Another business day, another bank failure. (Excuse me: “stock-swap transaction.”) Yet Congress seems paralyzed, leaving the financial crisis unresolved.
This morning John McCain was bragging (prematurely) about how he’d brought House Republicans on board to pass a bailout package. This afternoon, of course, the bill failed to pass… and McCain promptly pointed his finger at Obama for failing to get the Democrats in line… even while saying, in the very same speech, “now is not the time to fix the blame.”
Nevertheless, scapegoating is what everyone in the beltway spent the afternoon doing… even though both the support and the opposition to this bill was genuinely bipartisan (roughly 33% of Republicans for it, 66% against; 60% of Dems for it, 40% against). Both sides worked diligently all weekend on a compromise bill, and genuinely thought they had reached one this morning. As MSNBC’s Chuck Todd reportedly observed, the real dividing line was not party at all, but fear of voters: the clearest pattern was that members with safe seats voted for the bill, while those facing serious challenges in November voted against it. (And the opposition may not succeed even in that narrow sense, at least for the GOP, as it inspires one of the party’s most loyal and “rock-ribbed” demographics to lose faith.)
Thus the stock market suffered its biggest single-day point loss ever, making $1.2 trillion of value disappear in a puff of panic, and lots of lots of baby boomers watched their retirement portfolios get markedly smaller. Meanwhile the credit freeze continues to demonstrate that it’s real, not just hypothetical, as not only commercial paper sales but even routine auto loans, student loans, and corporate payrolls begin to fell the pinch. And it’s spreading beyond the U.S., too, to the U.K., Belgium, Germany and beyond. As the Guardian so elegantly put it, Panic Grips World’s Markets.
NYU economics professor Nouriel Roubini wrote, last February, about “The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster.” The entire piece is long but well worth reading (summary here). It’s interesting (in a morbid sense) to note that eleven of the steps he warned of have now come to pass, and the twelfth appears to be well under way. At the end of the day:
“A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.”
The bill rejected today was arguably better than nothing, and certainly better than Bush and Paulson’s original no-strings-attached proposal, but it was still far from perfect. The chief “compromise” forced on it by the House Republicans, even if not enough to satisfy them, hardly helped; the “insurance plan,” far from being a more “market-oriented” approach, would actually create a much more massive liability for the government with less profit potential for the taxpayers. Whether inspired by fear of voters or a long-held quasi-religious faith in The Market, too many legislators seem inclined to cut off America’s nose to spite its face.
So what now? We (read: our representatives) are left with only two choices. One: do nothing. Two: come up with something better.
Fortunately, there are arguably better solutions out there. Perhaps (major surge of optimism, anyone?) today’s events will inspire our legislators to take a look at some of them. Re-regulating the financial markets to require (and allow) a relatively orderly deleveraging, as I wrote a few days ago, would be one important step. Professor Roubini, he of the frighteningly accurate prognostications, discusses several other possibilities, emphasizing that:
“…purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system. Such recapitalization — via the use of public resources — can occur in a number of alternative ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; government assumption of government liabilities.”
Roubini points readers to a “10-Step Plan to Resolve the Financial Crisis” that he published last week. Prominent among these steps is a modern equivalent to the Home Owners Loan Corporation that was so crucial during the Great Depression—a means of securing the value of otherwise endangered mortgages without trying to re-inflate the housing bubble.
He also notes an IMF study (.pdf) showing that out of 42 banking crises around the world, the government managed to recapitalize markets in the vast majority of them without buying up bad assets. One of the most successful examples was Sweden’s handling of its 1992 crisis, which economist Brad DeLong discusses in some detail as an instructive example:
It might work like this. Congress:
- grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
- requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless
- the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
- grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
- requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.
Perhaps the available options wouldn’t be so unpopular, and Congress wouldn’t be so afraid to own the legislation, if they’d made some effort to frame it as something other than a “bailout” from the start: say, a “stabilization plan.” Certainly, public opinion seems to shift dramatically depending on how the situation is described… underscoring that even after saturation media coverage, most people just honestly don’t understand what’s going on.
Public opinion aside, doing nothing is not a viable option. The system will not fix itself: if this crisis has demonstrated anything, it’s that unregulated capitalism will devour its own young before exercising voluntary restraint, however prudent. One can only hope that our legislators, of both parties, come to their senses long enough to do something that makes them worth voting for in five weeks, rather than letting the problems accelerate. Otherwise, as Ezra Klein writes, “It is further proof that we have a calcified political system incapable of responding to either long-term threats or short-term crises.” (Or, as Paul Krugman put it, “a banana republic with nukes.”) Any vicarious satisfaction “Main Street” may get from watching Wall Street crumble under those circumstances would be very cold comfort indeed.
(…Hmm. I notice that I haven’t written anything about comics or pop culture in over a week. Can’t imagine why that would be!…)Tags: bailout, economy, financial crisis, McCain