Chelsea Green Publishing

Chelsea Green Blog

Robert Kuttner: Will the Bailout Work?

**UPDATE 2:32 PM** The $700 billion rescue plan was defeated on the House Floor. ORIGINAL ARTICLE: Assuming the Paulson-Pelosi package passes the House and Senate, will the $7oo billion bailout even work? Robert Kuttner, author of Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency, puts our chances at about 50/50. And the plan put forward by the rogue Republican faction? Kuttner, writing in the American Prospect, calls it “a joke.” The Paulson-Pelosi bill is flawed, but it may be our only shot at avoiding Great Depression II. Robert will be appearing on Talk of the Nation today at 2:00 PM to talk about the economic crisis and the Wall Street bailout. Check your local listings. From the American Prospect article:

Will Congress pass the Paulson-Pelosi package? Will both presidential candidates vote for it? And will it work?

At this writing, passage is still far from certain. There is still open rebellion on the Republican right, and a lot of progressive Democrats don’t really like it either. House Speaker Nancy Pelosi needs at least 80 of the 199 House Republicans, or the package becomes more the Democrats’ baby. Even if the rescue plan keeps markets afloat through the election, a proposition that I’d put at 50-50, there will be a rolling taxpayer backlash that Republicans will milk for all it’s worth.

For any House Republican facing a tight re-election race, the easier vote is No. The alternative Republican plan is a joke. It’s billed as a “free market” solution, but it depends on government tax breaks and government insurance to bribe more investors into buying this junk. It’s hardly a free market — if it were, they wouldn’t need the tax subsidy or the insurance. And it is even less likely to work than the Paulson plan. But angry taxpayers don’t follow the fine print. They only know that Wall Street is getting $700 billion and they are not.

Pelosi has one trump card. Wall Street desperately needs this plan, and Wall Street is not wrong to fear Great Depression II. In normal times, Wall Street has pretty good lines to the Republican Party. But in these times, Republican members are willing to gamble with the economy in order to appease angry voters. However, if Republican legislators will not share the credit and blame, there will be no bill and we can look forward to deepening crisis.

A similar drama is playing out in the presidential campaign. Both McCain and Obama said they were inclined to support the package, but both left themselves just a bit of wiggle room. Imagine the scene at McCain Headquarters. The phones are ringing off the hook from opposite quarters — captains of finance urging him to support the plan; and the Republican pseudo-populist rightwing demanding that he stand with them.

If Obama declares his intentions first, there will be great temptation for McCain to double-cross him. As McCain slips further and further in the polls, it’s desperation time. McCain could easily give a speech saying he hopes the measure works, but he can’t in good conscience vote for it be because it’s too tilted to the fat cats and doesn’t do enough for ordinary working Americans. Since the vote will be far closer in the House, which votes first, McCain would have the luxury of voting no, but knowing that the bill will pass. This then sets up the mantra of the campaign’s final month: McCain=Principled Independent who speaks for You; Obama=Washington Club that bails out Wall Street.

Obama, who views himself more as a steward and is already thinking about where the economy will be in January, will very likely vote for it. But in announcing his support, we can expect him to say that the package is far from what he wanted; that it is at best a stopgap; that in round two, when he is president, we will need to come back and do this right; and that any politician who plays politics with this vote is playing Russian roulette with the economy. Voters and pundits can then draw their own conclusions about whether McCain is populist hero or cynical opportunist.

But what about the plan itself? Ever since the plan was unveiled, I have been urging that critics of it not festoon it with more benefits for homeowners and more limits on executive compensation — but offer a whole other approach. The road not taken included direct government refinancing for homeowners instead of government mopping up of junk securities. With that approach, stability trickles up. The money markets get the same relief. But it’s far more just to ordinary people and far better politics. The Democrats, alas, were not able to add more than modest additional homeowner help to the package.

The second basic difference in the alternative approach is the idea that government should become a part or full owner in failing financial institutions. Variants of this have been proposed by Jamie Galbraith, former Soros associate Rob Johnson, and Douglas Elmendorf of the Brookings Institution.

But Congress did not follow this path. So is the package worth voting for? It is, in my view, but just barely and only as a stopgap. Congress did add tighter controls, and does not permit Paulson to go out and spend the whole $700 billion at once.

My crystal ball says that markets stabilize for a few weeks, credit begins unlocking, but the deeper rot in the system comes back to produce persistent crises. One place to look is hedge funds, as investors gradually begin exercising their right to withdraw their money. Another source of continuing crisis is the huge market in exotic derivatives. Because Wall Street financial engineers created highly leveraged and unregulated products at multiples many times the value of underlying mortgages, this process is still unwinding. The collapse of the insurance giant A.I.G. was the consequence of one small unit in London writing over $300 billion of these contracts, and taking down the entire company when its bets went bad. The best primer ever written on this subject is Gretchen Morgensen’s recent Times piece. You owe it to yourself to read it carefully. The problem is that there is a lot more such rot in the system, and we don’t yet know what will unravel next, only that it will be something big.

Read the whole article here.


Author Petra Kuenkel: The Art of Leading Collectively

More than ever before, there is a focus on new, collective forms of leadership—and an urgency to get collective change processes underway, all over the world. What’s behind the recent push to move collective leadership to the fore? Whether we find ourselves in societal or organizational change, it requires collective energy and drive to bring […] Read More

10 Books to Curl Up With This Winter

William Wordsworth was right when he said, “Nature never did betray the heart that loved her.” Nevertheless, the cold, dark days of winter can still get the best of even Nature’s most tenderhearted admirer. What’s one to do? We here at Chelsea Green have concocted the perfect cabin fever remedy with our suggested winter reading […] Read More

Top 8 Chelsea Green Books the Self-Styled Oregon Militia Should Read

The ongoing armed militia occupation of the Malheur National Wildlife Refuge in Oregon is showing no signs of ending — so, rather than send them snacks, or sex toys, we had an idea: Send them a book! Better yet, send them several Chelsea Green books. Don’t worry, we’ve picked five key titles that we think […] Read More

Author David Stroh: First Steps to Becoming a Systems Thinker

Systems thinking is often seen as something relegated to scientific and business analysis – economics, resource depletion, and climate. However, Systems Thinking for Social Change focuses on how to use systems thinking to make breakthrough progress on intransigent social problems. We asked author David Stroh how this approach can make an impact, and how readers […] Read More

Use Systems Thinking to Make Lasting Social Change

What can be done when our best intentions create unintended problems—such as temporary shelters increasing homelessness or food aid accelerating starvation?After decades of helping change-makers in the nonprofit, public, and private sectors address tough social problems, systems-thinking expert David Stroh shares the pioneering framework that both demystifies systems thinking and shows how it can lead […] Read More
Follow us
Get every new post delivered to your inbox
Join millions of other followers
Powered By WPFruits.com