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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

Bailout Backlash

Yesterday I noted that some conservatives are urging Republicans to oppose the Paulson Plan while hoping that Democrats provide the votes to actually enact it. But there’s a Democratic backlash a-building as well.
The blogospheric Left is increasingly committed to full-scale opposition, viz. this post from Atrios:

Look, right now the choice is, Bush’s Plan, or Something Else. Kill Bush’s Plan now, worry about Something Else later.

Markos Moulitsas is arguing for a delay in any bailout plan until after the elections. And here’s how fellow Kossack Meteor Blades assesses the general situation:

Democrats, in general, and Senator Barack Obama, in particular – as the new head of the Democratic Party – should trash this outrageous dictatorial bailout and stop listening to the advice of those who led us into this mess – including some fellow Democrats of prominence. They shouldn’t tinker on the edges of the administration’s proposal. Their substitute plan should put the pain on the pin-striped grifters where it belongs instead of on those Americans who have been repeatedly victimized by them.

There’s also a lot of talk analogizing the political psychology of the bailout plan, and the choices it presents to Democrats, to the Iraq War Resolution and/or FISA.
But heartburn about the Paulson Plan is not limited to the blogospheric Left. Here’s Will Marshall of the Progressive Policy Institute in an op-ed today:

Rather than be stampeded into hasty action, Congress ought to deliberate long enough to make sure that Main Street doesn’t pay for Wall Street’s sins.

Marshall also links to his (and my) former colleague Rob Shapiro’s remarks on Marketplace yesterday, pointing out that the cost of the bailout would have a devastating effect on the policy options available to the next president.
While Democratic resistance to quick approval of the Paulson Plan is growing, there’s considerable confusion in terms of Democratic strategy. Virtually everyone supports Rep. Barney Frank’s efforts to secure substantive changes in the legislation; Paulson has already accepted a couple of key changes, including mortgage foreclosure relief and equity acquisition in bailed out institutions (this latter point being critical to potentially reducing the ultimate net cost to taxpayers). But such changes could also undermine Republican support for the plan, pinning Democrats with responsibility for enacting it, and raising the obvious questions as to why Dems don’t just craft a plan to their own liking and present Paulson and Bush with a take-it-or-leave-it proposition.
In any event, Democrats don’t appear to be just rolling over in a panicked reaction to last week’s market disaster, and letting a Wall Street guy toss three-quarters-of-a-trillion dollars at his old friends, along with foreign investors, with virtually no strings. We’ll soon know just how tough they are willing to be in what will be an extremely momentous series of decisions that could not only affect the November 4 elections, but what happens afterwards for years to come.

2 comments on “Bailout Backlash

  1. Brian Gaerity on

    I think everyone should be very skeptical of the Paulson plan. Here’s why:
    The root cause of the credit “freeze” is the inability of the market to determine the correct price of mortgage-backed securities, not the increase in the number of foreclosures. [If mortgage-backed securities didn’t exist, then the market would know exactly which securities were at risk and assign an appropriate price to them. While many companies and individuals would suffer real financial loss, markets and the broader economy would continue normally.] Without price clarity, risk is assessed at a “worst-case” level across all assets that involve collateralized debt securities, and buyers become scarce or non-existent. Without buyers (i.e., without a market price), per accounting rules, financial institutions are forced to write-down CDS’s at “fire-sale” prices. This triggers a series of actions that are either required by federal and state regulations (e.g., minimum capital requirements for banks) or market logic (e.g., risk aversion). A vicious downward spiral is thus set in motion, with the end result being that those with money don’t want to loan it to those who want money, and the economy slows to a halt.
    Here are ten questions Henry Paulson should answer before any plan is approved:
    1. Given the opacity of collateralized debt securities, how in the world can we – or the entities holding them – truly understand the problem we face?
    2. Given that less than 3% of all mortgages are in foreclosure – an historically high and therefore troubling number, but certainly not a disaster – why are we having this problem at all? Why don’t the markets discount mortgage-backed securities by 10-25%, or whatever number seems appropriate to the level of risk? Are these securities so inscrutable that we can’t even determine a ballpark risk level? I find it illogical and ludicrous that smart, capable financial minds cannot figure out a financial instrument created by one of their own.
    3. What is the scope of the “freeze”? What percentage of the debt markets is affected? What are the characteristics of the affected sections, e.g., commercial banks, investment banks, hedge funds?
    4. What other solutions to the credit freeze were considered and why were they rejected?
    5. Why is $700B to $1T the “right” number? How was that determined?
    6. Are there smaller, less severe stop-gap measures that can be quickly implemented to buy more time to fully consider all options and/or think through all the potential consequences of the current solution?
    7. If your proposal is implemented as is, or close to it, what ability would the Treasury have to deal any future monetary threats?
    8. If your proposal is implemented, how will you determine the price at which to buy the troubled assets? Be as specific as possible.
    9. What can you say to the 97% of mortgage holders who are not in foreclosure, who have made sacrifices to maintain their mortgages in good standing? Why should they be happy with this proposal, or confident that potential future threats can be adequately addressed?
    10. Why can’t we implement a mortgage refinancing plan to address at-risk mortgages without bailing out the financial institutions that created, sold and/or bought them? In other words, why is it essential that CDS assets must be removed from the books before they can be accurately assessed?
    Congressional Democrats, including Barack Obama, have not proven they truly understand the problem, nor are they offering any real alternatives. Like the Iraq War, we are facing a murky issue and are totally dependent on the opinion of a few people for both the facts and possible solutions.
    All Democrats should push for 1) more time, 2) more facts, 3) more specifics about the bailout plan, 4) more oversight, and 5) more deliberation of alternatives. I’m not convinced that the economy will crash if this specific bailout plan isn’t approved by Friday. And I believe there’s a better way to open up these derivatives and accurately assess their value. In the end, no matter what we do, the economy is going to suffer. It’s just a matter how much and for how long.

    Reply
  2. theotherone on

    I saw this brewing yesterday as well, glad you touched on it. The best that can come of scrapping the Paulson Plan and the Dems pushing a tough-on-Wall-St. plan is the potential for taxpayers to earn back off of their investment…

    Say, for instance, the market does recover, America has a Green Industry explosion (or whatever will fix our industry/economy) and then when these bailed-out banks and companies eventually turn huge profits we’ll have a huge infusion to the government to rebuild and refocus our infrastructure. A powerful and calculated plan to generate revenue for the country, based loosely on the idea of ‘bailouts’ and coinciding with a national push to recovery could actually be, in a decade’s time, a beautiful silver lining to this debacle.

    Here’s hoping.

    Reply

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