Paulson’s first plan was an affront to statecraft. From the ultimatum-like tone to the audacity of its Section 8, it resembled outright theft more than anything else. It was well-deserving of being DOA.
The cobbled-together Bipartisan Congressional Proposal was sausage. The parts that were good weren’t good enough, and the parts that were bad were unmentionable. As nicely symbolic and morally satisfying as it will be to make sure that the cheats and crooks who did this to us don’t get away with hundreds of millions of dollars, realistically that’s not going to affect the success or failure of the bailout, or the magnitude of our cost.
The House Republicans, backed by Helicopter McCain, dug in their heels and said “No!” God bless ’em. But what they said “Yes” to was the craziest: the Gingrich plan which substituted Conservative shibboleths for sensible economics. Note to Newt: Cutting capital gains taxes does not affect people taking massive capital losses.
So we don’t have a deal. What is Congress going to do? Especially considering the entire House is running for reelection and the bailout is phenomenally unpopular, and everybody is triangulating how the fluid coalitions of the Bush administration, the Democratic majority, and the House Republicans will help or hurt the top of the ticket?
One alternative is to do nothing. Walk away. The Fed has handled six major collapses already with no panic and a significantly smaller exposure than $700B. If the GOP declines to play ball with its President, the Democrats don’t have to play marriage counselor.
But that leaves the risk of total, unmanageable collapse on the table. Like in Iraq, it’s a risk that people are uneasy about taking, but Bush left us all once burned and twice shy. And the worldwide credit crunch is real, and its effects are pretty predictable (unlike the effects of continuing to contain Saddam.)
We let them kite a system of worthless debt swaps up to a dizzying height of perhaps five trillion dollars. If we cut it loose, it collapses. If we pull too hard on the string, it breaks. We need to a) wind it in very carefully and b) reinforce it where we can.
The current talks seem to be circling around these notions:
- a piecemeal budget, enough to calm the markets and add liquidity but not a blank check
- an equity stake so the taxpayers get something for their money (like in the AIG deal) instead of just sending up a hideously costly stronger kite string
- some symbolic humbling of the firms involved
- some component of preventing defaults by allowing individual home loans to be restructured
From what I know about the way the stripped mortgage-backed securities are packaged, the latter may be logistically the most difficult, but probably the most worthwhile to the economy as a whole. There are two domino effects here: the top-down credit crunch of the Wall Street high flyers, and the pocketbook effect of people who get kicked out of their homes defaulting on their car loans and credit cards, and not spending money in the consumer economy. Both sides need to be addressed.
I still fully expect a feint by the Republican House. They’ll pretend to agree, then vote against it in a futile but face-saving gesture, so they can call the Democrats the party of socialism for the rich and campaign based on their noble defense of the “little guy” against rapacious Government and Big Business. And McCain may just join their side.