So, what did John McCain accomplish with his grand gesture, as he swept into Washington Thursday to “help” his colleagues in Congress work out a deal on how to approach the economic crisis? Well, he went to the high-profile meeting he’d insisted that Bush call, at which

…he sat silently for more than 40 minutes, more observer than leader, and then offered only a vague sense of where he stood, said people in the meeting.

Meanwhile, the tentative deal Congressional leaders had already announced that morning dissolved around him. (The “Agreement on Principles” Senate Banking chair Christopher Dodd had released was far from perfect—including nothing at all on how to value the “toxic” corporate assets, nor on what sort of new regulations are necessary—but it did include valuable progress on formal oversight of the process, on taking equity shares in return for public funds, and on limiting executive compensation, all steps in the right direction. Of course, at last report, Bush was still threatening to veto any bill with that last item in it.)

From all reports Sen. Obama took a more active role in the discussion than did Sen. McCain. The real obstacles, however, came from the House Republicans, seeing an opportunity to distance themselves from Bush on an unpopular measure. At what cost? Well,

According to one GOP lawmaker, some House Republicans are saying privately that they’d rather “let the markets crash” than sign on to a massive bailout.

“For the sake of the altar of the free market system, do you accept a Great Depression?” the member asked.

And needless to say, the Democratic leadership isn’t about to let any version of the Bush/Paulson plan reach the floor unless the GOP is backing it. Even though Hank Paulson reportedly went down on one knee and pleaded with Nancy Pelosi.

So what was the takeaway? Well, after the meeting McCain’s campaign issued a statement saying,

“We’re optimistic that Sen. McCain will bring House Republicans on board without driving other parties away, resulting in a successful deal for the American taxpayer.”

Yet somehow, at the same time, McCain’s friend and ally…

[Sen.] Lindsey Graham of South Carolina – said Thursday night that McCain joined House Republicans in opposing [the compromise] proposal.

I guess where McCain stands is anybody’s guess at this point. Maybe McCain will show up to explain himself in Mississippi tonight. Or maybe not.

Meanwhile, just to keep the pot boiling…

In a move initiated by scholars from the University of Chicago, 166 economists from across the political spectrum, including three Nobel Prize winners, released an open letter opposing the Bush/Paulson plan, criticizing its fairness, its ambiguity, and its long-term effects. Of particular note is this remark:

“I suspect that part of what we’re seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,” said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory.

That’s a sobering thought—that Paulson and his former industry colleagues may be deliberately spreading FUD to save their own hides.

Then again, lest we grow too cynical, there’s ample evidence that things really are growing worse, not just on Wall Street but on “Main Street” (and as an aside, I’m already torn between appreciating the frequent use of that metaphorical contrast as a sign of growing public awareness of American class conflict, and being sick to death of its sheer repetitiveness and mind-numbing lack of imagination). But, the point: as the New York Times reports, mortgage lending and small-business credit has already entered a “lockdown”:

For nonfinancial firms during the first three months of the year, the outstanding balance of so-called commercial paper — short-term IOUs that businesses rely upon to finance their daily operations — was growing by more than 10 percent from a year earlier, according to an analysis of Federal Reserve data by Moody’s Economy.com. From April to June, the balance plunged by more than 9 percent compared with the previous year.

This week, the rate charged by banks for short-term loans to other banks swelled to three percentage points above the most conservative of investments, Treasury bills, with the gap nearly tripling since the beginning of this month. In other words, banks are charging more for even minimal risk, making credit tight. …

[In one midwestern city], as people try to refinance mortgages to hang on to homes and extend credit cards to pay for gas for their job searches, the local credit union is saying no.

And as you’ll surely have heard before reading this, the big news last night was that Washington Mutual went under. The nation’s biggest S&L became the biggest bank failure ever, as it was taken over by the FDIC and promptly sold off to JPMorgan Chase at fire-sale prices. (Customers, of course, are assured that business will go on as usual. At least one lesson learned in the Depression seems to have stuck.)

What are the side effects from all this? Well, even without a bailout—but possibly even moreso with one, given the effect on the Treasury—the rest of the world (i.e., the countries that buy our bonds and pay our bills) is getting more than a little nervous. The news from China late Wednesday was that Chinese regulators had told their banks to stop lending to U.S. financial institutions; by Thursday the Chinese government was categorically denying the report; yet by late Thursday, after the WaMu news broke, it was announced that “China’s banks are limiting foreign- exchange transactions with U.S. and European financial companies on concern tighter global credit markets will cause more failures.” Make of it what you will. Meanwhile, the German Finance Minister has accused “Anglo-American capitalism” of “endangering global stability,” and warns that “the US will lose its superpower status in the global financial system.”

Certainly, it’s not hard to imagine that if our foreign creditors lose confidence and decide to cut their losses rather than continuing to prop up U.S. capital markets, then in order to keep the country nominally solvent in the face of massive federal deficits (made even larger by the bailout under discussion), the Fed would have no choice but to monetize the debt (read: print money in very very large batches). At which point the dollar would stop being the global reserve currency, its exchange value would drop through the floor, inflation would skyrocket, more banks would fail, more jobs would disappear, and American standards of living would quickly evoke the 1930s.

The Bush years have vividly shown us the logical endpoint of the mania for deregulation begun in the Reagan era. Play the game without a ref, and everybody winds up getting injured.

Yeesh, and I started out thinking that this would just be a quick “news survey” post. Interesting times, indeed…

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One Response to “We are living in interesting times…”
  1. Since the 1930s, U.S. banks were the flagships of American economic might, and emulation by other nations of the fiercely free-market financial system in the United States was expected and encouraged. But the market turmoil that is draining the nation’s wealth and has upended Wall Street now threatens to put the banks at the heart of the U.S. financial system at least partly in the hands of the government.

    The government’s about-face goes beyond the banking industry. It is reasserting itself in the lives of citizens in ways that were unthinkable in the era of market-knows-best thinking. With the recent takeovers of major lenders Fannie Mae and Freddie Mac and the bailout of AIG, the U.S. government is now effectively responsible for providing home mortgages and life insurance to tens of millions of Americans. Many economists are asking whether it remains a free market if the government is so deeply enmeshed in the financial system.

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