Obama backs bailout, with conditions

Barack Obama has endorsed a $700 billion bailout scheme for financial firms hit devastated by the subprime mortgage crisis.

Obama called the Bush bailout proposal a "blank check." His counterprosal is basically a blank check with four conditions attached:

Adding some specificity to proposals he has already made, Mr. Obama, the Democratic presidential nominee, called for a payback plan for taxpayers if the bailout succeeds; a bipartisan board to oversee the bailout; limits on any federal money going to compensate Wall Street executives; and aid to homeowners who are struggling to pay their mortgages. [NYT]

I want to hear a debate about the core questions: What is the $700 billion dollar bailout supposed to achieve? Why a bailout instead of lending money to the firms at interest? How will we define success? 

I'm glad Obama favors increased oversight, but why a bipartisan oversight board instead of Congress? Bush's plan would give Treasury Secretary Hank Paulson sweeping powers with no oversight and no basis to challenge his decisions in court.

Comments

[Eric Jaffa]

John McCain and Barack Obama have been campaigning for two years. They've been talking about their proposals for the economy during that time.

Neither of them said before the past week that the government should spend $700 billion buying bad investments from corporations.

Now they both support that notion.

It's a bad idea from a bad adminstration which has been wrong repeatedly.

[Uncle Kvetch]

Republicans act; Democrats react. Obama's proving to be very Clintonian in his instincts, isn't he?

Given the timidity of the response, you'd never know that this bailout plan was the product of one of the most unpopular presidents in US history.

Not that it'll make much difference, but please go sign Bernie Sanders' petition anyway.

[Doyle Saylor]

Quoting Jamie Galbraith -
4. What should a bailout bill look like?

Oversight and accountability have to be included. The Treasury sent up a non-starter of a proposition, which was plainly unconstitutional in saying that its own actions could not be reviewed by any agency or court. Congress needs to put in tough disclosure requirements. Any firm that sells its assets to the Treasury Department should be required to make full disclosure–if you get in bed with the government, the public has the right to know who you are and how you value your assets. And it’s vital to know the price the Treasury Department is paying for the assets, that the firms get some cash but not so much that they don’t have any losses. There also needs to be a “No Cheney” clause; Congress needs to have all the documents and information it asks for, and there needs to be a conflict-of-interest clause. Henry Paulson has a huge fortune and probably owns a lot of Goldman Sachs stock in blind trust. He should be recused from the administration of this program. We need people who can act as tough counterparts to industry and advocates for the public interest, and not people who are likely to profit from the program or who have close ties with people who will.

[The Phantom]

UK

Its also the product of those who sought to ease lending requirements for the unqualified, by shouting "redlining" and "discrimination" when banks sought to have proper safeguards.

You guys own part of this pig too. Do not pretend that you don't

[Alon Levy]

Mr. Obama, the Democratic presidential nominee, called for a payback plan for taxpayers if the bailout succeeds; a bipartisan board to oversee the bailout; limits on any federal money going to compensate Wall Street executives; and aid to homeowners who are struggling to pay their mortgages.

These are conditions. They may not be conditions you agree with, but that doesn't stop them from being conditions.

[Alon Levy]

Its also the product of those who sought to ease lending requirements for the unqualified, by shouting "redlining" and "discrimination" when banks sought to have proper safeguards.

First, the people you're talking about aren't economists or even economic policy-oriented politicians. For all his faults, Krugman warned everyone about this bubble back in 2004. It doesn't absolve them, but it does mean that the left's contribution to the crisis isn't in having bad economic solutions, but in giving priority to other issues than economic solvency.

Second, did any Democrat actually use the word "redlining"? Redlining was a practice in which banks, encouraged by the federal government, would not lend to the qualified if they happened to live in neighborhoods that had too many unqualified residents, or any black residents.

[Jack]

"Its also the product of those who sought to ease lending requirements for the unqualified, by shouting "redlining" and "discrimination" when banks sought to have proper safeguards.

You guys own part of this pig too. Do not pretend that you don't"

I don't pretend that this is not a problem of bipartisan creation. However, in the blame game being played, Phantom is ignoring the matter of proportional responsibility, to wit: Starting with the late Saint Ronald of Reagan, the mantra of the GOP was deregulate, deregulate, deregulate. Get out of the way of corporations. Let the "magic of the marketplace" work.

We are seeing that particular approach come home to roost in a very, very nasty way. If Democrats share any of the blame, it is in not fighting harder against the "trickle down" economic theories of Eraserhead Ron and his band of merry cutups. Concentration of financial control in the hands of too few with little oversight is biting us in the ass again as it does periodically throughout our history.

[FungiFromYuggoth]

The idea that the CRA, passed in 1977 caused the recent boom has been soundly debunked. Loans made under CRA were less likely to be resold and also less likely to default. Most

Oh, and of the people who got subprime loans, over half of them qualified for prime loans. That's mortgage fraud exacerbated by the Bush administraton's deregulation and slicing the FBI's enforcement budget.

Again with ideology over knowledge, Phantom?

[Count Zero]

I want to hear a debate about the core questions: What is the $700 billion dollar bailout supposed to achieve? Why a bailout instead of lending money to the firms at interest? How will we define success?

I haven't heard a solution from any camp that I agree with as both seem to be in the pocket of big buisness, so it's likley either way we the taxpayer are going to be assuming their debt. I agree with Jacks' assessment of "Let the "magic of the marketplace" work." Let them fail, provide money to those who need it (i.e. not AIG, WaMu, Freddie, Fannie, Bear Sterns) afterwards till the market magically recovers.

[Eric Jaffa]

John McCain fear-mongering:

"We must pass legislation to address this crisis. If we do not, credit will dry up, with devastating consequences for our economy. People will no longer be able to buy homes and their life savings will be at stake. Businesses will not have enough money to pay their employees."

So regarding Lindsay Beyerstein's question of "How will we define success?"

I guess that as long as there isn't a total shutdown of the economy, the Senators will congratulate themselves for having supposedly saved us.

It's like the old joke:

A: Why are you blowing that whistle?
B: To keep away elephants.
A: There are no elephants around here.
B: See, it's working.

[The Phantom]

Alon

Don't know about recently, but Democrats and their friends have used the word redlining for ages.

To speak out against the real abuses that you mention ( yes it did exist ) but also to push for more investment in their communities. Whether the borrowers were qualified or not.

[mudkitty]

Where to start, where to start?

[Tyro]

Piss off, Phantom. We've been hearing that BS from you wingnuts for a while now. For us to argue with you about your delusions would just reinforce your persecution complex.

The reason a bunch of right-wingers are feeding you that BS to place the blame on the CRA is because they know you're easily manipulated by stoking your resentment against poor people and your desperation to blame it on them. There are programs to help small minority- and women-owned businesses. Blaming the CRA for this mess makes about as much sense as blaming those small business programs for the dot.com bubble.

[TB]

Oh look, The Phantom Homer is back, and trying to explain economics; like paying attention to a conservative on economics makes any sense.

Always a good idea to blame the minorities The Phantom Homer, it plays real well with the home crowd over at The Corner, but here in the reality based community, you just end up looking like an idiot.

Again.

And how about that great leadership from your chosen guy McCain? He's really putting country first now, ain't he? His lack of focus and ability to multi-task makes him look like a real stable, thoughtful kind of leader, doesn't it?

Listening to conservatives talk about how to fix this (or any other) problem makes as much sense as listening to an arsonist telling you how to put out a fire they started.

[revenantive]

on forbes.com (saw the link via a kos poster)

_____

"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

___________

I think that just about says all that needs to be said about this extortion attempt by this failed Administration.

[PurpleGirl]

I want to see the Glass-Steagall Act of 1933 re-enacted and enforced. If there are parts of it that need modification to reflect technology issues, fine, but the main provisions regulating the financial sector must be brought back. The problem was and is deregulation. "The Market" is a man-made concept, it isn't invisible and isn't natural. It does not self-regulate. I don't want my tax money going to pay off greedy financial sector thieves.

[Alon Levy]

Test.

[Alon Levy]

What is the $700 billion dollar bailout supposed to achieve? Why a bailout instead of lending money to the firms at interest? How will we define success?

1. It's supposed to prevent a complete financial meltdown, in which at best the US will have a lost decade, much like the 1990s for Japan and Sweden, and at worst everybody's savings will be erased.

2. I don't know. There are economists who prefer lending money to the firms, on the grounds that it'll end up costing less money. This is still a bailout, but it's a possibly safer one. If it is, there's no reason not to do it.

3. Right now, I'll be happy with single-digit unemployment, no lost savings, and any GDP growth.

[Lindsay Beyerstein]

Saying that "it's supposed to prevent financial Armageddon" isn't an answer worth $700 billion dollars. It's the epistemic equivalent of "collect underpants...intermediate step...profit." There are ways to make a profit by collecting underpants. Depending on the business model you have in mind, it might even be your best investment option.

I want several independent experts to outline how this financial meltdown would go down, and how exactly this plan would work to prevent that. I know the doomsday scenario involves a credit crunch and bank runs, but even that's not good enough.

Suppose we spend $700 billion, and the system doesn't collapse, how will we know that it survived because we spent the money?

[Eric Jaffa]

The limit on executive pay for participating corporations will be a scam (under the proposal in Congress today.)

The corporations will have to have a non-binding shareholder vote on pay.

A corporation can pay a CEO $50 million per year after taking billions of public dollars for a bailout.

[Bernard SG]

There's something disturbing in that idea of making profit by collecting underpants...

[Alon Levy]

Saying that "it's supposed to prevent financial Armageddon" isn't an answer worth $700 billion dollars.

Providing historical evidence that without intervention, the failure of a few large banks leads to financial Armageddon, is a reasonable answer given the circumstance. This is especially appropriate given the evidence that AIG failed because the federal government decided not to bail out Lehman Brothers. This makes the problem not just historical, but also current and urgent.

I want several independent experts to outline how this financial meltdown would go down, and how exactly this plan would work to prevent that. I know the doomsday scenario involves a credit crunch and bank runs, but even that's not good enough.

So far, I know one high-profile one: Krugman. Krugman thinks very little of Paulson's solution, but has noted how the only way to rescue the financial markets is to infuse them with federal cash, probably at several times the shares' market value.

And so far, the alternatives proposed fall into two categories: brazenly partisan (suspending the capital gains tax, bailing out homeowners), proposed only by think-tank pseudo-scholars and backed by no major economist; and kinder, gentler bailouts (lending Wall Street the money instead of taking over its debt), which are overall more cautious but still accept the basic premise of the situation.

[doyle Saylor]

Alon writes;
And so far, the alternatives proposed fall into two categories: brazenly partisan (suspending the capital gains tax, bailing out homeowners), proposed only by think-tank pseudo-scholars and backed by no major economist; and kinder, gentler bailouts (lending Wall Street the money instead of taking over its debt), which are overall more cautious but still accept the basic premise of the situation.

Doyle;
The agenda was fixed by two elements, first the crisis, then the forum of the Congressional testimony of Paulson and Bernanke in which alternatives are hard to bring up in light of their lack of details. Alon condemns pseudo-scholars which to me is a weakness showing up in Alon's thinking process. The alternatives might be there, but the debate has been short changed. And Alon justifies a lack of debate or serious consideration of alternatives.

Government intervention may be the only way to ameliorate the problem. Creative Destruction arising from the crisis will certainly be more disruptive than we are currently experiencing things, but it is also true that the 'bailout' might not work as planned because it pushes money toward entities like the banks which will not be concerned to prevent hard times falling on many people.

The short selling ban has already hit the hedge funds hard (source Financial Times). The key distinction in the effort to bring the government in is where the money is pointed. The plan was unconstitutional as offered by Paulson. Hence it was no plan. It was an attempt to subvert power from Congress to further the life time of a very bad hedge fund system.

If the conservatives succeed to feed these billions to banks, then there will be no money for the people as things get worse. They have no real conception of the extent of the losses. If they top 1 trillion, 1.5 trillion, that would be similar to the Administration guesstimates about Iraq war costs.

Right now the consequences of the bailout are inflationary. That is opposed to deflationary asset deflation coming out of the credit crunch. Any answer to these problems in my view requires re-assertion of democratic controls upon the economy. I mean Congress must assert it's constitutional powers to halt the executive setting the agenda and wasting our resources once again.

Bailing out the banks is not the only alternative.

[mitchell porter]

I just mailed a friend to say: "This week, I feel sorry for the Americans, as they try to decide whether to give Paulson his blank check, or to add conditions, or not do it at all. There are a lot of impassioned critics (and not just on the left) who think it's a scam or class war from the beginning, but I think that's a mistake and just a distraction intellectually (even if it's tempting for frustrated powerless individuals who never paid attention to the economy before). The real question is, what if they give him the power, and he spends all that money, and doesn't get it back, and it still doesn't solve anything?"

Since I don't have any definite advice to give, and no immediate stake in the outcome, maybe I should stay out of this discussion. But I have to say this: it is probably impossible to understand what is really at stake here, and the actual web of cause and effect, without understanding the USA's relationship to its foreign sovereign creditors. Above and beyond the whole amazing edifice of subprime loans, mortgage-based securities, and credit default swaps, is the "Bretton Woods II" arrangement in which China and other governments stockpile US dollars in their foreign exchange reserves, and lend the US hundreds of billions of dollars every year by purchasing Treasuries and Agencies. That arrangement has to end one day and it may be ending now. It is only an intuition, but I think the end of Bretton Woods II is the biggest unacknowledged risk surrounding Paulson's plan.

[Jack]

Sam Brownback was on public radio's Marketplace Morning Report today; he said that while we obviously have to do something, he's not certain that "this" is it. He would prefer a phased in approach rather than $700 billion all at once. He also wants limits on executive compensation for "the guys that got us in this in the first place." His best line: "Those golden parachutes should be lead balloons."

Is anybody besides me really sick of Bush always saying Congress needs to act, that it should not "fail to act"? Like the only alternative to giving the big baby exactly what he wants is inaction. Like different action isn't even an option.