Today’s NY Times op-ed page features two columnists who ordinarily can barely agree on what day it is, much less on matters of substance. Today is different. They both think the Paulson “cash for trash” plan, at least in its current form, is a loser.
[W]hat, exactly, in the experience of the past year and a half – a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes – justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us….
Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached – no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.
I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.
But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded – if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.
Kristol (ignore the second half of his column, in which he returns to his usual mindless shilling for McCain — the first half is worth reading):
I acknowledge that there are serious people who think the situation too urgent and the day too late to allow for a real public and Congressional debate on what should be done. But – based on conversations with economists, Wall Street types, businessmen and public officials – I’m doubtful that the only thing standing between us and a financial panic is for Congress to sign this week, on behalf of the American taxpayer, a $700 billion check over to the Treasury….
[I]s the administration’s proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for – or even promises of – disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.
And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right – or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.
Please, please, Members of Congress, do not allow yourselves to be steamrolled by the Bush administration AGAIN. They’re very good at doing this — it’s how they got us into Iraq, it’s how they gutted FISA, it’s how they get pretty much everything they get. Do not allow them to destroy the American economy in the same way. Yes, something needs to be done, and it should be done reasonably quickly. But no, you do not have to go along with the Bush/Paulson plan to just hand over the money and shut up. Listen to the growing chorus of people from all ideological viewpoints who doubt that a pure cash-for-trash approach will work, and do it right. The American people have got your back on this one.
While the present administration has made a killing from everything from No Child Left Behind to the construction of concentration camps here in the US for the last eight years; as the regime winds down, the taxpayer still has a couple bucks. Not for long. Time for them to make a few bucks more, bail out friends and business partners and move on.
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p>The only question is; how many politicians will be paid off to get this through?
What in the world are you refering to? Please be careful with your rhetorical exaggeration. Last I checked Auschwitz had not been relocated to the United States!
This has been going on for eight-odd years. This bailout, coupled with the lack of any oversight or consequences is just what a dictatorship needs. Isn’t it odd that the plan was produced so quickly. Just like the Patriot Act.
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p>Hide your silverware. You’re gonna need it.
I think Swamp Yank has it about right. Paulson, formerly the Chairman and CEO of Goldman Sachs, wants to help his friends on Wall Street and make a few bucks for friends of the administration along the way. That won’t destroy the economy. But it probably won’t save it either. Without tighter oversight, the banks and their clients will just blow another $700 billion. The U.S. also needs to end its current account deficit, which is starving this country of capital by putting us at the whim of changeable foreign investors.
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p>These, however, are long term solutions. The immediate problem requires an immediate solution. The best plan is the tried and true approach used to resolve the S&L crisis: nationalize defunct companies and dispose of their assets in an orderly manner. The word “orderly” is key here: markets are built on the psychology of trust; panic is everyone’s enemy. The Bush administration, however, is so excited at the prospect of getting $700 billion for their pals, and so used to getting their way, that they will never go for that, in my opinion. They will take the whole country down in pursuit of their selfish personal ambitions. Exhibit A: Iraq war. Congress has to accept this situation — thank you, 2004 Ohio voters! — and compromise: buy the trash, but create a new regulatory agency with bipartisan leadership that is fully transparent to hold and later dispose of it. The events of the past three months have demonstrated that the Fed and the Treasury will not do that job properly.
How the Democrats Created the Financial Crisis: Kevin Hassett
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p>Commentary by Kevin Hassett
More Photos/Details
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p>Sept. 22 (Bloomberg) — The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.
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p>Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.
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p>But really, it isn’t. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.
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p>Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street’s efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.
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p>In the times that Fannie and Freddie couldn’t make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.
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p>The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.
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p>Turning Point
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p>Take away Fannie and Freddie, or regulate them more wisely, and it’s hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.
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p>It is easy to identify the historical turning point that marked the beginning of the end.
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p>Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission’s chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie’s position on the relevant accounting issue was not even “on the page” of allowable interpretations.
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p>Then legislative momentum emerged for an attempt to create a “world-class regulator” that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
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p>Greenspan’s Warning
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p>The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn’t be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie
continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said.We are placing the total financial system of the future at a substantial risk.”<
p>What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
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p>Different World
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p>If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
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p>But the bill didn’t become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn’t even get the Senate to vote on the matter.
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p>That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: “It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.”
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p>Mounds of Materials
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p>Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.
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p>But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.
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p>Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
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p>Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.
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p>There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.
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p>Oh, and there is one little footnote to the story that’s worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.
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p>(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)
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p>To contact the writer of this column: Kevin Hassett at khassett@aei.org
A McCain advisor and AEI shill says the Dems are to blame. Glad you found such an unbiased source.
… in it’s factual inaccuracies.
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p>There are so many different ways that this ‘essay’ (sic) is so very very wrong. But only one that really really matters…
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p>’Subprime loans’ are, by definition, loans that don’t meet standards set by Fannie and Freddie.
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p>Freddie and Fannie were supposed to guarantee loans, even if they were bad. They were where the buck stops. That’s what they were designed for. The thinking, so it goes, was that the vast majority of loans were considered good and so risk would be spread through the securitization of credit and, if anybody had to be hurt by the odd bad loan it was Fannie, and then later Freddie. I don’t particularly think this is a good idea, but there it is… It works out OK, as long as the amount of bad debt stays relatively small.
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p>… But a combination of the housing bubble, massively leveraged investments (leverage works two ways, ya know…) and, yes, lack of regulation on the securitization of mortgages (thank you Phil Gramm!) has caused the adults to stop lending money. This is the source of the crisis: people can’t tell whom it is that is credit-worthy and so liquidity has gone away…
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p>Basically, people bought houses they couldn’t afford (housing bubble), at rates they couldn’t sustain (subprime), on mortgages that were sold in a succession of leveraged bundlings (securitization) to companies that didn’t know they had them (Lehman, Bear Stearns, Fannie/Freddie, others). The important point is that, as mortgages are bundled together and sold up the food chain, some ratio of good mortgages to bad mortgages (an inexact science)is assumed to favor the good mortgages. This appears not to have happened quite simply because there were no regulations regarding ‘swaps’ (the act of bundling). As foreclosures came in, these companies realized that they owed more than they had on hand, and could not determine when the foreclosures would slow or stop. Credit dried up.
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p>The only difference, in this instance, between the GSE’s (Fannie and Freddie) and investment banks like Lehman and Bear Stearns is that the GSE’s expected to have some bad debt… Nobody knows, however, how much bad debt is out there…
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p>It’s entirely possible that actions already taken, bailouts and Lehman failure and conservatorship of fannie/freddie have dealt with the bulk of the bad debt. It’s entirely possible also, that it hasn’t. There really isn’t any way to know at this point.
http://www.usnews.com/blogs/ca…
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p>Things happened fast, as they had to. Worst thing of all is that this is happening in an election year, where any action is subject to legitimate/illegitimate carping.
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p>Let’s just get this solved and quickly. 20% Unemployment isn’t going to help anyone. And BTW, forget about discussions of either side’s grandiose proposals; they just went by the wayside, to say the least.
The administration wants fast action because their plan cannot stand the scrutiny of daylight. This is a con. No con-man wants the sucker to look over the contract. The same people that brought the financial mess are bringing you their solution.
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p>Do you really think they are out to help you? The United States? Themselves?
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p>Tell you what! Give me all your dough. All your family’s dough. I promise to take care of you. But, if I don’t, you agree not to call the cops. Sign right here.
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p>No? You won’t sign? Look, you ain’t got much time. Sign now or you’re doomed!
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p>Would you sign?
but after hearing Barney Frank on WRKO this morning, think that he gets the sense of urgency here also. Unless you don’t think you’ll be affected in your daily life by a continuation over the next few months of stock market indices dropping 2-3% a day.
We’re dealing with the same guys who lied to us about so many major issues. The guys that took away our Constitutional rights. That made the United States a moral pariah throughout the world. Tortures women, children. Now they’re ok because there is a big problem? They won’t use a situation for their own advantage?
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p>Now we should believe them?
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p>If we do, we deserve our fate. Shed a tear for this once great country. The world may not see her like again.