Entries for September 2008

President Bush just made another appeal for Congress to pass the Paulson rescue package. This time, he emphasized that the eventual cost to the government will more than likely be far less than $700 billion or whatever Treasury ends up spending. Yet Bush did not go as far as former hedge fund manager Andy Kessler, who speculates that Treasury could make $1 trillion to 2 trillion off the portfolio of securities it buys. Here are a few options of what might happen next:

1) The Democrats could push through the bailout with more Democratic votes by adding in a stimulus package or a provision that would allow bankruptcy judges to unilaterally change mortgage contracts. With the markets in chaos, Bush would have almost no choice but to sign it. (Conspiracy theorists speculate this was Nancy Pelosi's plan all along.)

2) Continuing market chaos could push dissenting Republicans to vote for the plan as long as there is some modification that would serve to justify their change of hearts, such a change in the oversight provision that would make it harder for Treasury to spend the dough. Some sort of tax sweetener, either for buyers of the bad assets or for homeowners, would be better.

When economists come up with their own rescue plans, they often model what happened in Sweden and Japan. The governments there bought into the banking system, as happened here with AIG. If the Paulson plan doesn't pass, we may get a lot more of that here. So if you are an economic conservative, you have to ask yourself: Which is the lesser of two evils?

OK, here is a bit of what I think, and a bit of what I know, about the state of the economy as it affects the presidential race:

1) The John McCain campaign has suffered two terrible body blows in the past few weeks. First came the dramatic escalation in the credit crisis. Lehman bankrupt, Merrill Lynch merged, and AIG nationalized. The Paulson plan only served to put a period on the end of this sentence: The economy is totally messed up, and Republicans are to blame. Second was McCain's strangely detached performance in the first 15 minutes, the segment on the economy, of last Friday's presidential debate.

1) How about a coordinated rate cut, 50 basis points or so, by the major central banks around the world?

2) How about a new, VERY Democratic bill that includes tighter executive pay proposals or the inclusion of a stimulus package? Stuff Republicans really hate. And then that bill gets crammed through.

3) How about more AIGs, where the Fed basically took over the insurance giant? Basically, the Stockholm Solution.

The market is down over 700 points as I write this.

I am not sure what Plan B is now. (All day, my Capitol Hill sources were very gloomy.) And I am not really sure what bill could get House Republicans on board. Even though Newt Gingrich now says he would vote for the bill, his antibailout rhetoric has taken root on the right. I think most likely is another vote after some arm-twisting. The worse the market does, the better it will be for the bailout's eventual passage.

"John McCain's problem tonight was that he was more comfortable talking about the height of South Koreans than he was talking about the health of the U.S. economy," was more or less my insta-analysis on CNBC immediately after last Friday's presidential debate. Although many pundits thought the result was a narrow McCain victory or a tie based on his perhaps winning the longer foreign policy portion of the debate, the segment on the economy—the most important issue—was no contest. (Just check out the Gallup Polls, which show Barack Obama opening up a healthy lead.) It was as if McCain spent so much time either preparing to talk foreign policy or inserting himself into the bailout debate that he didn't prepare much for the last-minute addition of an economic chunk. (Note how little he attacked the specifics of Obamanomics.)

So McCain instead went on autopilot and talked about the domestic policy issue he knows best—spending. Of course, polls show spending by itself ranks far below economic growth, jobs, and energy as the main concerns of most folks. It is not, per se, an economic issue that directly affects people. A politician has to help voters think of government spending in Washington as a kitchen-table issue on Main Street. He has to make the case that overspending will hurt our standard of living. But McCain didn't do that, nor was he able to weave the Mother of All Bailouts into a coherent and persuasive narrative about the failure of Fannie/Freddie and the evils of know-it-all, spend-it-all Big Government. Talk about the Mother of Missed Opportunities.

But just having a government that more or less balances its books doesn't ensure prosperity. Necessary perhaps, but not sufficient. And that was where McCain really whiffed. He didn't make the case that his economic plan bettered the life of the average American. He didn't hit hard the fact that his corporate tax cut would not only help keep jobs in America but would actually raise the wages of workers. And he couldn't trumpet his own broad middle-class tax cut because he doesn't have one. (And once again, he screwed up the description of his plan to double the dependent exemption.) Team McCain can't afford too many more wins like that one.

If you want to understand the bailout counterproposal from the House GOP—where shaky banks would pay for insurance from the government on their toxic debt—I suggest you watch the second Godfather movie, in which Michael Corleone harshly responds to Senator Geary's deal for letting the Corleone family do business in Vegas. "Uh, senator—you can have my answer now if you like. My offer is this—nothing. Not even the fee for the gaming license, which I would appreciate if you would put up personally." Now, that's a tough negotiating position.

It is clear to me that Republicans in Congress are very mindful of what happened to Democrats who voted for President Clinton's 1993 tax and budget proposal. They got wiped out in the 1994 midterm elections. On Monday, there were 150 or more GOP-ers in the House ready to vote for the bailout. But a week of no financial Armageddon and lots of angry constituent feedback mean now there are maybe 50 ready to agree to the evolving Paulson plan.

Why are we still wondering about the status of the Mother of All Bailouts—a full week after the financial world was supposed to end—if it didn't happen? Well, maybe Hank Paulson and Ben Bernanke need to listen to more country music. As the lyrics to a hit from a couple of years ago say, "If you're going through hell, keep on going.... You might get out before the devil even knows you're there."

Clearly, those guys, as well as President Bush, should have moved even faster and harder on all this. Now the "freak show" of lobbyists, pundits, bloggers, media, and interest groups have caught up to them. Maybe the key error was not having the president address the country last Friday with a fire-and-brimstone, wrath-of-God speech about what would happen to the economy if a bill was not passed almost immediately. And he should have used the D-word not just the R-word when painting his scary picture. He didn't and here we are.

Economic conservatives may be horrified at the thought of a trillion-dollar bailout of Wall Street, but the GOPers on Wall Street seem horrified that they are being left to wither on the vine by Washington. Take a look at this email I just got last night from a money manager:

I am a lifelong ( 51 years old) "rock-ribbed" conservative.... What an eye opener this week has been! I now realize what a blowhard Newt truly is by advocating the GOP bail on the Paulson Plan. As a professional money manager I can tell you I am shocked, dismayed and depressed that the Speaker would excoriate the GOP to abandon this plan which is URGENT and necessary to avoid a financial catastrophe that once commenced may be irreversible. The level of ignorance of financial and economic reality displayed by the Speaker , Rep. Boehner, Sen. Shelby , et al, has been frightening and sad. I thought the GOP had a better grasp of such matters than the Dems. Apparently not. And if this has been pure election gamesmanship as I suspect? The willingness to play politics with the U.S. financial markets is appalling and disgusting.

I am a huge Reagan fan and admirer.I have voted GOP every election since 1976. Until now. Today. September 25, 2008. As soon as I finish this email I am going to try and get my $1000 McCain/Palin credit card donation back as I will not be voting GOP this year after watching this circus and the theatres passing as leadership displayed by the GOP. I am embarrassed to have been an erstwhile supporter of this gaggle of self-serving jerks. I hope the GOP lose their asses come November. They shall deserve it.

I am just throwing this out there, but I find it hard to believe that either Hank Paulson or Ben Bernanke could remain at their jobs if this bailout goes down in flames. Wouldn't that basically be a vote of no confidence in them by Congress and America? Here we have in Paulson a guy who has spent his life on Wall Street and comes to DC with a gold-plated reputation. And in Bernanke, we have a Fed chief whose field of study as an academic was financial system meltdowns. And they both tell Congress that not passing their bailout plan means financial Armageddon. And then Congress says "no." There can't be any going back after that, can there?

Here is, I think, a pretty safe prediction: The Republican presidential nominee in the summer of 2012 will have come out against the Paulson-Bernanke bailout plan in the fall of 2008. Conservative rage against the $700 billion "rescue" attempt, as President Bush terms it, has been stoked white hot by Newt Gingrich, Rush Limbaugh, and the powerful pundits of the right-wing blogosphere such as Michelle Malkin and Jonah Goldberg. But the inherent skepticism was there from the very beginning. Economist Brian Wesbury sums up the fears of many economic conservatives: "When the public hears the government must save the economy from capitalism run amok it loses faith in our free market system."

It's all about "first principles" as Fred Thompson might describe it. And a belief in the wonder-working power of free markets is about as basic as it gets for conservatives. Indeed, savvy political observers might have noticed that 2008 runner-up Mike Huckabee has already come out against the bailout. He wrote the following on the Huck Pac website on Sept. 23: "Frankly, I'm disappointed and disgusted with my own Republican party as I watch them attempt to strong-arm a bailout of some of America's biggest corporations by asking the taxpayers to suck up the staggering results of the hubris, greed, and arrogance of those who sought to make a quick buck by throwing the dice."

What, a $700 billion bailout not big enough for you, Wall Street? Apparently not. Bond guru Bill Gross told CNBC that the Paulson Plan "goes far but it doesn't go far enough in terms of recapitalization. The banking system and the investment banking system in total really require about $500 billion more. Where that comes from is still up in the air."

Who cares where it comes from? As former hedge fund manager Andy Kessler told me today via the Wall Street Journal, Hank Paulson is going to get such a good deal on all that bad mortgage debt, that Uncle Sam is going to make money hand over fist when it's eventually resold. Kessler thinks Trader Hank is going to turn $700 billion into $2.2 trillion. (Hey, that would pay for half of Al Gore's zero-carbon emissions plan!) See, America, the worse it gets for Wall Street, the better it is for Main Street. Not really...

Every once in a while America loses something—China, Vietnam, Wall Street—and we try to figure out who lost it. Rush Limbaugh thinks he knows:

The issue is not a runaway, unregulated free market. The issue is not the failure to regulate. The issue is not stupid and crooked executives throughout the banking industry doing stupid and crooked things, although there was some of that. There's some of that in every area of life. But that's not the cause. What you need to understand, my good friends, is that this situation has occurred and is occurring as a direct result of government policies: liberal government policies that were used to force the issuance of trillions of dollars in risky loans that people could not pay back. And when they couldn't pay them back, people couldn't get the asset value that they had sold and packaged the mortgages for, and everything crashed, everything crumbled.