The Legislative Chess
In my estimation, this is one hundred percent correct. The only way to avert disaster is for a substantial block of progressive lawmakers to say — as soon as possible — that they will note vote for any bailout that does not:
- Preserve substantial financial upside for taxpayers in the event that the bailout works (I think in practice this requires an equity stake in the bailed out firms, but I’m not sure).
- Meaningful steps to restructure mortgages and keep most people in their houses.
- A real second stimulus package.
- Controls on executive pay for bailed out firms.
If such a block of legislators emerges, it’s conceivable that a bad bailout plan will nonetheless pass with the votes of conservative lawmakers and on the insistence of the Bush administration. And if that’s what happens, that’s what happens. But at all costs the scenario to avoid is a situation in which the lame duck administration, with the assent of progressive lawmakers, passes a bad bailout with only fig leaf protections that conservatives are then able to disavow. Progressives need to make clear that our top priorities are (a) relief for middle class families, and (b) protecting the interests of the taxpayers. If the finance class needs progressive votes for a bailout, they should only be able to get them by agreeing to (a) and (b). To concede in advance that “something” must be done, and then start dickering with the lobbyists over how many scraps ordinary people get tossed would be crazy.
39 Responses to “The Legislative Chess”
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September 21st, 2008 at 3:28 pm
who are you bargaining with?
Bush will do what Bush will do. and you’ll either like it, or hate it. but you don’t get a say in it.
September 21st, 2008 at 3:37 pm
“Bush will do what Bush will do. and you’ll either like it, or hate it. but you don’t get a say in it.”
Thanks for reminding me why I voted straight Democratic in 2006.
September 21st, 2008 at 3:38 pm
who are you bargaining with?
Bush will do what Bush will do. and you’ll either like it, or hate it. but you don’t get a say in it.
American progressive leaders. Just as pathetic as the rest of the American political establishment.
September 21st, 2008 at 3:40 pm
Obama has a statement out on principles for considering the Treasury bailout proposal — worth a look
http://my.barackobama.com/page/community/post/amandascott/gGg9zm
September 21st, 2008 at 3:41 pm
Matt, I think you’re wrong abou #1. If the Fed buys mortgage-backed bonds (and CDOs, etc.) from the banks, and those assets end up going up in value in the long term, the govt. makes money even without an equity stake in the banks. So there is financial upside.
I do think an equity stake for the govt. is a great idea, though.
As for a stimulus, though, I’m not sure it does anything. It’s just a fancy name for a temporary tax cut.
September 21st, 2008 at 3:45 pm
Noah, I don’t think “bailout works” means the financial assets increase in value. Part of the problem is that no one knows what their value is, in many cases. I also doubt that the Fed has the expertise to manage a massive portfolio of distressed and opaque mortgage-backed bonds and other instruments.
September 21st, 2008 at 3:55 pm
Noah, I don’t think “bailout works” means the financial assets increase in value.
Wouldn’t the Fed be buying these assets at prices so low that there are almost certain to go up in value on average? It’d be criminal not to.
September 21st, 2008 at 3:57 pm
I think the poster a few threads back has it right: Bush is offering us a shit sundae. Democratic Members of Congress are arguing that , in exchange for $700 Billion of our money, Bush should put a cherry on top.
Which does NOTHING to help the ordinary taxpayer but merely makes Democrats complicit in Bush’s giveaway to the Superrich.
Democratic Congressmen evidently have their pride as whores. They may do the political equivalent of giving blowjobs in a dirty alley but , for appearances sake, they want some cheap token in return.
Which will let Rush, O’Reilly etc claim in a few weeks that this was all an irresponsible $2 Trillion Democrat giveaway to bail out some poor people. After all , the Democrats control Congress so they are responsible.
And Democrats in Congress will be genuinely bewildered. Because they don’t understand what this foreign word “responsible” means.
September 21st, 2008 at 3:59 pm
“note”? I think you mean ‘not.’
September 21st, 2008 at 3:59 pm
Where’s Obama?
September 21st, 2008 at 4:01 pm
Re “A real second stimulus package. ”
————–
So you dump $31,000 of additional debt onto some poor Democratic voter — and then give him a cheapshit $500 “stimulus package”??
Assuming that the poor dumbshit slept through those public school arithmetic classes?
I guess we’ve learned something from Karl Rove after all.
September 21st, 2008 at 4:02 pm
WillieStyle — why would that be? What should the prices be right now? What does this “almost certain?” mean? If that were true, wouldn’t private market players who didn’t have liquidity or solvency problems be snapping those securities up themselves?
September 21st, 2008 at 4:03 pm
Duncan KInder, Obama is at http://my.barackobama.com/page/community/post/amandascott/gGg9zm
see comment 4
September 21st, 2008 at 4:17 pm
* Preserve substantial financial upside for taxpayers in the event that the bailout works (I think in practice this requires an equity stake in the bailed out firms, but I’m not sure).
At Friday’s closing prices, USG can purchase Bank of America/Merril Lynch outright for about 216 billion dollars. If you saw the chart in the NYT a coupla days ago, the total market capitalization for all banks is about a trillion dollars. For this money, forget the equity upside, just buy the things outright at Friday’s closing price. That’s perfectly fair for shareholders.
* Meaningful steps to restructure mortgages and keep most people in their houses.
This is the important issue of the real economy. Do I need to point out that if the Feds buy the banks they control own the mortgages and can set any terms they want?
* A real second stimulus package.
This is a distraction from the issue of the banks and mortgages. Summary: if you can’t find people (because they’ve been foreclosed and are living on the streets) how do you send them a check?
* Controls on executive pay for bailed out firms.
Irrelevant. Totally fucking irrelevant. Giving the banks a free hand in exchange for this would be the worst trade since the Indians sold Manhatten for 24$.
Basically, the banks have screwed the pooch here and the bankers should get fired. That’s fine, but I don’t care, that’s petty stuff that might distract people from the real issue.
The issue for the real economy are the foreclosures; the issue for the financial economy are the derivatives paper. If you bought the banks outright, the Feds could simply tear up many of the derivatives, renegotiate the mortgages without needing the judges, and then pay off the creditors in whatever amounts seem fair. (And they can keep the banks running at the same time!) Further, the banks can’t fail from stock price collapses if the feds own them.
Bottom line: there is absolutely no reason to give the banks the same amount of money that it would cost to buy them at market price.
NB: if someone suggested such a plan, banks stocks would be bid up, but the Fed can set the price to the Friday close, which was a fair market price.
max
['All else is minor.']
September 21st, 2008 at 4:18 pm
bdbd: Not necessarily. If the CDOs etc. are just illiquid (i.e. hard to price, but fundamentally worth something), the bailout could “work” and then the govt. could make money in the long term if and when housing prices go back to where they were in the bubble days. Seems unlikely. But they almost certainly will go up somewhat, meaning the bailout won’t end up costing $700B.
WilleStyle: I agree.
September 21st, 2008 at 4:33 pm
noah, I agree that “it could happen” is a way of describing things. I would shy away from it as a strategy. I don’t know what it means for CDOs to be illiquid — they are just securities or some other sort of instrument, and they have a value somewhere between 0 and big (which as you say is quite uncertain — that’s a big part of the problem. Perhaps “has an uncertain value” is what you mean by illiquid, but again that’s a big problem for something that shouldn’t be so opaque.). But it is businesses that are illiquid or insolvent. I also don’t see what future prospects for housing prices has to do with the current situation.
September 21st, 2008 at 4:34 pm
Irrelevant. Totally fucking irrelevant. Giving the banks a free hand in exchange for this would be the worst trade since the Indians sold Manhatten for 24$.
Oh, it’s petty and childish and I’d like to see it done, regardless.
September 21st, 2008 at 5:05 pm
there should be a logarithmic capital gains tax: Log(income) x 10%. The response to Wall Street bleating that this would discourage capital formation should be, “good.”
September 21st, 2008 at 5:36 pm
Not only liberals are against this proposal. Fiscal conservatives are as well. If Obama opposes this correctly, he could win their respect. They would never vote for him, but their estimation of him might go up 1%.
September 21st, 2008 at 6:21 pm
Noah, it’s a $700 billion debt ceiling, not $700 billion total. If Paulson stumbles into assets that are worth something, he’s sell them and plow what he gets back into more debt that nobody else wants. Everything I’m seeing about this indicates that the Treasury is not going to be buying at firesale prices; they’re going to be buying at market value where private buyers with actual skin in the game beyond $3000 in debt for every American aren’t willing to pay. If that weren’t the case, this sham would be structured differently.
September 21st, 2008 at 8:18 pm
Sounds like Obama and Pelosi have incorporated those key items in their statements today. So now our job is to make sure Congress passes the Obama/Pelosi plan, not the Bush/Paulson plan.
September 21st, 2008 at 9:42 pm
I’ll show my cards upfront: I voted for Bush twice (the 2nd time holding my nose), and work for a large investment bank (trading subprime mortgage bonds).
As much as it’s in my personal financial interest for this $700bln “bailout” to go through (I told all my family members that if it makes them feel better, the $2,333 that they owe will go to my bonus), I’m completely opposed to it.
Either the govt is going to buy these securities at too high a price, or the govt is going to buy at the fair value (ie pennies on the dollar for most HEL RMBS and CDOs). If it’s the former, it’s basically a direct transfer of wealth from the govt to the banks. If it’s the latter, it doesn’t actually help banks because the sales will crystallize the losses now, and basically expose how “insolvent” most of them are.
The worst thing about this is that the bailout won’t solve the underlying problem of housing credit availability. Just because you’ve taken a bank’s bad assets, it’s not about to lend $300k to someone for a house that’s now worth $200k. Underwater homeowners (except perhaps the ones working for investment banks) are just as screwed as before.
Finally, the opaque, unaccountable nature of this proposal is extremely disturbing.
The alternative to passing this monstrosity is certainly scary. I’ll tell you what, come Wednesday afternoon everyone was pretty much expecting that by the weekend Goldman Sachs and Morgan Stanley would either be bankrupt or taken over. That would have meant all of the major investment banks gone in the course of the past half year. The stock market probably would have dropped many hundreds of points more. The economy would have ground down with the loss of credit.
But that’s the price that the system had to pay by everyone risk leveraging to the hilt. And, as much as Paulson might not admit it, the world can go on without Goldman Sachs. New banks will grow into its spot. It would be a rough patch, but also a thorough cleansing of the financial system. Wildfires, as destructive as they are, are a natural part of forest life cycles, after all.
I encourage everyone to contact their Congresspeople and Senators; get them to stop and think for a second. Yes, the stock market retraced the week’s loss after the announcement, but probably a large part of that was the [idiotic] ban on short selling forcing hedge funds to buy buy buy, NOT because the markets think government interference in banking is a great idea.
I mean, to give Paulson a $700bln checkbook with which to do whatever just cause a few banks go under and the stock market drops hundreds of points… Come on, people! And to think this is coming from a Republican administration…
For the first time, I’m considering voting for Barr. McCain and Obama are identical on this debacle.
September 21st, 2008 at 10:13 pm
Re Subprime MBS Trader’s comment “$2,333 that they owe will go to my bonus”
——————
I’m surprised you’re still in business, MBS Guy, with that kind of analysis.
Best i can figure, there’s about 65 Million households that can pay taxes. Dividing up this $1.5 Trillion Bailout (more like $2 Trillion when you throw in $80 Billion per year compounded Interest over 4 years) and you’re looking at around $31,000 per household.
September 21st, 2008 at 10:18 pm
On the other hand, maybe you didn’t account for interest and just divided the $1.5 Trillion by 65 million. But that gives you 23,000 NOT 2,333. You would have dropped a zero.
Hmmm. I think I’m beginning to understand how this shitstorm began.
September 21st, 2008 at 11:41 pm
We’ve been asking for help for years now, only to hear Republicans rail against socialized this and universalized that. Now is our time to negotiate. You want $700 billion? We want affordable health care. Now.
http://whatsinitforus.blogspot.com
http://www.chronicallypissed.com
September 22nd, 2008 at 6:51 am
Well, you missed a couple of bullet points:
* No more off-balance-sheet asset trading
* Get rid of credit default swaps
Bad mortgage selling was the first necessary ingredient of the collapse, but totally opaque trading and accounting methods were the second. Would you ‘rescue’ someone from drowning at huge expense, then just blithely accept them jumping back into deep water?
Stupidity is not making mistakes – stupidity is making the same mistake over again and expecting a different outcome.
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