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Go Home A Matter Of Trust

THE PLANK SEPTEMBER 23, 2008

A Matter Of Trust

BY CLAY RISEN

Clay Risen is managing editor of Democracy: A Journal of Ideas and a contributing editor at World Trade. His first book, A Nation on Fire: America in the Wake of the King Assassination will appear in January.
 

It's tempting to watch today's Senate Banking Committee hearings, with Democrats and Republicans alike tearing into Federal Reserve Chair Ben Bernanke and Treasury Secretary Henry Paulson, and feel pangs of sorrow for the beleaguered duo. There to defend the administration's $700 billion rescue plan for the nation's debt markets, they faced withering charges of having cobbled together an "ad hoc" (in the words of Alabama Republican Richard Shelby) three-page proposal that was "stunning and unprecedented in its scope and lack of detail" (Connecticut Democrat Chris Dodd). Paulson could only play defense: Of course it's short on details--that's what we're here for, he told them. Oversight and other details were "the role of Congress." To think otherwise would be "presumptuous."

That's nice of him. But wait ... let's remember with whom we're dealing here.

It's hard to watch the tragicomedy unfolding on the Hill and not see the chickens coming home to roost for an administration that seems to wake up every morning with new ways to be "presumptuous"--toward Congress, taxpayers, foreign leaders, and the Constitution. To be fair, Hank Paulson probably does believe that time and decisiveness are of the essence, and I'm willing to allow that he means it when he says, "I hate the fact that we have to do it, but it's better than the alternative." But, in a perfect distillation of the mindset of the Bush administration, his original bailout plan read, "The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this act ... without regard to any other provision of law regarding public contracts."

Such brazenness is the norm for the administration. Remember, to take just two examples, when it forced Democrats to accept both the Iraq War resolution and the anti-labor provisions in legislation creating the Department of Homeland Security in 2002, on penalty of seeming weak on national defense? It's the same thing here--that it can use the rhetoric of crisis to force through a plan granting the executive even more powers. If Bush's power-grabbing tendencies were just for his own political sake, it would be hard to see the worth in making a push this late in the game. The Paulson plan shows clearly that for the Bush team, executive power is more than just political; it's ideological. They really do believe that the executive, whoever it is, should have unchecked power over the economy, in the same way they have pushed for unchecked power over homeland security and the war in Iraq.

This time, of course, Congress isn't playing along, and as a result, we will see a great pushback over the next few days as Hill leaders hopefully coalesce around a counter-plan of their own. If we're lucky, the two sides will reach an agreement quickly. If not, we could be in for weeks of haggling, opening the door to interest-group finagling.

In a post on Friday, I implicitly called on the administration to push through its incipient plan quickly so as to avoid such complications. Had I forgotten who sits in the Oval Office? I didn't imagine it would do so by completely avoiding consultation with Congressional leaders (though, if rumors are true, openly courting Wall Streets banks). By eschewing outside input completely, the White House has raised Congressional ire and thus made such complications all the more likely--and, because markets are all about perception, made sure that financial turmoil would continue. Naively, I assumed that in a moment of real crisis, the administration might act otherwise. But like the proverbial scorpion that kills the frog carrying it across the stream, they could hardly do otherwise. It's in their nature.

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17 comments

Michael Tomasky blogs about a nice idea (for which he explicitly denies originality):

-- Harry Reid and Nancy Pelosi say that, since either Obama or McCain will be the president in a matter of a few short months and one or the other will have to handle the bulk of this crisis, they won't put anything up for a vote unless it has been signed off on by both candidates. I think that's kind of brilliant. It speaks to good-faith negotiation and bipartisanship. No responsible candidate can wriggle away from that.

www.guardian.co.uk/.../congress.wallstreet1

- ndmackenzie

September 23, 2008 at 4:50pm

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Naomi Klein was on Bill Maher's show Friday discussing her book "Shock Doctrine" in she writes about exactly what you have described Clay. This Administration lets everything build to the point of dire crisis and then ram their prescriptions down everyone's throat lest you be seen as a barrier in a time of need. They don't care to govern effectively; they only care to use our government and its vast resources to benefit themselves and a select few. Thank God Congress is not going along with it, finally.

- mcgumbleton

September 23, 2008 at 4:51pm

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I'm glad to see Congress actually standing up to administration on this one.  I was worried that they'd push through whatever was asked for in a moment of panic.  This is a move that could have profound consequences for economy and if the past 7 years have taught use anything, it's that "trust us" from the Bush administration just isn't good enough.

I'm concerned about the fundamentals of the plan, though.  I don't want Democrats in Congress to tack on some limits on CEO pay or other bells and whistles and call it a victory if the plan if fundamentally the wrong way to deal with the situation (as it increasingly seems like it is).  The central issue is that this needs to be an investment, not a gift.  If the taxpayers are going to fork over this kind of money, we need to get more out of it than a bunch of crappy assets.

- AlanSP

September 23, 2008 at 5:13pm

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Well they could just set the housing value of these "crappy assets" at 100k a pop and sell off 7,000,000 houses at affordable rates.  In California alone it is something like 50k foreclosures a month for the last year or so.  This way the Gov can get their money back and the citizens making median incomes can buy affordable housing.

Of course they would have to pass something that prevents these specific assets from having any affect on the property values of other similar houses.

- TLaBorn

September 23, 2008 at 5:25pm

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Myself an economics ignoramus who struggles daily, weekly, monthly, keeping spending records and balancing the checking account, I have nothing constructive to say about the bailout, but I do ask why it's called a "bailout" when it seems to me a more apt term is "bet" - the 700 billion dollar bet. Is it not so?

If someone, even the former CEO of Goldman Sachs, were to approach me and ask if it's ok with me for him to extract at a later time any amount of money out of my checking or savings account, or pension, he deemed necessary to secure a 700 billion dollar bet that the financial markets would use the money to clean their houses so they could operate normally afterward, I'd tell him to get lost. Am I being unfair? Unwise?

- tomeg

September 23, 2008 at 5:42pm

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This administration reminds me of the old fable about the boy who cried wolf.  Who believes Bush and his buddies?  But what if they are right this time and the wolf is really there?

- cal80

September 24, 2008 at 12:23am

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Maybe the wolf is really there, but giving them unchecked power in definitely no solution. In fact, it's the opposite of the solution. You have to be pretty demented to ask for full unchecked powers after you fucked up majorly. Yet this is exactly what the Republicans are doing. Breathtaking.

- sleepyavl

September 24, 2008 at 2:51am

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Remember: right before Paulson left Goldman (where he was CEO), he decided to have the entire firm double down on its mortgage back security risk, causing a cascade of firms to follow - especially Lehman.  Goldman was  the premier firm and influenced everyone else's behavior.

In light of this, its particulalry hard to feel sorry for him having to sit in that seat and take the heat for having to clean up the mess that he actually had a very specific hand in creating.

- Wandreycer1

September 24, 2008 at 6:40am

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The strangest thing about this episode is that perhaps Paulson actually believes in this demential plan as the only way to "save the economy".

Since for him (perhaps the last true believer in "supply side"...) f you arrange things for the zillionaires in Wall Street everything will flow from there...

Well, perhaps some will be happy for some (limited) time. Particularly traders, real estate sellers, owners of expensive sushi reastaurants, explorers of expensive resorts in the Maldives... Until every last cent has been burnt, they will be happy...

But simultaneously, you´ll be keeping the American economy on the kind of opium it has been living in these last years: dollars for no production.

Indeed, instead of stimulating actual productive and skilful activities (and inherently resortful and virtuous citizens), you'll be stimulating the kind of activities in which one gets money for nothing (trading shares, selling luxury imported cars, mediating real estate,  opening restaurants...).

And, if you approve that plan, you also be loosing an opportunity to send a clear message that an economy (and a society) depends ultimately not on it's (very apparent) "financial soundness" (apparent since it will be a "bailed out" soundness) but in the actually existent resortfulness and virtuosity of it's citizens. And the success of a nation will ultimately depend on that (not on paliatives that may work for a short period of time...).

Not to mention an opportunity to spend money (if you're going to spend public money), not on financial wizards, but on things that America is desperately in need of (infrastructure, good public education, energy renewal, etc.) and in inherent creation of ACTUAL JOBS for ACTUAL WORKING PEOPLE.

And I'm not going to say again how morally repugnant this plan sounds to me (I've already said that in the yesterday's discussion on the Lowenstein article). But indeed, you'll be rewarding the villains. You'll be doing what the American Founders would consider unthinkable: to use Government (in this case massive Government means), not to promote the virtue of citizens but to reward (and consequently promote) it's very opposite (the irresponsible management of money in financial "schemes" that resemble Casino activities...).

So perhaps Paulson is a good man thinking that he is doing the right thing (although the political tactics, probably imagined by the likes of Cheney and Rove, are repugnant, since they are the politically equivalent of pointing a gun at the head of Congressmen). But you simply cannot be, once again, deceived by ideologically inspired and misinformed people. By people that think they are doing the right thing to the point of fanatism, but are actually doing it's very opposite.

So, reject this plan, pure and simply. The sky will not fall over your heads.

And if, perhaps, you'll be choosing the hard way in what concerns the most immediate future, I'm sure it will be the right way in what concerns THE FUTURE THAT MATTERS. Indeed: you have to think about the America you want to leave younger generations: is it a totally unproductive America, addicted to Wall Street gambling and to Main Street consumption (of "made in China" unneeded "stuff")? An America that lasts until the dollars is completely discredited worldwide (see todays op ed on the NYT about the very fragile position of the dollar...)?

So, this once, do the right thing. Thank Mr. Paulson for his efforts but reject his plan. Totaly and completely. If you do it, that will actually mean "a fresh start for America", I guess.

- luispc

September 24, 2008 at 8:37am

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CORRECTION: And, if you approve that plan, you'll also be loosing an opportunity to send a clear message, according to which an economy (and a society) depends ultimately not on it's (very apparent) "financial soundness" (apparent since it will be a "bailed out" soundness) but in the actually existent resortfulness and virtuosity of it's citizens. And the success of a nation will ultimately depend on that (not on paliatives that may work for a short period of time...).

- luispc

September 24, 2008 at 8:50am

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Acting without first thinking through this financial problem is a mistake.  For example, take Buffet’s investment into Goldman Sachs, which demonstrates this market will find ways to fix their own problems and they do not need the government to bail them out.  Doing nothing is a decision and the taxpayer should be left out of this deal.  Let’s wait and see what the market will do before we take any additional action.  Let the whiners (the banks) work it out for themselves so we (taxpayers) do not have to write yet another blank check.

Signed, US Taxpayer

- mrtbob

September 24, 2008 at 10:23am

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luispc, I agree, if it is a liquidity crisis (meaning there is not enough money in the system) how the hell does borrowing $700 billion from the Chinese do anything but put off the inevitable. regardless, the 700 billion is there, let the people who are holding this paper sell them themselves and bear the hit.

- blackton

September 24, 2008 at 10:38am

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I have been brought to any economic bona fides I enjoy much against the will of my basic nature. Happenstance and necessity have required my participation in some fairly sophisticated financial arrangements. Thus survival has seen fit to motivate a deeper understanding and facility of various complex mechanics in modern financial instruments and thus an acquaintance with potential cascading consequence.

The valuation implications involved in a negative resolution of this market circumstance are far reaching and the pain won't be limited to Wall Street. On the contrary the most pain will be found on Main. Yes we have been having sex with an 800 pound gorilla. Imagining he was all fine and handsome with only mutual interest in mind. Now having grown weary and a bit dry our pleasure has vanished. Now it is a good thing to consider rape law and its implications. Even necessary. But why dally while that gorilla is still pumping away to our detriment but for the want of a big enough cop to get the fucker off?

The reason this plan is being bruted as such is that scale is crucial. Without we are looking at individual firms and their interrelated considerations having to face the pitiless market forces that don't have anything like proportion in mind. Price discovery is matter of greed and fear in this place. It is not an equitable and reasonable arbiter of all things being equal. I truly can't see any good to come from letting the gorilla having its way.

- boxofrox

September 24, 2008 at 12:38pm

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I don't understand your point. The gorilla will have it's way big time if you feed it with 700 billion.

Plus: what is being drawned here is a technocratic kleptocracy.

These economists that supposedly know everything about the markets (as if this was about rocket science and not about ideologically based assumptions) are feeding their nests with 700 billion that will supposedly "flow" to a population permanently drugged (and made politically numb) by an endless consumption will.

Well, you'll have drugs for a few more years (or months). But the dealer will be running out of product (since the dollar's credibility will continue to fall). And the vice will maintain itself to a point in which there aren't any more drugs and there isn't any possibility of recovery.

This is a moment of decision: either to break free from all that or to accept another injection...

And make no mistake: one day, you'll have to face the consequences. An enormous debt, a bankrupt dollar and no productiveness. And, in that same day, you will also have to address a moral colapse...

One other thing: It's extraordinary how Buffet puts 5 billion on Goldman Sachs and then says "this is like Pearl Harbor".

This is the same thing as a dealer (that invested 5 billion in buying that "stuff") saying to drug addicts: come on and turn my 5 billion into 700 billion or I won't ever give you any product again...

I do hope that you have not yet achieved the point in which he already knows (by inside information) that the bailout will pass and is preparing to grow even richer on account of the American tax payer via his pal (and ex-Goldman Sachs CEO) Paulson...

I do hope that kleptocracy is still a threat and not a reality...

- luispc

September 24, 2008 at 1:15pm

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Luis. I'm of the opinion that you are simplifying the complicated and complicating the simple in reverse priority. If all valuations collapse but for the want of a big enough pool of money to rescue the good assets from the manageable bad assets in what may be a relatively break even scenario then all you have done is invite chaos for the sake of some sacrosanct principle. I happen to think that priority can and will be adjusted with having to cut the spiteful nose off of the face. You have created this class warfare consideration that really doesn't have a bearing on what we are dealing with now.

- boxofrox

September 24, 2008 at 1:50pm

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Should read:

I happen to think that priority can and will be adjusted without having to cut the spiteful nose off of the face. You have created this class warfare consideration that really doesn't have a bearing on what we are dealing with now.

- boxofrox

September 24, 2008 at 2:01pm

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This is not about "class", Jack. I don't fucking care if those Wall Streeters have "golden parachutes" and "stock options". As long as they play by the rules and assume their resposibilities and risks, they can keep their money. And if I were a marxist, I would not to be worried. I would be feasting on the spectacle of capitalism showing it's contradictions and following it's path to ruin.

This is about ideological fanaticism (masqueraded as "economic science") witholding all moral and prudential judgment. This is about putting the strange and unsustainable logic of supply side economics (supposedly "flowing" from Wall Street to Main Street) over any other consideration, including very important moral and political considerations that constitute the basis of your polity.

This is about feeding and rewarding in a massive scale the absurd unproductive logic in which American economy (and American society) has been living: gambling, making money out of nothing, borrow, downgrading the dollar, destroying all credibility. This is about bailing out Wall Street and promising Main Street no sacrifices and perpetuation of excesses.

And this is about living once more the political atmosphere that anticipated the Iraq War: push everything to the limit, withhold all judgment, watch the spectacle, expect to keep and upgrade the unproductive, consumption "American way of life" for ever.

I tell you: if I were an American I would be using every possible mean to have my message heard

by my Congressman. More: I would probably be demonstrating on the streets. This is just too bad.

- luispc

September 24, 2008 at 3:12pm

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