Sunday, September 21, 2008

Obama on the Treasury Proposal

The Bush Administration is playing a game of chicken with its bailout proposal. It's essentially saying to Congress: I need $700 billion to buy bad debt. Give me the money, no questions asked, or the collapse of the financial system will be on your shoulders.

In his statement, below, Obama says "No deal, but let's talk." What will McCain say? This is a tough call for Holtz-Eakin and Gramm.

My guess is that the Administration will push for a vote very quickly, the Democratic leadership will roll over and agree, the Paulson proposal will pass--with vague promises of action on the points Obama raises--and voters will be pissed. Neither Obama nor McCain wants to be on the receiving end of that anger.

From the Obama campaign:

Senator Obama recently issued a Statement of Principles for the Treasury Proposal...

The era of greed and irresponsibility on Wall Street and in Washington has led to a financial crisis as profound as any we have faced since the Great Depression.

But regardless of how we got here, the circumstances we face require decisive action because the jobs, savings, and economic security of millions of Americans are now at risk.

We must work quickly in a bipartisan fashion to resolve this crisis and restore our financial sector so capital is flowing again and we can avert an even broader economic catastrophe. We also should recognize that economic recovery requires that we act, not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America.

But thus far, the Administration has only offered a concept with a staggering price tag, not a plan.

Even if the Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects some basic principles.

• No blank check. If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight. Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check.

• Rescue requires mutual responsibility. As taxpayers are asked to take extraordinary steps to protect our financial system, it is only appropriate to expect those institutions that benefit to help protect American homeowners and the American economy. We cannot underwrite continued irresponsibility, where CEOs cash in and our regulators look the other way. We cannot abet and reward the unconscionable practices that triggered this crisis. We have to end them.

• Taxpayers should be protected. This should not be a handout to Wall Street. It should be structured in a way that maximizes the ability of taxpayers to recoup their investment. Going forward, we need to make sure that the institutions that benefit from financial insurance also bear the cost of that insurance.

• Help homeowners stay in their homes. This crisis started with homeowners and they bear the brunt of the nearly unprecedented collapse in housing prices. We cannot have a plan for Wall Street banks that does not help homeowners stay in their homes and help distressed communities.

• A global response. As I said on Friday, this is a global financial crisis and it requires a global solution. The United States must lead, but we must also insist that other nations, who have a huge stake in the outcome, join us in helping to secure the financial markets.

• Main Street, not just Wall Street. The American people need to know that we feel as great a sense of urgency about the emergency on Main Street as we do the emergency on Wall Street. That is why I call on Senator McCain, President Bush, Republicans and Democrats to join me in supporting an emergency economic plan for working families – a plan that would help folks cope with rising gas and food prices, save one million jobs through rebuilding our schools and roads, help states and cities avoid painful budget cuts and tax increases, help homeowners stay in their homes, and provide retooling assistance to help ensure that the fuel-efficient cars of the future are built in America.

• Build a regulatory structure for the 21st Century. While there is not time in a week to remake our regulatory structure to prevent abuses in the future, we should commit ourselves to the kind of reforms I have been advocating for several years. We need new rules of the road for the 21st Century economy, together with the means and willingness to enforce them.

The bottom line is that we must change the economic policies that led us down this dangerous path in the first place. For the last eight years, we’ve had an “on your own-anything goes” philosophy in Washington and on Wall Street that lavished tax cuts on the wealthy and big corporations; that viewed even common-sense regulation and oversight as unwise and unnecessary; and that shredded consumer protections and loosened the rules of the road. Ordinary Americans are now paying the price. The events of this week have rendered a final verdict on that failed philosophy, and it is a philosophy I will end as President of the United States,” said Senator Barack Obama.


Anonymous said...

Obama makes sense, and he has a concrete plan. We need Obama now, not four months from now. (McCain is more interested in scape-goating Cox to take the heat off his Enron buddy Phil Gramm.)

Ken Houghton said...

"My guess is that the Administration will push for a vote very quickly, the Democratic leadership will roll over and agree, the Paulson proposal will pass--with vague promises of action on the points Obama raises--and voters will be pissed."

We agree, but you left out the last step:

Pissed-off voters either (1) vote Republican or (2) stay home. (See, e.g., 2000, where some of them actually got out of their chairs and cast a "protest" vote for Nader.)

Obama, having said the right thing, just lost the election, unless Pelosi is smarter and shrewder than she has been for the past 19 months.

This is the time to play Chicken, and Tom's suggestion about the 39.6% tax rate isn't a bad place to start.

Walt French said...

The call for a "new regulatory environment" is tone-deaf... a political killer.

Innovations in markets help them, not slow them down. And the American public -- especially when they are being asked to put their hard-earned money on the line -- will not tolerate any connection to the govt-sponsored cronyism that the Paulson plan reeks of.

Economists for Obama should urge him to take three immediate actions:

1. demand that McCain to apologize to the American people for politicizing the current crisis and making it harder for public servants to do their jobs. SEC Commissioner Cox, whose head McCain called for, is merely carrying out the policies that McCain advocated. Bernanke, who McCain said should get out of the bailout business runs an independent agency created for the express purpose of calming banking markets. McCain must be shown to be the uneducated buffoon that he is acting as, and not capture the high ground of responding to Americans' righteous anger at this mess.

2. Call for Congress to do its job, even while reminding voters that Paulson has been aching to do this for a while, but waited until things got bad enough that he could put a gun to Congress's heads. Basically, the Administration yet again failed to anticipate needs of the US, but the Congress is NOT the Administration. Paulson should be called an expert tactician and honest servant who needs to be told the priorities of the American people.

3. Let the voters know that "urgent" is not a substitute for "vital." America importantly needs long-term reforms that all Americans can celebrate, bjut that John McCain has fought against:
* Paid-in insurance for all Federal backstops. FDIC insurance is widely understood as a huge success that helps banks operate smoothly, so successful that its costs are very low. (A bit TOO low; the government should only re-insure losses higher than an industry association can't handle, putting the incentive for good risk management on the experts.) Anyway, it'd be a bargain at twice the price and the banks would jump at it.

* Cleaned-up disclosure for all entities doing business with the govt. FASB 140 has been gutted but it needs to be strengthened past what FASB recently had shot down. This si the fundamental purpose of SEC's existence. Open, honest, transparent markets make the US marketplace the envy of the world and lower businesses' costs of funds by maybe a half percent vs other less-transparent markets. This fair-dealing will only be opposed by swindlers.

* If money funds are to be insured -- and the genie seems out of the bottle -- clients of those funds need full disclosure of all assets, SIVs, conduits, whatever. Not to mention ALL bailouts by parent banks in the past 10 years.

* Close down all OTC risk markets -- derivatives, swaps, spreads. This is where lots of the toxic waste is; an open, exchange-like marketplace where all counterparty risks are covered or at least fully disclosed is the only answer. This perfectly parallels the institution of the Fed from banks' issuance of unverifiable banknotes in the 19th century. Create open markets where counterparty risk disappears.

* Finally, maybe most importantly, voice the principle of "Let business do what business does best." We owe our current overall well-being to the incentives for innovation and risk-taking that corporations do. That means NO additional red tape; rather enhanced markets from more open disclosure or risks and credit. It means an environment where businesses can take risk, possibly to the point of failing, without jeopardizing others besides the shareholders. (No externalities!) It means that Creative Destruction reigns, not the Financial Terrorism of "Give us your money or you all die!"

So the "new regulatory environment" is a modernized framework that provides for markets that don't freeze up due to Akerlof's Lemons and manageable risks (viz Diamond & Dybvig).

Now is the time for Obama to carpet-bomb the inept "give the keys to the inmates" actions of the hard-right-wing Bush & McCain deregulation mania. I think a half-hour speech, reminding Americans that the President gets free access to talk to the public but his campaign is buying time to let them know that help is close at hand, would shoot down McCain's lies about lack of specificity and higher taxes while exposing his ineptness.

Walt French said...

Oh, another long-term cleanup: it's time to stop issuers from buying ratings. Asking the Feds to insure monies or backstop risks based on hired flacks is unacceptable.

Issuers would pay a fee to the new "Federal Reserve Investment Bank" if it wanted ratings, for which the FRIB would contract with independent ratings agencies. The agencies would owe their allegiance to, and be subject to quality checks by, the US Govt.