The big news overnight is that the whole nature of the economic rescue plan seems — since nothing yet tried has thawed the frozen credit markets — to be shifting from Republican-favored “bailout” to Democrat-favored “recapitalization.”
Both Treasury Secretary Henry Paulson’s original plan and the modified version that Congress eventually passed provide for the government to buy up the toxic debt that sent credit markets (and before long, the whole economy) into a deep coma from which they show no sign of reviving. Joe Sixpack hates this “bailing out” of the irresponsibly-greedy on its face, as do a number of economists who think it can’t work. But modified Paulson (“modP”) finally passed both houses of Congress because something had to.
Democratic experts like Paul Krugman and Brad DeLong figured that at least modP made room for something much more apt to help: direct recapitalizing of the banks, in which the government would, rather than absorbing their toxic debt (thereby giving a windfall of relief to the very executives behind the crisis), inject capital directly into them by buying equity in — yes, temporarily nationalizing — them. It worked in a similar crisis a few years ago in Sweden, and yesterday, Britain made this very move (to the tune of £500 billion). Though Republicans may cry “Socialism!,” according to the lede story in today’s New York Times, Paulson and Fed Chairman Ben Bernanke (who yesterday okayed another $37.8 billion loan to AIG) have apparently — three weeks late — warmed to the Krugman/DeLong-favored “Swedish model.”
At a news conference on Wednesday, the Treasury secretary, Henry M. Paulson Jr., pointedly named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.
"We will use all the tools we’ve been given to maximum effectiveness," Mr. Paulson said, "including strengthening the capitalization of financial institutions of every size."
The idea is gaining support even among longtime Republican policy makers who have spent most of their careers defending laissez-faire economic policies.
"The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other," said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. "We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly."
Paulson and Bernanke’s turnaround pulls another rug out from under John McCain and his shiny new idea to “relieve homeowners.” McCain’s big second-debate surprise was a proposed $300 billion buy-up of distressed mortgages at their full face value, not current market value. But what he didn’t explain, Brad DeLong does:
The McCain plan is:
- Take $300 billion.
- Pay double current market value to banks that have troubled mortgages on their books, thus:
- Give a present of $100 billion to the bankers who made the loans.
- Acquire and regularize the mortgages of only two-thirds as many homeowners as could have been accomplished if the $300 billion were invested wisely.
There’s a big difference here: Democrats want to prevent depression and support the financial markets by investing taxpayer money in banks with troubled assets. Republicans want to give taxpayers money away to the shareholders and managers of banks with troubled assets.
I would say that this is unbelievable, but I do believe it.
Camp Obama, momentarily as taken aback as everyone else by McCain’s gambit, quickly recovered:
The [McCain] plan would cause the government “to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don’t recover,” Obama economic adviser Jason Furman said in a statement. “The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.”
Marc Ambinder quotes an unnamed Obama adviser, “This is a big gift to financial institutions, and the more irresponsible you’ve been, the more money you’ll get from it. It’s a bad way to help homeowners, a bad way to recapitalize banks, and it totally ignores the principle I thought McCain and Obama agreed to about protecting taxpayers.”
Meanwhile, as Iceland and Pakistan cling on the edge of national bankruptcy, you have to wonder who’s next — and whether more Republican guff-and-delay will nudge us nearer the brink. Maybe they will capitulate on recapitalization. But the most of the country has long since given up on their judgment.
UPDATE: NYT gets first reviews from economists Nouriel Roubini, Paul Krugman, Barry Ritholtz, Tyler Cowan, and Greg Mankiw (who generally sound relieved in a “WTF-took-youse-so-long?!” kind of way).
History doesn’t repeat itself – but it rhymes – Twain
The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer
Deep in your links, I also found this link to the 2002 White House initiative to increase minority and low income home ownership. Can’t blame it all on the Community Reinvestment Act.
You can’t blame any of it on the Community Reinvestment Act. The mortgage lenders and investment banks pushing subprime loans were not CRA institutions. And these initiatives to increase low income home ownership were supported by the Administration and the Republican Congress because they were heavily pushed by the lobbyists for the mortgage bankers, investment banks, and other Wall Street firms.
Does anyone really believe that advocates for poor people were able to get their way with the Bush Administration, the Republican-majority Congress, federal regulators, and Wall Street? The push for Fannie and Freddie to buy securities backed by subprime mortgages came from the lobbyists for the mortage bankers and investment banks who wanted the GSEs to buy their MSBs.
Don’t fall for any of the nonsense from talk radio, etc. Wall Street was completely in control of government and of Federal Reserve policy when all these decisions were made.
Below is a link to a Newsweek article that gives a good look at the lending crisis – especially the claim that poor minories are behind the meltdown.
Realtor friends of mine told me months ago the biggest problem in the real estate market was lack of underwriting requirements that let a “wild west” mentality run rampant among “investors” and speculators.
“The right blames the credit crisis on poor minority homeowners. This is not merely offensive, but entirely wrong.”
http://www.newsweek.com/id/162789
I was watching streaming video of Ronnie Musgrove’s meeting with the Hattiesburg American’s Editorial Board this morning, wherein Musgrove pointed out the role the SEC’s 2004 decision (to dramatically loosen the debt-to-net capital ratios of some of the big investment banks) played in the current financial crisis. From what I understand the SEC exempted some investment banks from the required 12 – 1 debt/capital ratio which had been in place since the 1930s. Some to as much as 40 to 1. Among the firms exempted were Bear Sterns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs. This is something I must have missed while watching the MSM. IMHO no rescue plan will work without first returning to tried and true regulations and oversight.
It’s still settling, but latest numbers say the Dow closed at its low for the day — off 7%, somewhere below 8,600. I can’t bear to look at my IRA.
This Financial Times article is a month old, but now that Republicans are blaming Democrats for not regulating Fannie Mae and Freddie Mac while the Republicans controlled the White House, Senate, and House, it needs to be read.
Oxley hits back at ideologues
…The dominant theme has been that Congress let the two government-sponsored enterprises morph into a creature that eventually threatened the US financial system. Mike Oxley will have none of it.
Instead, the Ohio Republican who headed the House financial services committee until his retirement after mid-term elections last year, blames the mess on ideologues within the White House as well as Alan Greenspan, former chairman of the Federal Reserve.
The critics have forgotten that the House passed a GSE reform bill in 2005 that could well have prevented the current crisis, says Mr Oxley, now vice-chairman of Nasdaq.
He fumes about the criticism of his House colleagues. "All the handwringing and bedwetting is going on without remembering how the House stepped up on this," he says. "What did we get from the White House? We got a one-finger salute."
…Mr Oxley reached out to Barney Frank, then the ranking Democrat on the committee and now its chairman, to secure support on the other side of the aisle. But after winning bipartisan support in the House, where the bill passed by 331 to 90 votes, the legislation lacked a champion in the Senate and faced hostility from the Bush administration.
…"We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed," Mr Oxley says.
Good for Mike Oxley, Researcher! This story doesn’t cover the Senate in any more glory than it deserves, but may BushCo including Greenspan rot in hell.
Dow settled at 8,579, down just under 679 (7.33%).