Progressives and the Bailout

October 1, 2008

Dear Citizens and Elected Officials:

I hope my readers understand now why I chose to emphasize former Federal Reserve Chairman Paul Volcker’s September 5th comments - that the financial system is broken and that this decade would see the slowest growth of any since the Great Depression – in the introduction to “The End of An Era, Part II,” released on September 7th. There was no exaggeration in his statement.

The lobbying on behalf of the Paulson bailout package which went down to defeat in the dramatic Monday afternoon vote, 228 to 205, has given me some very surprising allies, now in belated agreement that we are in a tremendous crisis. My “favorite” newspaper, The Washington Post, has turned to End of Empire (Roman) metaphors, with its editorial from Tuesday, “Congressional Neroes.” If we get “an economic catastrophe” the Post wailed, you can put all the blame on that one vote, by the “backbenchers,” made up of populists from the left and right – confirmation of David Sirota’s thesis in his book called The Uprising. Remember, this high drama editorial comes from the newspaper which “studiously” avoided reviewing any of the six books which made up “The End of an Era,” books which warned of very serious economic troubles and a pyramid of bad debt called our “financial system.” When a majority of the House of Representatives chose not to take a leap of faith on a proposal they did not believe in, and that a good proportion of their constituents did not either, then charges of irresponsibility came flying. To put it another way, the Post didn’t think George Soros, Kevin Phillips, Robert Kuttner or Charles Morris had anything to say that was worth reviewing, but Hank Paulson, silent partner in the whole de-regulatory era on Wall Street, and co-proposer of all the failed incremental measures since August of 2007 – now deserved to single handedly “save the system.”

David Brooks, the moderate conservative columnist for The New York Times, denounced all 228 who voted against their leadership as “nihilists,” as in “The Revolt of the Nihilists.” That would include, I guess, Maryland’s own Roscoe Bartlett (R, 6th), Elijah Cummings (D, 7th), and Donna Edwards (D, 4th). Having volunteered in Donna Edwards campaigns, and having heard her speak at least a dozen times, including her moving swearing in address, this June, on Juneteenth day no less, I think I can safely reply to Mr. Brooks and say Representative Edwards is no nihilist, indeed, is as far from that term as one could get.

While The Post, Brooks and “Wall Street” pull their remaining hair out over “Black Monday,” William Greider had the perspective to acknowledge that “it adds another deep shock to the system, both in politics and economics, but what an invigorating moment for democracy.” He has some nerve, that Greider fellow, invoking democracy just now: we’re in a major crisis, the experts that contributed to it but couldn’t foresee it have an proposal which has not been subject to any congressional hearings, which started as a three page royal edict, grew to 110 pages by Sunday evening, giving the public all of 18 hours to read, digest and inform Congress before Monday afternoon’s vote; who could possibly disagree with a set-up as sweet as this one?

I can tell you what I did. After getting my 110 page download of the “Emergency Economic Stabilization Act of 2008” courtesy of The New York Times Sunday evening (the two Congressional sites were frozen), the first thing I did was turn to Sections 109 and 110, the sections addressed to “Foreclosure mitigation efforts” and “Assistance to homeowners.” They were wholly inadequate. After reading about 60 pages, I posted that I was leaning against the bill in reply to David Sirota’s online editorial at Ourfuture.org, “Top 5 Reasons to Vote Against Wall Street’s Bailout,” which at the time was only the second comment to his blast.

Congress has to share some of the blame for the way it shaped its response, locking itself into semi-secret drafting and a no public hearing formula. Does it remind anyone else of the “fast track” trade deal formula, the one that has proved to be such a hit among blue-collar workers? Robert Kuttner had the right idea, which goes back about ten days, if I’m not mistaken. It was that Congress needed to hear from the responsible dissenters who had very constructive, but very different proposals for preventing financial collapse. What he recommended was that Congress should give itself a deadline of Columbus Day, Monday, Oct. 13th, to come up with a plan. At the time it was made, it would have given at least a week for public hearings, a week to work on a new proposal, and still have had some time to spare.

Writing today, October 1st, it could still work because critics have had time to shape up their proposals. With citizen attention now riveted on the crisis and the shaky proposal on the table, this could have been a week of national education and debate, with a pledge deadline for markets around the world that a matter so momentous needed at least a week of airing and vetting to get it right. But Congress was tinkering around the edges of what still is basically Paulson’s program, and I think it’s very reluctant to give serious consideration to counter proposals. Hence Bill Greider has it just about right when he notes that “The Dems do not want to assert real control over Paulson’s decisions for fear they will be blamed if and when everything fails.” As well it might.

The Paulson plan that the House voted on was certainly a better one than the opening three page “Edict,” but it really posed a dilemma for Progressives, most of whom disliked the idea of buying the toxic assets en masse, and who felt that foreclosures and homeowner needs were being greatly shortchanged. Those who supported the bill did so holding their noses and hoping that it would calm financial markets enough in the short run to carry us through until a new administration.

Here’s how I tally the folks I’ve been tracking: William Greider – terrible bill, don’t support; David Sirota – terrible – don’t support; Dean Baker – terrible, don’t support; Nouriel Roubini – terrible, no support; Paul Krugman – not very good, but we have to act, reluctant support; James Galbraith – not what I would recommend, but best we can do under time constraints; Robert Kuttner: not what I want but we must act in crisis – hold nose and support. He apparently discarded his own earlier counsel on further hearings. Jared Bernstein – pretty much same as Kuttner, reluctant support; Joseph Stiglitz – strong reservations, but support.

The major dividing line here between those who opposed and those who reluctantly supported the bill was drawn on the estimation of imminent market calamity: those who felt it was going to collapse right away felt there was no time to improve the bill – the market needed an instant dose of confidence. Those who were opposing felt it was so bad that it would only make matters worse, or that some of the recent converts to “Verge of ’29” thinking were engaging in very self-serving exaggeration – especially given their lack of alarm since August of 2007.

My clear sense is that progressive thinkers don’t like the government purchase of the toxic assets; they much prefer a remedy that leans towards injecting bank capital where needed, along the lines of the Scandinavian approach from the early 1990’s, with the capable FDIC under Sheila Bair doing the emergency room diagnosis, and caring for the “patients,” and with Warren Buffett type hard bargains driven on behalf of the public (on similar terms to his $5 billion dollar investment in Goldman Sachs). Bill Greider is ready for a complete federal takeover of the banking system under emergency provisions, but I can’t see that happening until the Paulson plan proves a failure. We may get there sooner than anyone could have imagined just weeks ago.

The other major Progressive plank is to have the federal government actually buy up all the foreclosing properties and distressed mortgages. In a clear summary of this line of thinking, Jonathan G.S. Koppell and William N. Goetzmann wrote in an Op-Ed in today’s Washington Post (October 1, 2008,” The Trickle-Up Bailout”) that the Paulson $700 billion “is almost certainly more than sufficient to pay off all currently delinquent mortgages. If the government did this, all the complex derivatives based on these mortgages would be as good as U.S. Treasuries.” I think nearly all the progressives I’ve listed above would support an effort in this direction, either in the bill or after its passage. I think we are going to get to this, most likely the hard way, and if it was in the Paulson package, I think Speaker Pelosi and Majority Leader Hoyer could find the votes they need on the Democratic side of the aisle, and put tremendous public pressure on those Republicans who wouldn’t come to the aid of “Main Street.”

But, as Nouriel Roubini has pointed out, this wouldn’t be sufficient in itself, because “the recession train has already left the station.” We are going to need a very, very substantial stimulus program, centered on infrastructure and energy, to keep the recession from heading down the 1929-1933 road. Even David Brooks of the “Revolt of the Nihilists,” and who probably doesn’t want to go down that road, starts out his Op-Ed today with “In 1933, Franklin Roosevelt inherited an economic crisis…” I know that by now, my readers have those mile posts firmly planted in their frame of reference. The scope of the stimulus is going to have to be on a scale similar to that of Paulson’s bailout, in the range of $600 to $800 billion. That probably cannot happen in even a proposal reworked to Progressive standards over the next two weeks, but it will get more traction when the recession signals flash a deeper shade of red over the next month or so.

Robert Kuttner has outlined the methods he would use to pay for a program like that, spending on a large scale for a number of consecutive years. We’ll talk about those revenue sources in more detail in future postings.

As of September 29, here is what Kuttner is calling for in a good Democratic proposal: quoted directly from his “After the Bailout Failure; What Now?”

• An RFC-style agency to have the government take over or take major equity positions in failing banks
• Direct refinancing of threatened mortgages, on the model of Roosevelt’s Home Owners Loan Corporation
• Extension of FDIC guarantees – and standards – to other financial institutions, with government takeover if they fail
• A small transfer tax on financial trades to pay for a lot of the cost of recapitalizing Wall Street

Please note the last item: a means to pay for what the public is going to at least risk, and maybe have to pay for; the financial transaction tax would raise between $100 billion and $150 billion a year at .25% per transaction. I think it would be a deal breaker to be in the bill now, but before this all plays out, it’s going to be a mainstream measure. So if you’re going to call your Congressional Reps at the switchboard number of 202-224-3121, start planting this idea right now. Its makes a mockery of the “payment” scheme in Paulson’ plan: to wait five years, look at the balance sheet, and tax only the rescued banks for any public costs. And we’re also going to have to broaden the way we look at the international financial system. There are now proposals in Europe to convene a Bretton Woods II meeting in New Hampshire. We’re not there yet among the players at the table, but I think before we have a new and more stable system, we are going to have a Bretton Woods II equivalent.

As this is about to go to press on Wednesday evening, the US Senate sounds like it is set to vote later tonight, with its addition of tax cuts and an increase in the scope of FDIC insured deposits aimed to win over reluctant representatives in a new House vote, leaning towards the Republican dissenters.

I’m going to leave it to my readers’ good judgment on how to urge Congress to vote, given the tremendous time pressures and the after-taste of the 777 point Dow plunge on Monday.

I can tell you that just about an hour before Monday’s House vote, I called Chris Van Hollen and Steny Hoyer’s office and said I opposed the bill as written, but that I didn’t want the House to walk away from it. The public deserved to hear testimony from those who have been on top of the crisis long before Henry Paulson said anything dire in public: from people like Nouriel Roubini, Robert Kuttner, James Galbraith, George Soros…Joseph Stiglitz, William Greider….and that I supported changes along the lines bulleted above and a deadline of Columbus Day to do it right.
Whether we now could have such a time frame, given the state of financial markets, is the toughest call of all.

I am confident, however, to state that pass the Paulson version or not, sooner or later, most likely sooner, the core Progressive directions not in the bill will be front and center with the public clamoring for their new New Deal direction. We’re on our way, and we’ll have to give Democrats in Congress some time yet to realize that a new era has begun.

And now here are the links to the best of what I’ve been reading over the past five days or so:

William Greider, “Bailout’s Political Turmoil,” Sept. 29, 2008: http://www.thenation.com/doc/20081013/greider3 [1]

Robert Kuttner, “After the Bailout Failure, What Now? Sept. 29, 2008:
http://www.prospect.org/cs/articles?article=what_now_08 [2]

Robert Kuttner, “Learning from 1929,” Sept. 30, 2008: http://www.prospect.org/cs/articles?article=learning_from_1929 [3]

David Sirota, “Top 5 Reasons to Vote Against Wall Street’s Bailout,” Sept. 28, 2008:
http://www.ourfuture.org/blog-entry/2008093928/top-5-reasons-vote-agains... [4]

Joseph Stiglitz, “How Much Will It Cost and Will It Come Soon Enough,” Sept. 29, 2008:
http://www.prospect.org/cs/articles?article=how_much_will_it_cost_and_wi... [5]

Joseph Stiglitz, “A Better Bailout,” Sept. 26, 2008:
http://www.thenation.com/doc/20081013/stiglitz/print [6]

Until the next post, the very best to my readers,

Bill Neil
Rockville, MD