Major League Update below.
As I understand it---and remember I understand less about these things than John McCain does---the object of the bail out is not just to save the summer homes, private jets, and art collections of the geniuses who brought this disaster about. The object is to save the whole system of credit that our economy runs on.
If things collapse, not too far down the road when you want to buy a new car and ask for a loan, you'll drive off the lot in the heap you drove there in. There'll be no money to loan you. If you need a home improvement loan to put a new roof on your house, too bad. If your kid needs a loan to pay for college tuition, tough. All these banks and investment houses and loan guaranteers etc etc go under, all the survivors start reining it in, and eventually down go car dealerships and roofers. Local banks close and officers and tellers are out of work. Colleges have to let the untenured go, as well as cafeteria workers, janitors, maids, and other support personnel because there'll be a lot fewer students to teach, feed, clean up after, and otherwise support.
Small business and little companies won't be able to meet their payrolls one week, or the next, or the next one after that.
Happens to big businesses and large companies too.
Ed Paisley at the Center for American Progress lays it out:
“It’s-a-Wonderful-Life” banking doesn’t really exist anymore, when banks took in deposits, made loans from those deposits, and earned a reasonable profit on the interest. Today, even deposit-heavy commercial banks borrow in the markets themselves to raise money to lend to borrowers and in turn sell those loans to institutional investors worldwide—earning vastly higher profits in the process. Unfortunately, after being severely burned after purchasing soon-to-be troubled residential and commercial mortgage-backed securities, these investors are not buying any debt, be it credit card, auto loans, or student loans that banks and other financiers want to package and sell to them. And the banks themselves can’t borrow except at extremely high rates of interest to make those loans in the first place. The consequence: a severe contraction in the availability of credit for cars, college, or retail purchases.
Paying off all those troubled mortgages won't help. The banks don't trust each other anymore.
Several of the economists on my sidebar and a couple who should be there, Paul Krugman, Brad DeLong, the Marginal Utiliarians, Ken Houghton and Tom Bozzo, both of whom are now also blogging at Angry Bear, and Mark Thoma wanted the bailout bill to pass Monday. It wasn't that they particularly liked it, and it certainly wasn't that they didn't think there weren't any better plans out there. It was that they thought the bill was a lot better than what Paulson had asked for and was good enough to start doing the job that needs to be done and that that job needs to be done.
Krugman sums up what seems to be the general feeling:
I think that Congressional leaders know that it’s a bad bill, but feel compelled to defend it, because they’re (rightly) scared of the financial consequences of a second rejection. And to some extent economists like myself are in the same position; I think I called it the “hold your nose caucus.”
So am I for the bill? Yuk, phooey, I guess so. And I’m very angry at Paulson for putting us in this position.
Atrios's initial objections seemed to me to be mainly on the politics. He was concerned, rightly, that the Democrats were about to suddenly own both the mess and the very unpopular solution. And it did look like the Democratic leadership in their A-student, teacher's pet way were rushing in to clean up the glass the Republicans broke with their ball just to show the grown-ups how responsible and mature they are, not caring about how to all the other kids in school they would look like dweebs and chumps and brown-nosing weenies. Fortunately enough Democrats rebelled that the bill was defeated, and several goods have come of that, the best of which is that the Republicans got the blame. Just about nobody was fooled by their phony populist heroes act. Just about everybody saw what a pack of cowardly, hypocritical opportunists they were.
Another good thing is that it's given people more time to think.
The rush to do something has been what's bothered me all along. I couldn't understand why we had to do something without talking about it. Of course I know why Hank Paulson wanted to rush through his proposal---for the same reason every con artist doesn't want you reading the fine print on the deed for the bridge you just bought. Even though Congressional Democrats and some Republicans saw right through that dodge, why were they all still in a rush to do something else? Even if things were that dire, couldn't they find a little time to explain to us just how dire they were? The forest has been burning for a long time, but was the wind about to shift and the fire going to jump the fire breaks? Yes, as it turns out, but not today. There was and is time to take a week and hold televised hearings on the crisis and the proposed solutions. There was and is time for Congress critters who are in favor of a bailout to go home and hold some town hall meetings explaining things to their constituents.
I suppose, though, if Nancy Pelosi had been taking advice from the likes of me, what would have happened is that she'd have been giving the Republicans time to further demogog the issue and make it part of the campaign. Not that they haven't tried it anyway, but I guess the hope was that it would have become old news by November or that by that time voters would have had time to study and reflect and they'd have concluded that the Democrats did the right thing. That plan does sometimes work out for us. With the bill defeated, for the time being, Pelosi bought time and the Republicans have taken ownership of the blame. Now Chris Dodd and Barney Frank will have to explain some things. See if they can.
But it still looks to me as though there's not enough oversight and too much trust placed in Hank Paulson and the masters of the universe to spend the money wisely and do a good job of fixing things themselves. Feels too much like we're giving Dagwood Bumstead an unlimited budget to fix his own plumbing and repair the leaks caused by his last repair job. I keep picturing Hank Paulson down in the nation's basement hanging off a pipe wrench, water gushing from every joint of pipe around him, water up to his knees and rising, and a new leak opening up under his chin and spraying him right in the face.
And as improved as it was over Paulson's original, it still didn't include enough help for the people John McCain forgot to mention during Friday night's debate, which is partly why my Congressman, Maurice Hinchey, voted against it:
Hinchey said the $700 billion proposed was too much. The proposal would also limit possible investments in education, infrastructure and health care.
"It is imperative that our focus be on building up our economy with investments in the working and middle class," Hinchey said. "This bill ignores that component and instead focuses entirely on the Wall Street power brokers who were greedy and took advantage of the system."
And of course there's hardly anything in it that helps people who are about to lose their home, as Dennis Kucinich makes plain:
If you are tempted to vote for this legislation because you think it will keep people in their homes, think again: in fact, Treasury will not be able to change the terms of bad mortgages because the Act does not require Treasury to purchase a controlling share in the underlying mortgage backed securities and collateralized debt obligations. The Secretary will be powerless to make any real and substantive change in the terms of mortgage. The Secretary will have NO power to avoid foreclosures and keep families in their homes.
And everything Glenn Greewald says here is true. The way the bill was put together and presented and the way it or something very like it will pass (and that is going to happen) represent all that is wrong with our government. The system is corrupt and it stinks.
But it's not going to get fixed soon and meanwhile the fire is raging and the winds have shifted and it will jump the fire break.
The sops in the version of the bailout the Senate passed last night are just that sops, and not even to voters directly. The tax cuts and the disaster relief and the what-have-you are there for Midwestern and Southern Republicans to take home to distract their voters with. "Look, folks, I got you some tax relief! I got you more money to rebuild your towns with! Oh and by the way---" cough cough cough, mutter mutter---"I voted for that damn bailout. Did I mention I got you some tax relief!"
There's no reform. There's no overhaul of the system. Some people are still going to lose their homes, some are still going to lose their jobs. People who deserve to lose their jobs will keep them. People who should go to jail will get off scot-free. Companies that should have gone down the drain will stay afloat. Companies that were doing business in good faith are going to sink. And too many of the princes of Wall Street who ought to be out on the street selling pencils will get to keep their summer homes, private jets, and art collections. But as Brad DeLong says, "Tough."
Yes, it is important to design the elements of the rescue package in such a way as to give as few windfalls as possible to the undeserving feckless, greedy, imprudent, thriftless, et cetera. We will do what we can within the law to make sure as few gains ill-gotten survive going forward. But as Federal Reserve vice chair Don Kohn says, it is bad public policy to hold the jobs of tens of millions hostage in an attempt to teach a few feckless financiers (or even somewhat more thriftless borrowers) even a much-deserved lesson.
So that's where I'm coming from. But remember who I think knows more about all this than I do.
Big shout outs to Susie Madrak and Avedon Carol, neither of whom I'm sure agrees with me about needing to pass the bailout. Once again, if it wasn't for them I couldn't blog about anything but TV shows and comic books. Not that there's anything wrong about blogging about TV shows and comic books.
I love the fact of Michael Moore but Moore himself is a problematic figure. He stacks decks. He leaves things out. He gets stuff wrong. Like this:
The Dems who voted for the giveaway did so mostly because they were scared by the threats of Wall Street, that if the rich didn’t get their handout, the market would go nuts and then it’s bye-bye stock-based pension and retirement funds.
And guess what? That’s exactly what Wall Street did! The largest, single-day drop in the Dow in the history of the New York Stock exchange. The news anchors last night screamed it out: Americans just lost 1.2 trillion dollars in the stock market!! It’s a financial Pearl Harbor! The sky is falling! Bird flu! Killer Bees!
Of course, sane people know that nobody “lost” anything yesterday, that stocks go up and down and this too shall pass because the rich will now buy low, hold, then sell off, then buy low again.
Moore's drawing a political cartoon here. You can almost see him working hard to shade in the top hat on the fat capitalist squatting on a frowning Mr Globe.
First off, it's not the Stock Market's reaction that has people for the bailout most concerned, although anyone whose retirement accounts just got clobbered is probably not feeling as complacent as Moore is. It's what the Market's reacting to. Shorter me above: We're in a world of shit if we can't get car loans next spring.
I know it's often looked like the Princes of Wall Street have been playing Monopoly with other people's money, and a lot of them think that that's what they're doing too. But that's not how it works.
...financial markets channel money to the real economy, and that is the source of the profits you see on Wall Street (beyond the zero sum game among some traders). Loans are paid back - with interest - from the profits the borrower made with the money. Money doesn't breed, simply taking out a loan from a bank won't make you wealthy, you have to do something productive with that money, that is where you get the profits to cover the loan and interest.
So the ultimate source of profits on Wall Street is the real economy (though occasionally, i.e. when there is a bubble, the profits are based upon false valuations in the real sector). Profits come from people doing productive things with the loans they take out, and those productive things employ people and make the economy grow faster. Wall Street is a conduit to the real economy, it is not an end in and of itself, and when that conduit is not functioning properly - when money stops flowing through financial markets and intermediaries - productive activity is diminished and growth and employment pay the cost.
Updated because NOW he tells me: Although he supported version of the bailout the House shot down Monday, grudgingly, Ken Houghton doesn't like the Senate's version at all and he lays out his reasons in a comment you need to read.