Financial Markets

This is running on their site now:

After nearly eight years of voting in virtual lock step with President Bush on everything from tax cuts to torture, House Republicans decided on Monday to break ranks on the survival of the nation's financial system.

The rejected bailout bill that was on the floor after a weekend of hard negotiating was objectionable in many ways, but it was a Republican-generated bill and was improved from the administration's original version. Sixty percent of House Democrats voted for the bill, enough to easily pass the measure if the Republicans had not decided to put on their display of pique and disarray.

The question now is whether the stock-market plunge that followed the House's failure to lead - and a renewed credit freeze - will be enough to get the 133 Republicans who voted against the measure to change their minds. And, more important, whether the damage that the no vote has inflicted is readily reversible.

Republican no votes were rooted less in analysis or principle than in political posturing and ideological rigidity. The House minority leader, John Boehner, conceded as much: "While we were able to move the bill drastically to the right, it wasn't good enough for our members."

It's not clear what would be good enough for the Republicans since there was very little talk of substance on Monday after the bill died on the floor of the House. Instead, the Republicans tried to blame a speech before the vote by House Speaker Nancy Pelosi, who connected the current crisis to the fiscal and economic mismanagement of the Bush years. It may not have been the perfect moment to say that, but it was true.

Republicans were also upset that serial bailouts represent a rejection of free-market principles. They do. That's because the free market in finance, unregulated and unsupervised, has failed. And, in its failure, it is inflicting greater damage on an already weak economy.

No amount of amendments to the bailout package will change the administration's disastrous economic record or erase the manifest failure of the Republicans' free-markets-above-all ideology.

Since last week, this page has urged Congress to take the time to get the bailout right. Over all, lawmakers have given too little consideration, in public at least, to alternatives to the Treasury's plan to buy up the bad assets from various financial firms.

In the bill rejected on Monday, the unlimited powers that the Treasury Department had initially sought were curbed, and Congressional oversight was added. But judicial review of Treasury's purchases was not adequately ensured. The courthouse door was not closed entirely; lawyers could still seek effective remedies for actions that violate the Constitution. But that's a much higher hurdle than the already formidable barriers in place to discourage lawsuits against the government.

Homeowners were also given short shrift with provisions that mainly urged lenders and the Treasury to do more to help them. That's unconscionable. The financial crisis is as much a problem for homeowners as for Wall Street investment bankers. Appeals to lenders' better natures have not worked to bring lasting relief to homeowners. If they are still not working in the coming months, Congress will have to revisit the issue.

Taxpayer protections are also iffy, such as a requirement that in five years, the president must give Congress a plan for recouping any losses from financial firms. What will happen then is anyone's guess. Lawmakers could decide at that point that taxpayers are the only pit bottomless enough to absorb those losses.

Still, the imperfections in this bill are the result of a democratic process that can be rethought, revisited and reworked. It is better than nothing, which is what some backward-looking House Republicans gave Americans on Monday.

As some of you may be aware our office is right across from the Treasury Building.  I can see Paulson from my front porch, so to speak.  

A few minutes ago a very loud protest began outside Treasury.  It is angry, loud, unnerving. 

For those in Congress looking to but a deal back together I hope they consider what has happened to the American middle class this decade.  The typical family is making less money today than when Bush took office.  Those in bankruptcy, with homes foreclosed upon, in poverty and without health insurance have risen.  Every day anger at the economy drove the GOP from office in 2006 and is driving the national debate today.  Given all this it was almost unbelievable that Congress would pass the 1st Bush Bailout Bill which had so little obvious benefit for those struggling harder and harder to make ends meet.  It is why the calls coming into Congressional offices are running big time - 30 to 1 in some offices - against the deal.  

The economic performance of the Bush era has been an epic failure.  A lower standard of living for the typical family.  Rising poverty and those without health insurance.  Out of control spending balanced with dramatic tax cuts for the wealthy creates a structural budget deficit and a huge increase in the national debt.  American support for global economic liberalization dramatically recedes, and the new global trading round - Doha - fails.  Needed investments in our kids, our skills, our infrastructure, the all important transition to a low carbon economy all put off.   Umployment rising.  Collapsing housing and financial markets. Bush's economic stewardship has been disasterous for America - why should we expect him to all of a sudden to get a major financial crisis right? 

Our advice to Congress - put real provisions to keep every day in their homes as part of the final deal or don't be suprized if the American people and very real voters spit the bit.  The American people are tired of a government more concerned with things other than their increasingly difficult struggle to get ahead.  This debate is a time - even this close to the election - where Congress and the President can acknowledge that the struggle of every day matters to them as much as the struggle of big banks.  This isn't that hard my friends.  Keeping people in their homes is both the right economic thing to do and the right moral and political one as well.  

If you are looking for a plan on how to do it give Hillary Clinton a call.  She has a good one.

We will have more to say on the bailout bill a little later today, but for now I found these essays by Larry Summers, Paul Krugman, Robert Samuelson and Steven Pearlstein helpful.

For both economic and political reasons, we start the morning disappointed more wasn't done to keep people in their homes.  

In a powerful lead editorial today, What About The Rest of Us?, the NYTimes echoes NDN's calls to make keeping people in their homes the core of the final financial rescue package:

Lawmakers were still wrangling Thursday night about the Bush administration's $700 billion bailout of the financial system. Political theater was mainly responsible for the delay, but it will be worth the wait if lawmakers take the time to make sure that the plan includes real relief for homeowners and not only for Wall Street.

The problems in the financial system have their roots in the housing bust, as do the problems of America's homeowners. Millions face foreclosure, and millions more are watching their equity being wiped out as foreclosures provoke price declines.

The problems became even more evident Thursday night with the federal seizure and sale of Washington Mutual to JPMorgan Chase.

It's unacceptable that lawmakers have yet to come out squarely in favor of bold homeowner relief in the bailout bill. Treasury Secretary Henry Paulson, the biggest advocate of bailing out Wall Street, is also a big roadblock to helping hard-pressed borrowers. He wants to keep relying on the mortgage industry to voluntarily rework troubled loans, even though that approach has failed to stem the foreclosure tide - and does a disservice to the taxpayers whose money he would put at risk in the bailout.

The New York Times offered these thoughts this morning:

Absence of Leadership

It took President Bush until Wednesday night to address the American people about the nation's financial crisis, and pretty much all he had to offer was fear itself.

There was no acknowledgement of the shocking failure of government regulation, or that the country cannot afford more tax cuts for the very wealthy and budget-busting wars, or that spending at least $700 billion of taxpayers' money to bail out Wall Street and the banks should be done carefully, transparently and with oversight by Congress and the courts.

We understand why he may have been reluctant to address the nation, since his contempt for regulation is a significant cause of the current mess. But he could have offered a great deal more than an eerily dispassionate primer on the credit markets in which he took no responsibility at all for the financial debacle.

He promised to protect taxpayers with his proposed bailout, but he did not explain how he would do that other than a superficial assurance that in sweeping up troubled assets, government would buy low and sell high. And he warned that "our entire economy is in danger" unless Congress passes his bailout plan immediately.

In the end, Mr. Bush's appearance was just another reminder of something that has been worrying us throughout this crisis: the absence of any real national leadership, including on the campaign trail.

Given Mr. Bush's shockingly weak performance, the only ones who could provide that are the two men battling to succeed him. So far, neither John McCain nor Barack Obama is offering that leadership.

What makes it especially frustrating is that this crisis should provide each man a chance to explain his economic policies and offer a concrete solution to the current crisis.

Mr. McCain is doing distinctly worse than Mr. Obama. First, he claimed that the economy was strong, ignoring the deep distress of the hundreds of thousands of Americans who have already lost their homes. Then he called for a 9/11-style commission to study the causes of the crisis, as if there were a mystery to be solved. Over the last few days he has become a born-again populist, a stance entirely at odds with the career, as he often says, started as "a foot soldier in the Reagan revolution."

After daily pivoting, Mr. McCain now says that the bailout being debated in Congress has to protect taxpayers, that all the money has to be spent in public and that a bipartisan board should "provide oversight." But he offered not the slightest clue about how he would ensure that taxpayers would ever "recover" the bailout money.

Mr. McCain proposed capping executives' pay at firms that get bailout money, a nicely punitive idea but one that does nothing to mitigate the crisis. And that is about as far as his new populism went.

What is most important is that Mr. McCain hasn't said a word about strengthening regulation or budged one inch from his insistence on maintaining Mr. Bush's tax cuts for the wealthy. That trickle-down notion has done nothing to improve the lives of most Americans and, even without a $700 billion bailout, saddled generations to come with crippling deficits.

Mr. Obama has been clearer on the magnitude and causes of the financial crisis. He has long called for robust regulation of the financial industry, and he said early on that a bailout must protect taxpayers. Mr. Obama also recognizes that the wealthy must pay more taxes or this country will never dig out of its deep financial hole. But as he does too often, Mr. Obama walked up to the edge of offering full prescriptions and stopped there.

We don't know if Mr. McCain or Mr. Obama will do any good back in Washington. But Mr. McCain's idea of postponing the Friday night debate was another wild gesture from a candidate entirely too prone to them. The nation needs to hear Mr. Obama and Mr. McCain debate this crisis and demonstrate who is ready to lead.

"The American people are facing a moment of economic crisis. No matter how this began, we all have a responsibility to work through it and restore confidence in our economy. The jobs, savings, and prosperity of the American people are at stake.

"Now is a time to come together - Democrats and Republicans - in a spirit of cooperation for the sake of the American people. The plan that has been submitted to Congress by the Bush Administration is flawed, but the effort to protect the American economy must not fail.

This is a time to rise above politics for the good of the country. We cannot risk an economic catastrophe. Now is our chance to come together to prove that Washington is once again capable of leading this country."

Tonight we all learned that "the plan" being discussed in Congress is actually President Bush's.  Not Paulson's plan, nor Bernanke's.  But George W Bush's.  Not sure what this will end up doing to the process, but I cannot imagine it is good.

As I get ready to hear from our President tonight, I am comforted by recalling that indeed he is our first President with an MBA. 

Perhaps, tonight, he can use that MBA to explain this statement from his Treasury Department earlier this week.  

Years of reckless mismanagement by the self-styled masters of the financial universe and senior economic policy officials now leave us with no alternatives but major action – but the Administration’s proposals are neither the only alternative nor anywhere close to the best one.

The Treasury says we need its plan to address a liquidity crisis, with banks unable to secure the funds to lend to sound businesses that need to invest or just need to meet their payrolls. There is evidence that overnight lending to banks by other banks or other financial institutions is way down. But there’s no evidence of sound companies unable to get funds to meet operating requirements. Moreover, the Federal Reserve has opened its "discount" window and is prepared to lend funds to any financial institution and at below-market rates. The Bush Administration seems to be trying to steamroll Congress and the public: we have to conclude that there is no liquidity emergency that could conceivably justify the steps they propose.

The Treasury also says Americans have to be prepared to bankroll their plan, because more financial institutions are on the verge of insolvency, which would trigger serious problems for the economy. The insolvency or capital problem is self-evident, since these institutions created it. They borrowed hundreds of billions of dollars to buy mortgage-backed securities and to sell the default-protecting derivatives of those securities, all of which were patently speculative: they bought and sold them precisely because they produced very large streams of monthly income, and since financial markets trade off risk and return, their initial high returns signaled that they were very risky.

Now that the securities have fallen sharply in value, these institutions owe much more on the debt they took on to buy them than the securities themselves are worth. That means capital losses that come out of their equity and leave many of them technically insolvent or close to it. So there is a real capital or equity problem across much of our financial system. The Treasury plan won’t solve it, however, not at least on terms that any sensible legislator, regulator or taxpayer should consider.

The Treasury plan originally contemplated providing that capital by paying financial institutions more than their securities are currently worth – since it’s the current market value of those securities that threatens these institutions with insolvency. So that means ordinary taxpayers would have to overpay for the assets of institutions owned and operated by the richest people in America. That’s the Bush economic doctrine, but it’s not mine – is it yours?

At a minimum, if taxpayers are to overpay rich people for their risky investments, they should get a big equity stake in all the institutions in return. That would make it a version of a debt-equity swap – but if that’s what it is, we alternatively could use regulation to require debt-equity swaps between the institutions and those they actually owe to debt to. That would be cleaner, less intrusive over the long run, and create no taxpayer exposure.

Alternatively, Congress could mandate that these institutions halt dividend payments and raise more capital, since we’re in this fix because they haven’t been subject to capital/equity requirements. Anything can find a buyer at the right price, and as a result of these institutions’ mismanagement, they’ll have to trade more of their equity for the capital -- as Goldman Sachs is doing now with Warren Buffet.

That still leaves the most serious business. Congress needs to take serious steps to address the underlying cause of the crisis by stabilizing the underlying assets: provide a new loan facility for homeowners facing foreclosure or new mechanisms to renegotiate the terms of the mortgages of people facing foreclosure. It also leaves one more thing: the stark and unhappy recognition that the Treasury, the Federal Reserve and the White House have produced an unworkable, inequitable and inefficient plan that Congress need not and should not accept.

In its lead editorial today, the New York Times asks a simple but super important question - why should we trust this Administration to understand what is happening now to our financial markets, offer the right solution and then manage the coming difficult process ahead? 

With two days of Senate and House testimony ahead, our financial future takes center stage in Congress, as it appropriate given what the American people are being asked to do, and who is doing the asking.

As I wrote over the weekend, I, like many, worry about what this means for the agenda of the next President.  Through the twin disasters of Iraq and the financial bailout, we will have little money now to tackle other urgent national priorities - modernizing our schools, improving the skills of our workers, investing in clean and traditional infrastructure, helping move our nation to a low-carbon future, radically improving our health care system, managing the coming retirement of the Baby Boomers, protecting our homeland, keeping people in their homes? Will cleaning up the terrible messes of this disappointing era overwhelm the need to build our 21st century economy and sap our collective capacity to tackle the necessary and tough challenges ahead?

Congress must stand firm and ask the tough questions.  The most important being will this investment of what will be more than $1 trillion actually stop the meltdown?  Rob and I offered our thoughts on this last Wednesday, and argue that without an effort to keep people in their homes, any moves by the the government are unlikely to do what we need them to do. 

It is more important now for Congress to do the right thing than the expedient thing.