Four Corners: The Politics of the Bailout

The outline of Treasury Secretary Henry Paulson's massive bailout plan is clear. But only the outline is clear because the proposed bill is a two-page outline that doesn't fill in any of the details.

Paulson wants Congress to appropriate $700 billion for the purpose of buying up the bad debt of financial institutions. The money is intended solely to purchase bad debt ("cash for trash" according to Paul Krugman). Paulson doesn't want any authority to regulate, manage, purchase, or punish the corporate managements that made all the bad decisions. In other words, the proposal is designed in such a way that the federal bailout has no impact on the management prerogative of financial instititutions.

Paulson is also trying to ensure that no other federal institution can interfere with his authority to distribute the money in any way he sees fit. He demands that there not be any kind of regulatory supervision, legally mandated process, or recourse to the courts in relation to the purchase of bad debt. Much as Paulson is seeking to ensure that corporate managements can do whatever they want, he is also trying to insulate himself from any oversight that would prevent him from doing whatever he wants.

Some people criticize the money. Others don't like the preservation of corporate autonomy, and others object to the dictatorial powers Paulson seeks for himself.

But nobody thinks this is a good deal.

Liberal Democrats object to Paulson's efforts to shield failing financial institution from further oversight, consequences for their recklessness, or quid pro quos. Connecticut Senator Chris Dodd has filed a proposal that empowers the federal government to acquire equity in financial companies in exchange for the purchase of bad debt. Barney Frank is pushing for a Congressional Oversight Board to oversee the use of the $700 billion. Other Dems want CEO salaries kept under $500,000 while liberal bloggers like Matthew Yglesias would like to see a lot of CEO's fired as punishment for their reckless investments.

Thinking about these objections makes it possible to better understand the logic of Paulson's proposal. Paulson essentially wants to use the $700 billion to re-establish as much of the status quo ante in the financial markets as possible. He wants financial companies to go back to a state where they are fundamentally solvent, free to invest company funds (and reward executives) in the way they see fit, and "unburdened" by much federal regulation. That's why Paulson asks nothing from the companies in return for the $700 billion and is adamant that he have total control over the money. Paulson doesn't want to create any more regulatory structures that could exercise control over the market.

But Democrat counter-arguments have validity. For the Dems, the huge salaries and bonuses, disregard for basics, and reckless plays in the derivative markets were all signs that the financial markets were fundamentally disordered before the bust. Consequently, the Dems believe that the failure to enact new kinds of regulation will only be inviting another orgy of bank excess and a future financial crisis. For the Dems, putting new regulatory structures in place would create a new status quo that is more stable than what Bernanke is trying to protect.

The real action in terms of addressing the financial crisis is between the Bush administration and Congressional Democrats. If Paulson and the Democratic leadership can work out a compromise (the main issue of contention would be Dodd's idea of a cash for equity swap), there will be some plan that preserves the $700 billion bailout but also enacts some of the controls over the market called for by the Demcrats.

If not, the Bush administration and the Dems will be playing their usual game of chicken in order to see who blinks first with the economy on the verge of depression.

At the same time, some conservative Republicans are mounting an interesting sideshow. Some Republicans like Patrick Ruffini of The Next Right think that the Paulson bailout is a perfect time to assert conservative principles in a way that works for the McCain campaign.

Let this be the political establishment (Bush Republicans in the White House + Democrats in Congress) saddling the taxpayers with hundreds of billions in debt (more than the Iraq War, conjured up in a single weekend, and enabled by Pelosi,
btw), while principled Republicans say "No" and go to the country with a stinging indictment of the majority in Congress.

For activists like Ruffini and "rock-ribbed" (love that phrase) conservative politicians like Jim Bunning of Kentucky, enduring a depression is not nearly as bad as enduring more government control over the economy.

For ideological conservatives, any government control is "socialism" and Paulson's bailout is "the end of free enterprise as we know it." Compared to that ideological catastrophe, a depression isn't such a bad thing.

But Republican leaders like John McCain live in a world where an economic depression is seen as one of the ultimate traumas on a par with a large-scale terrorist attack or military action on the scale of WWII.

If McCain's campaign talks about a "huge bailout" in a way that seems blase about a depression, they'll lose. But defending the Bush administration's bailout as it is doesn't look like a winner either.

Consequently, McCain is sounding a lot like the Democrats in calling for greater oversight and protection for householders facing huge mortgage payments.

. . . the GOP presidential hopeful nonetheless called for a bipartisan oversight board to supervise the proposed bailout, to be led by Warren Buffett or another widely respected business leader . . .

The Arizona senator also called on Congress to move quickly and work with the Bush administration to restore stability to the troubled financial sector. But he said the goal of any action must be to allow homeowners to stay in their homes and prevent Wall Street executives from profiting from a taxpayer bailout.

It's the worst of all worlds for McCain. Because his solutions sound lso much ike Democratic solutions, the McCain campaign was reduced to futile sniping at the New York Times and the Politico for not accepting any of their brand new distortions of Obama's background and record.

All that accomplished was getting McCain a little more bad press.

Right now, the four-corner politics of Paulson's Big Bailout is working for the Democrats. That will give Obama a little momentum leading into Friday's debate.