Forking It Over

So President Power Of Nightmares came on the teevee tonight and spoke darkly of grave and imminent dangers to our financial system, all of them somehow magically divorced from his own laissez-faire policies, belief in deregulation and failure to respond to the very clear warnings that we were headed down a path of disaster.

President Bush on Wednesday warned Americans and lawmakers reluctant to pass a $700 billion financial rescue plan that failing to act fast risks wiping out retirement savings, rising foreclosures, lost jobs, closed businesses and even "a long and painful recession."

His dire warning came not long after the president issued extraordinary invitations to presidential candidates Barack Obama and John McCain, one of whom will inherit the mess in four months, as well as key congressional leaders to a White House meeting on Thursday to work on a compromise.

"Without immediate action by Congress, American could slip into a financial panic and a distressing scenario would unfold," Bush said in a 12-minute prime-time address from the White House East Room that he hoped would help rescue his tough-sell bailout package.

Basically, gimme gimme gimme or the economy gets it. And while Bush appeared to accede to a lot of the steps sought by Congress - vague limits on executive compensation, some ability for taxpayers to cash in on the upside potential, and some manner of oversight - he drew the line at any re-regulation of the companies who got us into this mess, saying that it could "come later." And indeed, most of the talk was about the failure of borrowers to pay their bills, not the predatory practices of lenders to shuttle people into loans without explaining the circumstances (and through yield spread premiums, actually getting bonuses for that).

After a couple days of seeing the Paulson plan go down in flames, I now have a very queasy feeling about this. Bush clearly intervened in a Presidential election by inviting McCain and Obama to the White House, and the joint statement released by the two of them is worthless, all "we must rise above partisanship and work together for the good of the country" gibberish. McCain apparently dropped the specifics from the statement. Now the House and the Senate are claiming a deal with President Paulson, and the draft that's been floating around is not good. Ian Welsh calls it FISA all over again.

It's essentially a Wall Street giveaway plan, with only some fig leaves to try and pretend that it isn't.

Why? Because the language about taking warrants in exchange for buying up toxic assets is only for direct purchases and not for reverse auction puchases, which will be the majority of the purchases. As Soros points out, in any reverse auction, the government will get stuck with the most toxic of toxic waste because of information asymetries. In exchange they should at least get stock, equal not to what they paid, but to the face of the crap they are buying.

There is quite a bit of language about helping mortgage holders, but it is almost all qualified with words like encourage and request, rather than require. Since the Treasury is bailing mortgage holders out, the idea that the Secretary must "encourage" and "request" is just BS. The correct response is to make help for mortgage holders a requirement of participating in the program at all. If financial institutions don't like that they don't need to participate. Good way to make sure that companies that don't really need help don't swill at the trough.

Unlike the Dodd bill, this is not a copy of the actual language of the bill, but a summary gloss. Without seeing the language we don't know what's actually in there. Dodd was straight up with us. Frank is hiding his legislative language. Why?

The bill will allow bankruptcy judges to restructure mortgages for those having trouble paying, and that's the bright spot. But in the end, this is a stick-up. A stick-up with a $700 billion dollar price tag that was literally invented out of thin air. Now, there's one paragraph in The Hill piece that suggest this might go in stages:

Paulson said unemployment rates could approach 10 percent if the plan was not adopted, senators said, although he did indicate possible receptiveness to the idea of implementing it in stages. Such a plan, Paulson told senators, has worked in countries like Japan, where financial rescue plans were done in stages.

That's really the only way out of this right now. That $700 billion dollar price tag defunds even the most mildly progressive agenda. I think John McCain may have lost the election today, and at the hands of David Letterman, no less. But with the federal treasury raided and in the hands of Wall Street corporations who made bad decisions, it's hard to see how a President Obama can be anything but a fixer-upper and a caretaker. All because everyone bought the crisis frame so hard.