YOU are going to save Foreign Banks

September 22, 2008

Dear Citizens and Elected Officials:

I was on the verge of not writing a post so soon after Thursday’s, to give both my readers and myself a little breather from the dizzying pace of financial events last week. Then I saw an article in the New York Times Sunday evening that made me sit up and take notice : “Foreign Banks Hope Bailout Will Be Global,” by Nelson D. Schwartz and Carter Dougherty.” http://www.nytimes.com/2008/09/22/business/22global.html?pagewanted=1&hp [1]). Then I knew I had no choice.

According to the story, foreign banks were busy all weekend in lobbying the US Treasury to be included in the bailout. The article quotes Secretary Paulson as saying, on Fox News that “‘It’s a distinction without a difference whether it’s a foreign or a U.S. one.’” Well, if you’re a full blown globalizer, I guess there’s logic in that statement, and these derivatives gone bad were mostly originated in the US, so it really is a mess of our making, but I think the designers of this bail-out package have gone too far for the American public. This is going to be an explosive issue when the package doesn’t have adequate protections for Main Street USA, as we will see below from its critics.

Then, even later Sunday evening, we learn that the scope of the financial instruments that can be purchased has been dramatically widened, under intense lobbying, to include “car and student loans, credit-card debt and any other troubled asset,” according to Dawn Kopecki’s article on Bloomberg.com at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aj8rPFxHlPi8 [2] . The article goes on to point out that this change is bound to drive the price up beyond the $700 billion authorized.

Once again, the Washington Post, despite now having come around to devoting lots of space to the crisis and the bail-out, seems not to have noticed these enormous and explosive changes, even by its Monday morning print addition.

As the situation unfolded, I saw an old trap for progressives and Democrats looming up in an even starker form than it has historically taken. And that’s the “deficit” or debt trap. (And note the distinction between this year’s federal budget “deficit,” and its long-term cumulative debt, which is where the bail-out cost probably should be based, according to Dean Baker; but in terms of the popular debate, the distinctions tend to be blurred). Once again, we are facing, in terms of this massive bailout, a federal deficit/debt run up under “emergency” conditions, like the military spending post 9/11, that threatens to leave progressive causes begging for a few pennies. This line of thinking was triggered by a post from columnist and author David Sirota, a populist Democrat who was writing for ourfuture.org in a post called “The Picture of Obama’s ‘Minimalism.” (At http://www.ourfuture.org/blog-entry/2008093820/picture-obamas-minimalism [3]).

Sirota is worrying aloud about a picture of Robert Rubin sitting next to Obama at a restaurant, with Paul Volcker on the other side and Larry Summers and Laura Tyson at the edges. Sirota’s ire was directed at Rubin, who surely, as much as anyone, helped shaped the de-regulation in the 1990’s that has let to this meltdown. Although I haven’t dwelled on it in previous writings, Rubin comes in for a lot of well-deserved criticism in Robert Kuttner’s book The Squandering of America: “Today, Rubin’s outsized influence narrows, if not strangles, the ability of Democrats to offer fundamental economic reforms that might rally the support of middle and working class America.” (Page 185). Kuttner has noted an apparent change in tune from Rubin towards regulation since the market calamity – but I have to say, I’m unable to discern whatever it is that Rubin is whispering in Obama’s ear just now at the autumnal equinox. So here’s what I posted in response to Sirota’s piece:

“Here’s the key dynamic that has me worried, and I’d love to know what advice this group of insiders has offered. I think the American public needs a very sober and candid assessment of where we are in the financial crisis. The Congressional leadership got it Thursday evening – you could tell from their body language and nearly tied tongues that they had been read the “Verge of 1929” speech. And I don’t think that’s an exaggeration. But, apparently, the citizens who will be footing the bill either are not seen as deserving the equivalent or as being too likely to panic if given the truth directly. This is a very disquieting subtext to the entire unfolding of the crisis since Aug. of 2007: how much can we tell ‘the kids.’ Quite a bit different than FDR’s assumptions in his first fireside chat in 1933 on the banking crisis. Bob Kuttner has done a splendid job in describing this in is book, Obama’s Challenge. Anyone who saw the end of Kevin Phillips’ appearance on Bill Moyer’s Journal Friday evening (Sept. 19th) heard Phillips call, wish for, one of the candidates to level with the public to a similar degree.

The other great worry I have flows out of the huge cost to taxpayers of the bailout on the table - $700 billion and counting. What will we get in return? Progressives have an immediate list: more foreclosure and eviction help for homeowners, aid to states and cites about to go into steep deficits…and locked into local balanced budget legal requirements…infrastructure spending to help fend off a downward spiral (including other debt instruments from Wall St)…Look for Republicans to try to block these efforts over the next week in Congress…holding the club of urgency over the Democrats not to complicate ‘the rescue.’ And looking to January 2009, should the Democrats win, my great fear is that we will have the old debt/deficit dynamics with an especially cruel twist: having spent nearly $1 trillion to save Wall Street from its outrageous derivatives nightmare, citizens will be told there’s nothing left for their health insurance, green energy program…upgraded rail system…and so on….

Democrats will be faced with a stark choice: accept the old constraints on domestic spending, or make a clean break and pursue an adequate investment and spending budget to get out of the crisis …deficits be damned. And you can throw in a reevaluation of new foreign adventures as well…for Senator McCain who wants to pursue Bin Laden to the gates of hell, and Senator Obama who wants to pursue him into every cave in Pakistan…the gates of hell have been relocated to Wall Street and are soon coming to more and more Main Streets…so some major foreign policy assumptions are going to have to reworked very soon too…I would therefore like to see Nouriel Roubini at that economics table…and Andrew J. Bacevich at the foreign policy table ( new book: The Limits of Power: The End of American Exceptionalism, just out)”

As this post is about to go to press on Monday afternoon, the outcry against the nature of the bail-out package is rising from all parts of the political spectrum Paul Krugman is questioning the actual target, arguing that injection federal capital into the distressed institutions, rather than buying their bad debts, gets closer to the heart of the problem in his Op-Ed piece entitled “Cash for Trash?” and objecting to the virtual “dictatorial powers” given to the Secretary of the Treasury. (see http://www.nytimes.com/2008/09/22/opinion/22krugman.html?hp [4] )

Robert Kuttner is again on target with his article of Saturday, Sept. 21st on Huffington Post, “Calling Paulson’s Bluff,” which finds three major things wrong with the proposal: firms don’t give anything back; there is no accountability for Treasury; and the terms are great for Wall Street – with nothing for Main Street. And we might note, his piece was written before we learned that foreign banks are included and that the scope of the failed investments to be purchased was widened far beyond mortgage debts. Kuttner’s counter proposals include:

• A commitment to financial reform, including the shadow banking system of hedge funds and private equity firms
• Limiting the Treasury authority to 6 months so that the new Congress can re-authorize with needed reforms attached
• Reform the pay incentives for executives at the bailed-out firms to block windfalls
• The government should get equity positions in proportion to the help it gives
• Treasury should get control similar to the FDIC’s when the failing firms have to be taken over
• The public should get “recapture” provisions for a share of future profits at aided firms
• Some of the “$700 billion” should be directed to mortgage refinancing and for aid to cities and towns to acquire foreclosed properties and to put in renters and new owners at affordable terms
• At least $200 billion needs to be directed to infrastructure/job proposals.
• Democrats should be forcing votes on these proposals to make Republicans accountable at the ballot box, even if Dems can’t win all of these reforms just now.
Here’s the full article at http://www.huffingtonpost.com/robert-kuttner/calling-paulsons-bluff_b_12... [5]

William Greider, in a white-hot article online at The Nation on September 19, is even blunter that Krugman and Kuttner – he calls Paulson’s bailout plan “…a historic Swindle: …If Wall Street gets away with this, it will represent an historic swindle of the American public – all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called ‘responsible opinion.’ If this deal succeeds, I predict it will become a transforming event in American politics – exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.” Here’s the full article with its set of recommendations, even more sweeping than Kuttner’s: at http://www.thenation.com/doc/20081006/greider [6] .

Right now, it is Kuttner, Krugman and Greider that are giving progressives the best insights into the truly dangerous situation that has developed. Of the Democratic leadership, Barney Frank has been perhaps closest to their directions, but still falling far short. I’m pulling these sources together for you so that we can have a least a fighting chance of having a say on these matters that Bush and Paulson want to ram through Congress at the speed of light. As you should know by now, this writer has never underestimated the depth or seriousness of the crisis – and he isn’t now. But the “market movers” can’t be allowed to stampede Congress into more disastrous policies. If it takes 10-14 days to make these proposals better, and re-design them, then that’s what we have to do. And remember that Capitol Switchboard number: 202-224-3121.

And if this all becomes too much to take, just spend a few minutes visiting with Donald Luskin, an advisor to Senator McCain, and his article from Sunday’s Outlook Section (Sept. 14th) in The Washington Post, whose title tells it all: “A Nation of Exaggerators: Quit Doling Out that Bad-Economy Line,” and have a good laugh. He sounds like he lives in a different world than the one we’re living in, or perhaps, one could say, he just might be a voice from “The End of an Era.” At http://www.washingtonpost.com/wp-dyn/content/article/2008/09/12/AR200809... [7]

Until the next post,

Bill Neil
Rockville, MD
w.neil@att.net [8]