Experts discuss the politics of the bailout's defeat in the House, the fundamentals of the plan and where we might go from here.
We're watching economic history in the making. There is no consensus on what Congress is going to do next or what's going to happen on Wall Street in the coming weeks. Hundreds of billions of dollars are at stake, and it's clear that the decisions that are being made now are going to have a massive effect on all of us.
To help readers cut through the media overload, we've gathered together a dozen views from smart, alternative thinkers on the bailout, the politics surrounding its defeat and predictions about where the economy, and the government's actions, might go from here.
There's been quite a bit of discussion about exactly what happened with the bailout bill ...
Robert Kuttner offers his views, along with some suggestions for the Democratic leadership looking forward ...
In refusing to provide enough votes to enact a bipartisan bailout bill, Republicans may well have done Democrats a favor. The Democratic leadership gave up several provisions that their members wanted, including more relief for homeowners. But the Republican leadership took the position that they had extracted all they could get, and GOP House members were now free to vote their consciences. In practice that meant listening to the uproar of constituent backlash against a bill that did much for Wall Street and little for the common American. So the easy Republican vote was "No."
House Speaker Nancy Pelosi had been promised that 80 or 90 Republicans would vote for the bill. That way, both parties could share responsibility. But in the end, just 66 Republican votes materialized.
According to my sources, once Pelosi learned of the double-cross, she told the Democratic whips to make it a conscience vote on the Democratic side as well. With the likelihood of voter indignation and the strong possibility that this bill would not fix what was broken, Pelosi was not prepared to make this primarily a Democratic bill. Knowing that the Republicans were walking away from the deal, she held the roll call anyway, to make clear just whose failure this was.
When the vote came up short, she held it open a few minutes but made rounding up additional supporters the Republicans' problem. When the votes did not materialize, she banged the gavel, and the bill went down.
... The moment for this bill may have passed. Pelosi was also facing growing rebellion in Democratic ranks.
... Both parties will now go back to the drawing board -- and it is here that Republican calculations may have backfired, big time. For while many Republican legislators are posturing populist, they really don't have anything up their sleeves that is true to right-wing ideology, that will please angry taxpayers, and that will fix the problem. Vote No is not a program, and as the crisis deepens the vote will look increasingly cynical and opportunist.
Veteran journalist Peggy Simpson writes about the partisan dynamics ...
Pelosi not only had to work for the Paulson plan, she had to immunize her own folks against a potential campaign crusade by GOP ideologues that this was "socialism, socialism, socialism," foisted off on the public by Democrats now in charge of both houses of Congress.
Voters, meanwhile, had been persuaded this was indeed a taxpayer bailout for the rich, not a rescue plan for the very financial structure of the country. Their calls to congressional members ranged from 100-1 against to 300-1 against ...
Pelosi said from the outset that many liberal Democrats would not budge from the opposition. She also continued the tradition of the late House Speaker Thomas "Tip" O'Neill of understanding that "all politics is local" and that if a vote would mean sure defeat back home, the member could get a pass.
Pelosi and her team told Boehner they could get between 125 and 140 Democrats and that Boehner and Blunt would need to find between 80 and 100 Republicans. That seemed feasible Sunday.
On Monday, Pelosi delivered, Boehner fell short ...
Boehner said Pelosi had chased away a dozen wavering Republicans when she gave a speech saying the vote on this unpalatable $700 billion rescue plan had been made necessary by eight years of Bush policies, including lax oversight on Wall Street ...
Pelosi could have skipped the partisan speech on the eve of the vote -- but she was still trying to rally reluctant Democrats to swallow the bitter medicine.
Few Republicans had been on the House floor to hear Pelosi's speech, and none reacted when they heard it. It was later, after the shocking setback of the vote itself, that GOP leaders seized on the Pelosi speech to rationalize their own failure.
Ultimately, however, the blame-Pelosi excuse didn't help against Boehner.
It made him look even weaker. He had gotten only a third of his House Republicans to back the bill, far short of what he had promised. ... It turns out that Boehner knew hours before the vote ... that Republicans would be far shy of their goal, which could spell defeat for the overall bill.
If Pelosi had known that, she might have delayed the vote. That might have alarmed the markets but probably wouldn't have spooked them the way the actual defeat did.
David Brooks says that we're witnessing an epic failure of governance ...
This generation of political leaders is confronting a similar situation, and, so far, they have failed utterly and catastrophically to project any sense of authority, to give the world any reason to believe that this country is being governed. Instead, by rejecting the rescue package on Monday, they have made the psychological climate much worse.
George W. Bush is completely out of juice, having squandered his influence with Republicans as well as Democrats. Treasury Secretary Henry Paulson is a smart moneyman, but an inept legislator. He was told time and time again that House Republicans would not support his bill, and his response was to get down on bended knee before House Speaker Nancy Pelosi.
House leaders of both parties got wrapped up in their own negotiations, but did it occur to any of them that it might be hard to pass a bill fairly described as a bailout to Wall Street? Was the media darling Barney Frank too busy to notice the 95 Democrats who opposed his bill? Pelosi's fiery speech at the crucial moment didn't actually kill this bill, but did she have to act like a Democratic fund-raiser at the most important moment of her career?
And let us recognize above all the 228 who voted no -- the authors of this revolt of the nihilists. They showed the world how much they detest their own leaders and the collected expertise of the Treasury and Fed. They did the momentarily popular thing, and if the country slides into a deep recession, they will have the time and leisure to watch public opinion shift against them.
Some of the brightest economic minds have weighed in on why they endorsed or opposed the plan, and some discussed what they'd do differently ...
David Cay Johnston asks some pertinent questions ...
Questions abound: Do we believe in markets, which can be volatile -- or only in managed markets biased by government policy to the upside? Or do we believe in corporate socialism?
Is our economy so fragile that it cannot withstand shocks? Or is it fundamentally sound, as Senator John McCain was declaring until just days ago? And if our economy really is fragile, just how will borrowing $700 billion more to pay for bad loans make things better for anyone but the lenders and some of their customers?
What assurance do we have that borrowing $700 billion will not make things worse? None.
Keep in mind a paper released last week by two economists at the International Monetary Fund, who studied 42 banking crises over the past 37 years. Their conclusions (not the IMF's) are: Bailouts often do not work, they often result in more bad practices, and they distort economies by transferring wealth from taxpayers to bankers and their customers.
Perhaps the dissolution of this bailout bill means that we will now get a serious look at just where the problem is, how pervasive or concentrated bank problems are, and whether there are less expensive options ...
Maybe we will also get answers to some hard questions. Like:
- Why was the CEO of Goldman Sachs in the room when government officials decided to bail out the insurer AIG, especially since Goldman has about $20 billion, half of its shareholder equity, at risk on AIG? Keep in mind that Treasury Secretary Paulson is the immediate former CEO of Goldman.
- Why was Lehman Brothers, a Goldman competitor, the only Wall Street firm in trouble so far left to collapse on its own? The Wall Street Journal reports today that it was the collapse of Lehman (which because of its structure may not have been an attractive firm for purchase) that "triggered the cash crunch around the globe."
- Has Treasury obtained from every bank the amount of its illiquid assets, which would tell us if the problems are concentrated at a few banks or are pervasive?
- Would a temporary provision in the bankruptcy code, allowing people with toxic mortgages to get their loans rewritten or pursued to foreclosure, be a cheaper and better alternative?
Disclosure, transparency, options -- those should be the issues in the next few days.
Paul Krugman explains that the taxpayers wouldn't really be picking up that whole $700 billion tab, and suggests a different approach to the credit crunch ... "Where Will the Money Come From?"
In the end, the U.S. government will rescue the financial system -- not today or tomorrow, maybe not Thursday, but soon, and for the rest of our lives, or anyway until the next crisis.
But, people ask me, where will we get the money? Won't we have to borrow it from the Chinese?
(To understand why), a real-world example: the rescue of Wachovia. The FDIC got Citi to take over Wachovia's assets and liabilities with a deal under which the feds limit the losses -- they will cover any losses on mortgage paper over $42 billion -- in return, basically, for receiving a share of ownership, in the form of warrants and preferred stock. No actual money changed hands, which illustrates a fundamental principle: recapitalization doesn't mean laying out real money, at least initially -- it just means having taxpayers take on some of the risk.
A large-scale recapitalization would probably take the form of a giant swap of debt for equity: The Treasury would issue several hundred billion dollars' worth of bonds, and give them to financial firms in return for preferred stock. The bonds wouldn't have to be sold to outside buyers -- they would simply be credited to firms' balance sheets.
The effect would be that if the financial firms did well, taxpayers would share in their good fortune via those stock holdings; if firms did badly, they could meet their obligations by selling some of those bonds, which would cut into the value of all their stock, including the stuff Uncle Sam owns. So as in the case of Wachovia, what's really happening is that the taxpayers are taking on some of the risk.
So is all this magic? No, over time Treasury has to pay interest and principal on the bonds it issues; the value of the bonds comes from the fact that people believe the U.S. government can do that ...
James Galbraith thinks the bailout was the least-bad possibility, so he reluctantly endorsed it. But, like Krugman, he thinks there are better ways to skin this cat ...
The question now is, could the purposes of this bill be met with a smaller appropriation. In my view, the best way to answer that question is to ask: What problem does $700 billion solve? The answer to that is, we do not really know. On the face of it, the exposure to bad mortgage-backed securities is considerably larger; the purchase plan in the bill would inevitably bail out some inessential as well as essential investors and institutions, thus wasting a fraction of the resources; and we do not know the full extent to which banks need new capitalization in order to remain solvent. The reasonable presumption, therefore, is that TARP (Troubled Asset Relief Program) would buy time; one hears estimates that the authority would be used at a rate of $50 billion a month, though the basis for that estimate is not clear. A smaller appropriation would buy less time.
How much time is needed? There is in my view very little prospect that economic recovery will restore housing prices and personal incomes within a reasonable time -- that is, before the $700 billion runs out. Therefore, it seems to me unlikely that this issue will finish here; more will be needed at a later date. However, on the assumption that one can trust and monitor the actions of the Treasury to assure that it carries out its mandate in good faith, there is an argument for appropriating the full sum now: It will help ensure that the system will hold into next year. A smaller appropriation increases the risk of a major crisis in the relatively near term. By how much and when? No one can say.
If one does not trust the Treasury to act in good faith and in compliance with the spirit and letter of the monitoring and enforcement provisions, then of course there is no case for this bill ...
Whatever happens, if my analysis is correct, even if the bill is passed the issues will not go away. The $700 billion will permit parts of the banking system to be reorganized. I doubt it will cure an underlying problem of illiquid securities many times larger than that. I believe that as banking consolidation proceeds, alongside the decline and fall of the "shadow banking system," the fact that deposit insurance, regulation, disposition of bad assets and enforcement are the sensible way forward will become increasingly apparent. In short, I would do these things now if I could. But if they are not done now, they will still have to be done later, even if this bill is passed.
John Hussman, of Hussman Funds, weighs in ...
However the final legislation is written, the Troubled Assets Relief Program (TARP) being rushed through Congress will evidently be built around its single worst provision, which is that the Treasury will have authority to purchase distressed mortgage securities from U.S. financials ...
Does this transaction protect the institution against failure? No! If you buy the bad assets off the balance sheet at their market value, nothing changes on the liability side! You may have improved the "quality" of the balance sheet, but you've provided no additional capital. At best, you've allowed the bank to liquidate its assets more easily to meet continuing customer withdrawals in the vicious cycle described above.
The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.
A better approach would be for the government to provide capital directly, in the form of a "super-bond," in an amount no greater than the debt to bondholders. The "super-bond" would be subordinate to customer liabilities, so it could be counted as capital for the purpose of capital requirements, and would be seen by customers as a legitimate cushion of protection. However, in the event of bankruptcy, it would have a senior claim in front of both stockholders and even senior bondholders. Do that, and you've actually got a mechanism to protect the financial system while at the same time protecting customers and taxpayers. Ideally, the super-bond accrues a relatively high rate of interest so that financials have an incentive to shift to private financing as soon as possible, but you would also defer the interest until the bank meets a minimal level of profitability to make sure that the financing doesn't strain the institution's liquidity.
Floyd Norris, chief financial correspondent fro the New York Times, agrees that huge financial bailouts come with inherent risks ...
The banking industry is in trouble with or without this bailout. Its efforts to change accounting rules to hide its problems are sad and appalling. The defeated bill would have authorized the Securities and Exchange Commission to suspend the mark-to-market rule, which forced the banks to admit how badly they had gambled and lost. The S.E.C. has already yielded to political pressure and barred short-selling in financial stocks, so it is possible it would yield to the accounting pressure as well ...
Absent the defeated bailout, the government is picking off weak banks one by one, arranging takeovers (takeunders might be a better term) when they can. In both the Washington Mutual and Wachovia deals, the depositors are doing fine, while shareholders suffer. That discourages bank runs by depositors, which is good, but encourages what we will call "stock market runs" by shareholders of any bank that might be in the same league as those banks. (If your bank ever bragged about its mortgage lending, look out.)
The risk of a big bailout always was that it would make investors think the banks were in even worse trouble than they appeared to be. Henry M. Paulson Jr., the Treasury secretary, tried to structure this bailout as a purchase of assets, so that banks taking the money would not be tarnished by doing so. But the decision to force those banks to turn over equity may have killed that move, and the changes to be made in the bill now could well make it more punitive. That could be good for a sense of justice, but bad for containing the crisis.
Where Do We Go from Here?
Dean Baker asks an important question: Even if one opposes the deal in its current form, at what point does inaction become deeply irresponsible?
The Democrats have made good progress in getting the Bush administration to move from the $700 billion blank check proposal that we saw last weekend. ... However, there is still much that is missing.
(This week's debacle) leaves the question of whether the Democrats can responsibly walk away from the bailout. This involves a tough call. The financial system was really shaken by the events of last week when Lehman Brothers went under and AIG was about to follow suit. However, Ben Bernanke and Henry Paulson were able to duct-tape things together with the cooperation of the other major central banks.
The financial markets remain extremely unsettled and more bad news is a virtual certainty, but Bernanke and Paulson have lots of duct tape at their disposal. The sort of financial breakdown that we all fear remains a possibility, but my bet is that they will be able to deal with whatever crises develop.
There is one other point worth considering in assessing the responsibility of a walk-away strategy. Suppose the Paulson plan goes through. It is virtually certain that the economy will weaken further and the number of foreclosures and people without jobs will continue to rise.
This is the fallout from a collapsing housing bubble. Families that have seen most of their home equity disappear will feel the need to cut back their consumption and increase their savings. We have a huge cohort of baby boomers at the edge of retirement, most of whom have accumulated almost no wealth during their working lifetime. When these families respond to their loss of home equity by cutting back their consumption it will deepen the recession.
In this context it might prove very important to have the resources needed to provide a substantial stimulus. In principle, even a $700 billion bailout package would not be so large as to preclude a further stimulus next year. However, there is no doubt that this bailout will make further stimulus much more difficult to sell politically. In this sense it is hard to view supporting a bad bailout package as the responsible course of action. While the bailout may lesson a presumably small risk of financial breakdown, it could have the effect of making the recession much longer and more painful than necessary. This would not be responsible.
Sarah Anderson, Chuck Collins, Dedrick Muhammad and Sam Pizzigati from the Institute for Policy Studies argue that the tab for the bailout -- whatever its particulars at the end of the day -- should be picked up by Wall Street, and that the rest of the economy needs some relief as well. ...
Lawmakers in Congress appear to have assumed that the federal government will simply borrow more money to foot the bill for the bailout. The national debt ceiling will rise to a whopping $11.3 trillion, up from $8 trillion a year ago.
But this rush to borrowing merely shifts the bailout burden onto the backs of future taxpayers. Congress needs to change course -- and develop a "pay as we go" plan that makes Wall Street pay. The lion's share of bailout funding should come from the high-finance gamblers and the wealthy CEOs who have so profited from our casino economy.
Funding the Bailout: Basic Principles
- Wall Street and speculators should pay now for the mess they created.
- Instead of borrowing from the super-wealthy beneficiaries of the casino economy, we should tax them.
- Any bailout should stimulate the real economy with investments in Main Street, not just Wall Street.
Broadening the Bailout Dollars
The debate over the bailout has so far concentrated on the $700 billion purchase of "troubled assets" proposed by Treasury Secretary Henry Paulson. A real "bailout" would also target the troubled households of working American families. A $200 billion "Main Street Stimulus Package" could bolster the real economy and those left vulnerable by the subprime mortgage meltdown.
This package should include:
- A $130 billion annual investment in renewable energy to stimulate good jobs anchored in local economies and reduce our dependency on oil.
- A $50 billion outlay to help keep people in foreclosed homes through refinancing and creating new homeownership and housing opportunities. These funds could also help those locked out of the American Dream to purchase homes through nonspeculative mortgage programs.
- A $20 billion aid package to states to address the squeeze on state and local government services that declining tax revenues are now forcing.
Robert Reich lays out some of the problems facing lawmakers at the height of an election season, and makes a prediction for this week ...
House leaders will schedule another vote as soon as they can convince twelve of the naysayers, from either party, to approve.
Wild card: angry voters who go to the polls in five weeks. Conservatives don't want government to take over the free market. Liberals don't want Wall Street fat-cats to get a free ride. And the more the public focuses on the bill, the angrier they become. (Polls show about a third of Americans in favor, a third opposed, and a third undecided; the percent in favor is growing slightly, but the percent against is growing even faster.)
Wild card on the other side: The Dow is dropping precipitously. Roughly half of all American families have some retirement money in the stock market. And even if they don't own shares of stock, an increasing number are feeling the pinch of an economy gradually grinding to a halt. (This week's employment report will not be very encouraging.)
Don't expect easier sailing in the Senate. Fewer than a third of the Senate is up for re-election on Nov. 4, but they're all hearing from angry constituents.
Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street's bad debts with no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners.
And Brad DeLong predicts that the government will have to limit investors' risk in the future ...
I don't believe that after this the price of risk will ever again become a free-market price, just as after the Great Depression the short-term price of liquidity -- the short-term interest rate -- ever became a free-market price. The federal government, in one form or another, is going to be in the business of insuring debt securities against steep declines in value. Securities that are not so insured will simply not be traded. What Fannie Mae did for "conforming" home loans, the Treasury or some other government agency will do for derivative securities. It will offer insurance, charge for that insurance, and supervise and oversee financiers much more strictly.
... The market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency and adverse selection problems crash spectacularly. Is this a situation in which we should move health care -- also rife with moral hazard, agency and adverse selection problems -- toward a free market configuration? No. Market regulation needs to be smart. But first market regulation needs to be.
So much for the experts. Use the comments to share your own views.
Joshua Holland is an AlterNet staff writer.
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