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"A tremendous victory for democracy"

CNN's Frank Sesno was hosting NPR's Diane Rehm show this morning when economist Dean Baker joined the conversation and laid the "crisis" on the line.  Baker nailed it.

Dean Baker:  I think yesterday's vote was a tremendous victory for democracy.  People forced their representatives in Congress to do what they wanted them to do.  The "elite" media, unbelievably irresponsible as are the politicians.  President Bush has been using these shrill scare tactics -- "the Great Depression"!  I didn't know until I came in this morning that he took a look at the stock market drop and said, "It's going to get worse every day." What on earth is this guy talking about?

Frank Sesno:  In fact, the stock market opened well up today. [The discussion took place at 10:15+ ET.]

Dean Baker:  I'm not surprised.  If I'd had more money, I'd have been betting on that!  But the stock market is not the economy. The stock market heard everything in Washington.  They heard these reporters convey -- uncritically -- President Bush's statement.  ... Keep in mind: we had a housing bubble.  President Bush insisted there was no bubble!  Ben Bernanke insisted there was no bubble!  Henry Paulson insisted there was no bubble!  Now they're supposed to be great gurus of knowledge when they tell us the economy is collapsing?  Oh, we can't question them? This is unbelievably irresponsible reporting on the media's part to take this stuff at face value...

Frank Sesno, member of the media, interrupts: ... Well, are the media taking at face value then too that the credit crunch is so bad that companies like General Motors and United Airlines -- never mind small businesses -- may not be able to get the money they need to float and buy and pay the vendors they need ...

Dean Baker:  Apparently they are!  If they'd noticed, General Motors can't sell cars because they've been making monsters, things that get 5 mpg when we have $4/gallon gas.  The airlines have done the same thing.  The problem is not the credit.  That's only one minor problem ...

Frank Sesno, continuing to interrupt while Baker speaks:  They have lots of problems in their marketing and their product line is certainly one of them.  But the other is, as I understand it, that the credit crunch is so severe that all kinds of companies, healthy and unhealthy, including consumers who are maybe trying to buy a house at this point, are having a harder and harder time as these markets seize up.

Dean Baker:  They're having a harder time.  It's a factor.  And so is the fact that the economy is going into a slump because we've lost over $4 trillion in housing equity.  President Bush could get up there and say, with much validity, "If we don't pass a $250 billion stimulus tomorrow, it's going to get worse every day."  That's true.  That's a true statement.  So yes, it would be good to get the banking system in order.  But we didn't have to do this.  I don't know a single economist who thought this was the best way to deal with the problem.

Of course, a stimulus package at one third the proposed cost of the bailout would, presumably, be available  to taxpayers as much if not more than to the greedy mortgageers who brought the system down.  That would make sense.  In the meantime, Dean Baker is saying what we've all been sensing, those of us who oppose the White House/Treasury grand and urgent plans.  Writing today at CEPR (and at TPM Cafe), Baker says:

"In the short-run, we will have to rely on government stimulus to help spur growth and reduce unemployment. The Democratic demands for stimulus were not extraneous to the legitimate goal of a bank bailout bill. Fiscal stimulus must be central to any serious effort to boost the economy.
 
"The weakness of the banks contributes to the downturn, but they are not the core of the problem. We would still be facing a recession even if all our banks were flush with cash. Hence the hype about the urgency of the bailout was an invention. It would be good to get our banks in order, but it also would be good to send $100 billion to state and local governments to support infrastructure projects and other spending."

How to help the banks?

"How do we go about getting the banks in order? Almost every economist I know rejects the Paulson approach and argues instead for directly injecting capital into the banks. The taxpayers give them the money and then we own some, or all, of the bank. (That's what Warren Buffet did with Goldman Sachs.)
 
"This isn't about begging for a sliver of equity as a concession for a $700 billion bailout, this is about constructing a bank rescue the way that business people would do it."

How to deal with the irresponsible media?  Well, we could start with leather, whips, and chains ... Any other suggestions?

One of the reasons why so many Texans supported George W. Bush was his reputation for getting the Texas legislature to work.  He was the bipartisan governor. 

Look at him now.  In what he deems to be a huge crisis, he hasn't the cojones to get anything done.  No one listens to him anymore.  In similar circumstances when Bush has found himself up against opposition and doubt he's simply hammered his way through.  Maybe he doesn't believe in the bailout either.

In spite of the hearty shouts from Rush Limbaugh and a simulation of right wing intransigence on the Hill, it's entirely possible that the Republican party has crashed and what we're seeing now are post-mortem muscular twitches.

"Stinging rejection" and "humiliation" for McCain

The Economist sees John McCain as one of the more prominent losers after yesterday's vote on the Hill.  "The no vote was a big blow to George Bush, Hank Paulson, the treasury secretary, and Ben Bernanke, the Federal Reserve chairman," Economist analysts write. 

Nancy Pelosi picks up some blame for her "stupidly partisan speech shortly before the vote in which she poured scorn on the Republicans she is trying to court."

But John McCain is toast.

"The House vote also represented a stinging rejection of John McCain, the Republican nominee. Mr McCain suspended his campaign last week for two days, citing the financial crisis, and flew to Washington, DC, to help craft a solution to it. His main task was to persuade reluctant House Republicans to back their own president. In the event they voted against the deal made by their own leadership by two to one. The humiliation meted out to Mr McCain is intense."

A pox ...

John Boehner's post-vote appearance yesterday showed a man who has not earned his position in Congress or in political leadership.  It's not just that Boehner failed to keep his troops in line, it's that he reveals himself to be a political (and moral) midget.  Politico says this morning that Boehner may be losing his job as a result of his role in yesterday's debacle. 

Boehner isn't the only one who should lose his job.  The line stretches far beyond eight years and across the party divide.  One of the reasons I left the Democratic party was its drift -- not just to the right but towards an embrace of power without substance.  A common symptom of how many of us feel has been the inability to just listen to our leadership.  How many of us have actually been able to listen to George W. Bush giving a speech?  Not many.  Is this just partisan crabbiness? Not.  For every Bush there's a quick!-grab-that-remote Pelosi.  For every Boehner there's a switch-him-off Rahm Emanuel. 

Meanwhile -- have you noticed? -- the focus of the bailout story is Congress, the administration, and failing banks.  References to "main street" are made in an almost offhand way.  Hey! we're out here and we're voting and we're increasingly aware than no bailout bill passed by this Congress and signed by this president will give us full rights or sufficient recompense.  Nor do we see anything like relief on the horizon for the panic we're feeling as we experience the drop in value in our retirement funds, the unreliable and predatory nature of the banks holding our debt, and the stony deafness of our elected representatives. The New York Times' editors write:

"In the bill rejected on Monday, the unlimited powers that the Treasury Department had initially sought were curbed, and Congressional oversight was added. But judicial review of Treasury’s purchases was not adequately ensured. The courthouse door was not closed entirely; lawyers could still seek effective remedies for actions that violate the Constitution. But that’s a much higher hurdle than the already formidable barriers in place to discourage lawsuits against the government.

"Homeowners were also given short shrift with provisions that mainly urged lenders and the Treasury to do more to help them. That’s unconscionable. The financial crisis is as much a problem for homeowners as for Wall Street investment bankers. Appeals to lenders’ better natures have not worked to bring lasting relief to homeowners. If they are still not working in the coming months, Congress will have to revisit the issue.

"Taxpayer protections are also iffy, such as a requirement that in five years, the president must give Congress a plan for recouping any losses from financial firms. What will happen then is anyone’s guess. Lawmakers could decide at that point that taxpayers are the only pit bottomless enough to absorb those losses."

Of course, taxpayers are also voters.  And, speaking of bottomless pits, many of us are already hard at work digging bottomless pits to drop our Congressional representatives into at earliest opportunity.

A big mess we've noticed probably twenty years too late

This mess didn't start last week or last year.  I'm guessing the Reagan presidency followed by the Clinton bubble.

Jamie Galbraith knows his stuff and has both experience and good judgment.  I listened when he said nothing could have persuaded him to support the original bailout package.  The "compromise" voted on today was not quite as dreadful.  Passing it, he said as though he were holding his nose, was probably less bad than not passing it because of the mood of the markets here and overseas. 

But it didn't pass.  I don't know Galbraith's reaction to the latest news, but here's Paul Krugman:

"So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch.

"As a friend said last night, we’ve become a banana republic with nukes."

I find I'm not the only one who thinks the whole culture has to change and no bail out is going to be more than a temporary fix until we face the debt problem from top to bottom -- snake oil salesmen right down to their eager, self-deceiving customers out in the field.  But the process could be and probably will be hell on wheels.

Don't look at the Dow.  Keep your eyes on the S&P.  It gives a wider view of market activity.  And it lost damn near 9% today.

The language of (self)-deceit

There's a kind of in-word floating around in any discussion of the financial debacle.  A what-the-hell-is-that-fancy-talk kind of word.  A frenchie word. Speak French?  Then you'll have no trouble understanding what one financial analyst meant when she said, "So all of these risky tranches of ninja loans and subprime loans were peddled to investors worldwide."

Don't worry.  "Tranches" simply means "chunks" or "slices."  You wouldn't want a crisp financial analyst talkin' about "chunks of ninja loans."  Even if you do know what a ninja loan is.

N.I.N.J.A (No Income, No Job, No Assets).

That elucidation came from "Ask a Ninja" who also offers a link to a Washington Post report way back in early 2007 when there were plenty of concerns about the direction of the financial system:

Which of these products do you think makes sense?

(a) The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

(b) The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation.

(c) The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

(d) The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment.

(e) The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years.

(f) The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.

(g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced these "innovations," but it has also begun to combine various features into a single loan and offer it to high-risk borrowers. One cheeky lender went so far as to advertise what it dubbed its "NINJA" loan -- NINJA standing for "No Income, No Job and No Assets."

Gee. All that was funny a year and a half ago.  Laugh until you cry, but don't claim we didn't have plenty of warning.