Financial Markets

Our friend Rob Dugger penned a powerful op-ed in the Washington Post today, A Prescription for Recovery.  It offers these five principles to help guide our next steps in putting our financial system back on track: 

· Put individual taxpayers first. The program needs to focus on keeping taxpayers in their homes, strengthening their local economies and protecting their savings. It has to help Americans broadly, not just a few, and certainly not the managers who got us into this mess.

· Minimize taxpayer costs over the long term. Short-term thinking created this crisis. Only long-term efforts will end it. The S&L crisis was limited to the financial sector. It was best addressed on an aggressive basis, bank by bank. This meant that least-cost resolutions were the way to go and that the RTC should buy and sell assets quickly, which it did. But the current situation is systemic. It involves our entire economy. This means the revitalization program should buy distressed assets early and plan to hold them for a long time. The goal is to make the economic adjustment as shallow as possible, to limit the injury to families, jobs, homes and savings.

· Avoid creating an interim program. This program must not be like the S&L "rescues" of the mid-1980s, which merely enabled the problems to grow. The program needs to have the capacity, flexibility and scope to address the vast size of the current crisis. Congress should put no dollar or time limit on our national commitment. Yes, markets will want dollar figures. If numbers must be given, let them be in statements about the program -- and let them be big. Do not shy away from saying that the United States is prepared to commit a trillion dollars over the next 10 years to halt this meltdown here and now.

· Remember global investors, whose confidence we must regain. This crisis is an economic heart attack, but not a fatal one. We must assure global investors that we are fully prepared to cover American losses. No one suggests that this will be easy. The budget choices being forced on us will be profoundly difficult. But we have the strongest democracy and the most durable legal and financial systems in the world. We have the capacity to absorb losses and the ability to reshape our economy. Foreign investors need evidence that we are committed to the changes necessary for recovery. When they see that, they will buy our private assets again.

· Do not hesitate. Bill Seidman's greatest lesson was action. It is far better to deal with a few assets, even without knowing quite what to do, than to do nothing while trying to work out the details. Whoever is in charge of the revitalization program must not hesitate to buy the assets that institutions offer -- these will be what is burdening the institutions and clogging our credit system the most. There are many strategies for buying assets and infusing capital that can protect the program from paying too much and ensure that taxpayers benefit from price increases as recovery occurs. The key is to get the assets in-house quickly and learn how to manage them effectively.

Senator Obama released a detailed statement of principles that will be guiding his involvement i n the coming efforts to stop a full blown financial meltdown in the US.  It includes something NDN feels very strongly about - a plan to keep people in their homes. 

The statement: 

"The era of greed and irresponsibility on Wall Street and in Washington has led to a financial crisis as profound as any we have faced since the Great Depression. 

"But regardless of how we got here, the circumstances we face require decisive action because the jobs, savings, and economic security of millions of Americans are now at risk.

"We must work quickly in a bipartisan fashion to resolve this crisis and restore our financial sector so capital is flowing again and we can avert an even broader economic catastrophe. We also should recognize that economic recovery requires that we act, not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America. 

"But thus far, the Administration has only offered a concept with a staggering price tag, not a plan.

"Even if the Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects some basic principles. 

No blank check. If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight. Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check.

Rescue requires mutual responsibility. As taxpayers are asked to take extraordinary steps to protect our financial system, it is only appropriate to expect those institutions that benefit to help protect American homeowners and the American economy. We cannot underwrite continued irresponsibility, where CEOs cash in and our regulators look the other way. We cannot abet and reward the unconscionable practices that triggered this crisis. We have to end them.

Taxpayers should be protected. This should not be a handout to Wall Street. It should be structured in a way that maximizes the ability of taxpayers to recoup their investment. Going forward, we need to make sure that the institutions that benefit from financial insurance also bear the cost of that insurance.

Help homeowners stay in their homes. This crisis started with homeowners and they bear the brunt of the nearly unprecedented collapse in housing prices. We cannot have a plan for Wall Street banks that does not help homeowners stay in their homes and help distressed communities.

A global response. As I said on Friday, this is a global financial crisis and it requires a global solution. The United States must lead, but we must also insist that other nations, who have a huge stake in the outcome, join us in helping to secure the financial markets.

Main Street, not just Wall Street. The American people need to know that we feel as great a sense of urgency about the emergency on Main Street as we do the emergency on Wall Street. That is why I call on Senator McCain, President Bush, Republicans and Democrats to join me in supporting an emergency economic plan for working families - a plan that would help folks cope with rising gas and food prices, save one million jobs through rebuilding our schools and roads, help states and cities avoid painful budget cuts and tax increases, help homeowners stay in their homes, and provide retooling assistance to help ensure that the fuel-efficient cars of the future are built in America.

Build a regulatory structure for the 21st Century. While there is not time in a week to remake our regulatory structure to prevent abuses in the future, we should commit ourselves to the kind of reforms I have been advocating for several years. We need new rules of the road for the 21st Century economy, together with the means and willingness to enforce them.

"The bottom line is that we must change the economic policies that led us down this dangerous path in the first place. For the last eight years, we've had an "on your own-anything goes" philosophy in Washington and on Wall Street that lavished tax cuts on the wealthy and big corporations; that viewed even common-sense regulation and oversight as unwise and unnecessary; and that shredded consumer protections and loosened the rules of the road. Ordinary Americans are now paying the price. The events of this week have rendered a final verdict on that failed philosophy, and it is a philosophy I will end as President of the United States," said Senator Barack Obama.

$1 trillion bailout.  Government takeover off some of the largest companies in America.  Warnings of more bad news to come. 

It is critical that as part of this emerging financial bailout package, our Congress ensures that Americans facing foreclosure are also bailed out and allowed to stay in their homes.  This is not only the right thing to do, but as Rob Shapiro argued earlier this week, it is one of the best ways to stop the carnage on Wall Street.

Update, Sat 7:15am - Joe Nocera of the New York Times takes a hard look at the emerging financial bailout plan, and doesn't find much to like. 

After the fiscal mismanagement of the Bush era, are the American people really being asked to spend a trillion dollars bailing out failed financial institutions controlled by very rich people?  Will this rush to bailout prevent the next Administration from making critical investments needed to advance the national interest - in traditional and clean infrastructure, in our schools and teachers, in the skills of our workers, in health care, in reforming our immigration system, in securing our homeland? Will the next era of American politics be one of cleaning up the two great messes of the Bush age - Iraq and our financial and fiscal disasters? And not about embracing a new era of investment, of opportunity and 21st century prosperity? Of dreams deferred and sights lowered?  

The failure of conservative government in the Bush-DeLay-Abramoff era has been so epic, so profound and so terribly costly to the national interest and the American people themselves.  Bush and his team have been very much like a political hurricane, leaving behind unimaginable wreckage in their wake.  Perhaps it will be Katrina that becomes the symbol of this failed conservative era, the image that will be evoked in our collective minds eye for generations to come. 

Dr. Robert Shapiro, Chair of NDN's Globalization Initiative, and Simon Rosenberg, NDN President, today released the following statement:

The current financial crisis was caused by the persistent failure of the current Administration and the Federal Reserve to appreciate how our financial markets have been rapidly changing or to take minimal care to ensure that those changes did not put the American economy at serious risk. The Treasury and the Fed now are using nearly $1 trillion of Americans' money to bail out financial institutions whose reckless mismanagement they tolerated or ignored. The Congress must put at least as much effort into containing the crisis at one of its critical origins, by helping people keep their homes so the housing market and the derivative instruments based on it can stabilize.

Before Congress leaves, it should enact legislation that allows struggling Americans to renegotiate their mortgages, starting with the huge portfolio the government now holds through Fannie Mae and Freddie Mac. It should not be acceptable for our government to use taxpayers to bail out huge, mismanaged banks and insurance companies that speculated in mortgage-backed securities while allowing many of those same taxpayers to be tossed from the homes that backed up those securities. When Congress returns, it also should turn to the serious business of applying strict and appropriate transparency, capital and other regulatory standards to all significant financial institutions, including investment banks and hedge funds. And the politicians who hailed the hands-off attitude that enabled this crisis to fester and break out, and now blame greed instead of their own negligence, should be held accountable.

From tomorrow's NY Times;

In one the most extraordinary days in Wall Street’s history, Merrill Lynch is near an 11th-hour deal with Bank of America to avert a deepening financial crisis while another storied securities firm, Lehman Brothers, hurtled toward liquidation, according to people briefed on the deal.

The dramatic turn of events was prompted by the cataclysm of losses that has shaken the American financial industry over the last 14 months.

The moves came after a weekend of frantic negotiations between federal officials and Wall Street executives over how to avert a downward spiral in the markets. Questions still remain about how the market will react and whether other firms may still falter like A.I.G., the large insurer, and Washington Mutual, both of whose stocks fell precipitously last week.

Coming just a week after the government took control of mortgage lenders Fannie Mae and Freddie Mac, the magnitude of the industry’s reshaping is staggering: two of the most powerful firms on Wall Street, Merrill Lynch and Lehman, will disappear.

NDN's Rob Shapiro offered these reflections on the weakening of our financial markets a few days ago.