07 – Obama says the Iraq war has made Iran stronger. That's a good point, and maybe one that a lot of viewers don't understand. But he didn't really make the sale.

10:04 – According to the audience-o-meter, even Republicans didn't react to McCain's reference to "existential threat" and "second Holocaust."

9:52 – Decent answer from Obama about what we need to do in Afghanistan in Pakistan. Things are picking up a little bit.

9:39 – McCain: I hate President Bush. I'm a maverick!

9:34 – How did we get on nuclear power plants? Wasn't the question about what programs they'd cut because of the cost of the Wall Street bailout?

9:31 – This is just excruciatingly boring.

9:27 – Obama just said we have to free ourselves from dependence on Mideastern oil. I think that's one of our bingo squares. Hooray!

9:25 – McCain is kinda rambling now.

9:22 – If the audience-o-meter is any indication, these guys are putting the entire country to sleep.

9:20 – Hmmm. Obama has decided to refer to McCain as "John," not "Senator McCain." Good idea? Or bad?

9:19 – McCain: Spending is bad. Earmarks are evil. Gateway drug. DNA of bears. Yada yada yada. Obama: Senator McCain is absolutely right. But....tax cuts for the wealthy. CEOs! 95%! McCain: Earmarks! I'm the sheriff! Sigh.

9:13 – Come on, guys. Let's pick up the pace. So far this isn't even as interesting as a stump speech.

9:08 – Wow. McCain actually had the balls to say that House Republicans "decided to be part of the solution to our problem"? That's chutzpah.

9:07 – John McCain is feeling better tonight. Why? Because Republicans and Democrats are sitting down together to work on our financial crisis. You could have fooled me....

9:05 – What is that weird line at the bottom of the CNN screen? Instant audience reaction, it seems. Is that really necessary?

9:02 – Ah. "National security" includes the global financial crisis. Glad to get that cleared up.

8:59 – Apparently the French conduct better debates than us. Sheesh. We're losing our global lead in everything.

GAO Slams Carbon Offsets

| Fri Sep. 26, 2008 8:47 PM EDT

The GAO is soon to publish a report faulting the credibility of the carbon offset market. It suggests that Congress think carefully before letting companies use offsets to comply with climate change legislation. Everyone has known that offsets can be sketchy for a long time, but my article in the July/August issue of Mother Jones was the first to explore how leading offset companies have partnered with oil companies and anti-regulatory lobbying firms in an effort to carve out a huge new market for themselves through climate legislation. These are the same guys to whom well-intentioned enviros have paid millions to offset car trips and airline flights. The financial meltdown has been bad enough. Let's hope it won't take a polar meltdown for Congress to realize that a laissez-faire carbon market won't save us.