Economy

The Wall Street Journal opinion page on McCain's campaign suspension:

Last we checked, the President of the United States was still George W. Bush, the Secretary of the Treasury was still Henry Paulson, the Chairman of the Federal Reserve was still Ben Bernanke, and Congress still had 533 members not running for President who are at least nominally competent to debate and pass legislation.

So count us as mystified by Senator John McCain's decision yesterday to suspend his campaign and call for a postponement in Friday's first Presidential debate so that he and Barack Obama can work out a consensus bill to stabilize the financial system. This is supposed to be evidence of leadership?

Gretchen Morgenson at NYTimes explains why the details of the bailout plan must be transparent and debated:

....lawmakers are at work on a bailout fund that would buy the kind of distressed assets (defaulted mortgages [and credit default swaps], for example) that have ignited this firestorm. Treasury Secretary Henry M. Paulson Jr. has called the fund the "troubled asset relief program." I'll just call it TARP, for short. And depending on how TARP is operated and how the assets are valued before taxpayers are forced to buy them, it could bloat our final bill for this mess, while benefiting the very institutions that got us into it.Consider: A bank wants to sell the TARPistas (aka TAXPAYERS) a pile of stinky mortgage securities that it currently values at 60 cents on the dollar. Let's assume that the most recent actual trade [on the market] for similar securities was struck at 30 cents on the dollar. So what's a fair price that we TARPistas should pay for the assets? If we bought at 60 cents, a price that the bank would argue is appropriate, we would most likely face a loss. The bank, however, would be much better off than if it had to dump at 30 cents.

Read the rest of this entry...

Devilstower at Daily Kos explains the shiny new financial instrument called a credit default swap, which is at the root of our current problems:

A kind of insurance one bank could exchange with another, credit default swaps supposedly made it safe for banks to take on ever riskier forms of debt. The [Commodity Futures Modernization] Act didn't invent these swaps, though they were relatively new. Instead, by placing them in a state where they were not only unregulated but almost perfectly opaque, credit default swaps were turned into the perfect vehicle to fuel a Wall Street revolution. No one had any idea what these things were actually worth, they were traded "over the counter" without being administered by any exchange, and even the SEC could monitor their existence only indirectly. [...]

A secondary market for trading swaps exploded into existence, and swaps were traded with absolutely no consideration for the nature or quality of the underlying investment. Swaps changed hands a dozen or more times, growing in "value" as they went. Worse still, no one regulated who could buy a swap, so it was (and is) perfectly possible for a company to acquire swaps that theoretically cover billions of dollars in loans, even if that company doesn't have a red cent on hand to cover those swaps should the loans default.

Which is, of course, what happened, and the companies that were left holding the swaps didn't have enough money to pay out.

Do read the whole article, since it puts the current fiasco in context with the S&L and Enron scandals (hint: it's all the same guys).

Also see digby:

McCain thinks that firing [SEC chairman Chris] Cox will solve the problem. But Cox is just a natural symptom of the illness of modern conservatism's Randian philosophy, which, at its core, really does hold that the Big Money Boyz should be allowed unfettered freedom to make money without restrictions or rules. And when they gamble on the wrong thing, they believe that it is the right thing for the rubes to bail them out. Their basic philosophy holds that the taxpayers are parasites who benefit when the John Galts of the world make money, so [the taxpayers] should shoulder the burden when they fail. Indeed, they believe the serfs should be grateful for what they got out of it (which, by the way, wasn't much lately since the BMB decided some time back that they didn't have anything to lose by taking more and more of the pie for themselves).

Update: Tom Toles at the WaPo illustrates Bush's bailout plan (click for full size):

Blogger Avedon Carol:

[W]hat the oligarchs never want you to think about is that heavily taxing the rich — especially things like estate taxes — also make the economy richer, improve your opportunities, increase the likelihood of innovation, and all that other good stuff that America is supposed to be especially good at. Because without estate taxes, wealthy families can keep accumulating wealth for their unproductive offspring and keep that money out of the economy, making them stronger and you proportionately weaker, until the vast majority of people are little more than serfs and slaves working for a tiny number of Malefactors of Great Wealth. Money is like blood in the economy's body, and if it doesn't circulate — if it all accumulates at the top — the body withers while the head becomes stuffed up and bloated, and neither part functions very well.

Money as blood is an interesting analogy. It makes sense that there's a limited pool of wealth, and the economy would function better if more people had access to it. One could offer the counterargument that new wealth can be created (e.g. through new inventions or through harvesting natural resources). But the people in the best position to create that new wealth are — wouldn't you know it — the ones who already have lots of wealth.

A reader named John at AMERICAblog has a few comments:

How many times do we have to hear:

We don't have ENOUGH MONEY to fix Social Security.
We don't have ENOUGH MONEY to fix Medicare.
We don't have ENOUGH MONEY to provide health care to ALL Americans.
We don't have ENOUGH MONEY to help out Americans losing their homes.
We don't have ENOUGH MONEY to help all our veterans returning from war.
We don't have ENOUGH MONEY to rescue "no child left behind".

BUT...

We DO HAVE ENOUGH MONEY to bail out Fannie Mae and Freddie Mac.
We DO HAVE ENOUGH MONEY to bail out Bear Stearns.
We DO HAVE ENOUGH MONEY to bail out AIG.
We DO HAVE ENOUGH MONEY to pay for an unnecessary TRILLION DOLLAR war.

Thomas Frank (WSJ):

There is simply no way to blame this disaster, as Republicans used to do, on labor unions or over-regulation. No, this is the conservatives' beloved financial system doing what comes naturally. Freed from the intrusive meddling of government, just as generations of supply-siders and entrepreneurial exuberants demanded it be, the American financial establishment has proceeded to cheat and deceive and beggar itself — and us — to the edge of Armageddon. It is as though Wall Street was run by a troupe of historical re-enactors determined to stage all the classic panics of the 19th century. [...]

On Monday, John McCain blamed the disaster on "greed by some based in Wall Street." It's a personal failing of some evil few, in other words, and presumably capitalism will start working again once we squeeze the self-interest out of it.

WaPo:

A decade ago, Sen. John McCain embraced legislation to broadly deregulate the banking and insurance industries, helping to sweep aside a thicket of rules established over decades in favor of a less restricted financial marketplace that proponents said would result in greater economic growth.

Now, as the Bush administration scrambles to prevent the collapse of the American International Group (AIG), the nation's largest insurance company, and stabilize a tumultuous Wall Street, the Republican presidential nominee is scrambling to recast himself as a champion of regulation to end "reckless conduct, corruption and unbridled greed" on Wall Street.

Obama lays the financial meltdown squarely at the feet of conservatism (barackobama.com):

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It's a philosophy we've had for the last eight years — one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It's a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.

Well now, instead of prosperity trickling down, the pain has trickled up — from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street.

TPM has excerpts from Obama's speech today in Colorado:

Why else would he say that we've made great progress economically under George Bush? Why else would he say that the economy isn't something he understands as well as he should? Why else would he say, today, of all days — just a few hours ago — that the fundamentals of the economy are still strong?

Senator — what economy are you talking about?

What's more fundamental than the ability to find a job that pays the bills and can raise a family? What's more fundamental than knowing that your life savings is secure, and that you can retire with dignity? What's more fundamental than knowing that you'll have a roof over your head at the end of the day? What's more fundamental than that?

Update: Digby adds:

Every two-term Republican in the last 80 years who isn't Ike had some kind of a severe meltdown in the financial system. Coincidence?

The NYTimes reports that, as a measure of economic well-being, the GDP isn't all it's cracked up to be:

The gross domestic product grew robustly in the post–World War II years. Family incomes also went up, and a rising G.D.P. came to signal well-being as well as expanding economic activity. But these days, while the value added in making cars goes into the total, same as always, the actual cash can be distributed in stock dividends or profits or multimillion-dollar chief executive pay rather than in raises for workers — the G.D.P. does not reflect the shift in distribution.

And over the last 15 years there has been just such a shift. While the G.D.P. has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Other shortcomings have become apparent. The boom in prison construction, for example, has added greatly to the G.D.P., but the damage from the crimes that made the prisons necessary is not subtracted. Neither is environmental damage nor depleted forests, although lumbering shows up in government statistics as value added. So does health care, which is measured by the money spent, not by improvements in people's health. Obesity is on the rise in America, undermining health, but that is not subtracted.