Newt Gingrich: Kill the Paulson Plan. Hard.

Back to blog

Country before politics

Newt is right that the Paulson plan is flawed, but it seems to me that Newt is more concerned about the politics (2010, 2012 elections) than the real risks facing the US economy. Japan's stock/real estate bubble and the subsequent "lost decade" of economic stagnation was much longer and deeper than it would have been with the right policy responses. The BoJ did not cut the target rate after the stock market collapse, and the govt dragged it feets on recapitalizing the banks even after it was apparent that many of them were underwater, and even though Japan, unlike the US, had massive savings in the household sector to draw up, policymakers ended up just muddling through due largely to how dispersed power and policymaking know-how are in the Japanese political system. The US does not need to go down this path. It can look at what Sweden and Japan did when faced with the need to recapitalize their banking systems after their real estate bubbles collapsed. Yes, shareholders and unsecured debtholders in US financial institutions must feel the pain for any bailout. This is why I oppose Paulson's plan--it could easily become a covert recapitalization of Wall Street without inflicting any pain on management, shareholders, or debtholders. Management must be purged, if for no other reason that to drive home the point that the party is over (moral hazard). But I do not oppose the Paulson Plan simply because it is premised on govt intervention in the marketplace, and I think painting this crisis in such broadbrush, ideological strokes is dangerous because it minimizes or ignores the role of lax regulation (enactment of commodities futures modernation act in 2002, for one, opened the way for credit default swaps to be traded off exchange and this has created much of the fear about the dominos effect of interlinking CDS arrangements and whether CDS underwrites have sufficient capital to meet their obligations etc.) So to free-market advocates, I ask you to propose a realistic alternative to the Paulson Plan--one that would help recapitalize the banks but ensure management, shareholders, and bondholders are not bailed out at taxpayer expense. Otherwise, Newt and other members of the party of personal responsibility will bear a fair share of the blame when a full-fledged credit squeezes even good companies in non-financial industries and the US relives Japan's lost decade.

Mike of WA @ Sep 28, 2008 01:06:13 AM

Paulson Plan

Is this what a $700 Billion tube of lipstick looks Like?

Ray of UT @ Sep 28, 2008 00:11:45 AM

Where is foreclosure Phil and his wife?

In 2001 when Enron collapsed, the public cry was out to reform government. What happened?

Foreclosure Phil managed to pass the biggest

deregulation bill without committee insight - while the

government was otherwise engaged. Shortly thereafter, his

wife joined Enron. This is of course, after Enron used lobbying

$$$ to get strangling regulation away from Energy markets . Free reign capitalism in the energy markets set forward motion a free fall. Accountants and regulators were all on board. Surely, we all know that story.

The financial markets dilemna of today can be understood if you understand Enron. Still think there is no link to deregulation & all we need is a free market correction?

Phil headed off with his former commodities trader regulatory

wife straight to a Swiss Bank with all cash collected. Heck, he

said he didn't even understand how his deregulation act affected the market & the Enron collapse. He's just like McCain, he doesn't understand all that financial stuff.

He doesn't sit in Congress anymore - he sits on the Board of a

Hedge Fund. (Don't they all?) He is John McCain's economic

guru. I am sure they have alot to talk about. Anybody remember

the Savings/Loan crash?

Maybe Phil can lobby for insurance (sold by his hedge fund, of course)to help with the bail out? It would be free market (well kinda)instead of government regulated. He could form

one big hedge fund with all of his buddies acting as free-market insurance salesmen.

In the prevailing economic model, government is not for the

welfare and infrastructure of the citizens. Government is

only to enact rules that favor casino players. Enforcers

leave the government to join the casino & then (handsomely rewarded casino representives) figure out how to

beat the dealer (the government).

We have been following this economic plan for some time now.

Certainly doesn't sound like McCain wants anything different. John Q. Public needs to have a straight talker give them an economic history lesson. The devil is in the details. Let's

put some details on the cronyism, lack of oversight and why

"no rules" broke the house.

JHill of MO @ Sep 27, 2008 21:44:15 PM

The Bailout and Newt

Newt and Meltzer are dead wrong--and I say this as a staunch neo-con. Anyone who really understands the full picture would know that we, the global community, are already set back 10 years do primarily to the actions of Alan Greenspan and his ilk in allowing the "shadow" banking system to exist off balance sheet. The notional value of global derivatives reached over one quadrillion dollars--and much is potentially coming back on bank and investment bank balance sheets--the true reason for the rash of recent failures.

Newt's idea of accounting tricks (the non-transparency got us here in the first place) is possibly the next step in the process when it comes to perhaps a hundred trillion of derivative and CDS losses. But this "bailout" or stabilization scheme is necessary as a first action.

Liquidity dearth at most central banks is a true international problem. The US must lead the way out--as we are responsible for most of it. I respectfully suggest that Newt if he really wants to be helpful, takes the time to study the issues at the Bank for International Settlements website as well as a plethora of other existing data in the public domain.

The future of our democracy depends on it.

SRG of @ Sep 27, 2008 20:42:54 PM

BAIL OUT

Are we so stupid to have been seduced by the banking industry big time, to now bail them out and get raped all over again? Nuts! Let it crash!

Jim K. Little of WA @ Sep 27, 2008 14:53:53 PM

federal reserve a bunch of crooks

Why dont we here anything about the federal reserve ? They are not apart of government, they are abunch of crooks charging us intrest on money they make out of thin air . They should be run out of town on a rail. Say no to the bailout. Thanks Newt Gingrich and Ron Paul. Keep up the good work!

dave williams of MI @ Sep 27, 2008 13:46:18 PM

What condition would the world and the USA be in right now if...

What condition would the world and the USA be in right now if we had taken more of a "wait and see" approach to the war in Iraq? Would we be spending billions on a war "we can't win"? Would we be as "hated" by the other countries of the world?

The US economy makes corrections resulting from "natural" or, in this case, "man-made" problems. We should not... must not... throw good money after bad. If Fannie Mae, Freddie Mac, AIG, Lehman Bros... etc. all go belly up - so be it. Other companies will rise up and take their place.

Natural selection... survival of the fittest.

JFK in South Bend of IN @ Sep 27, 2008 13:07:04 PM

another dem agreeing with Newt

Bad apples should be allowed to rot. Let they who made the bad judgments pay. We the tax payer shouldn't have to pay our tax dollars to fix their mistakes. The housing industry has been allowed to build these $250,000 to 500,000 dollar homes that, as the average middle class income is $52,000, no one should have been given a mortgage for ,unless stricter criteria was met ( like more down money ) , and built nothing in our price range save for town homes ( read glorified"row" homes ) . Realators then hooked people into buying them . Mortgage companys sold them interest only or balloon mortgages or preaproved them for way more than they could afford. Comsumers failed to use common sense and instead ,played to their dreams of owning the americam dream "big house" . We are , after all , a generation that lives way beyond our means : credit card debt was never a part of my parents generation. I say let these bad apples fail and rot . Serves them right for their greed. The financial market should be rid of these bad players anyway. The American economy will survive as it always has despite the doom sayers. Don't play into the tatics of fear. The last 8 years should have tought us a lesson on that !

DMN of PA @ Sep 27, 2008 11:51:03 AM

We can't do this. It puts the burden squarely on our backs and allows the carpet baggers that did this to walk away. Not only with their golden parachutes intact? But, with permission to do it again. With any future profit going into special interest groups. Like ACORN and La Raza. Just evil.

DW of TX @ Sep 27, 2008 11:20:23 AM

Schadenfreude is not a policy

From today's WSJ lead editorial. For thoise of you who don;t know? The WSJ editorial page has been warnming of this crisis for YEARS due to Fonie and Fraudie's excesses.

" . . .Nobel economics laureate Gary Becker is no alarmist, but this week he wrote on his blog, "I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world economy in a major depression." Anyone who thinks that capitalism will fare better after a crash should recall that the 1930s didn't end politically until 1980."

Now re read that 5 times as you seeth and demand " NO BAIL OUT!!"

The "bailout "is not a "bail out". It is a financial restructuring needed ASAP. Once the avalanche commences ( as it already has started) it will be irreversable.

And the WSJ Continued:

" . . .We also have to marvel at Newt Gingrich's ability to pirouette as a fiscal conservative hero now that he's a TV pundit. When he had responsibility as Speaker of the House, he acquiesced to the Clinton Treasury's plan to use the U.S. Exchange Stabilization Fund to bail out holders of Mexican debt. We also recall his lobbying for the Medicare prescription drug benefit.

"The U.S. banking system continues to be under enormous stress, and if managed well the Paulson plan offers a decent prospect of preventing it from further infecting the economy. It might save taxpayers money in the long run. Yes, some bankers will remain in business when they wouldn't otherwise, but Schadenfreude is not a policy and revenge against what's left of Wall Street isn't worth the potential harm to innocents on Main Street."

Steve from Miami of FL @ Sep 27, 2008 10:58:37 AM

Back to blog

Add Your Thoughts
About You
Capital Commerce

Capital Commerce

U.S. News business reporter Matthew Bandyk examines the issues, people, and debates that shape the nexus of political and economic life in the nation's capital.

advertisement

advertisement

Subscribe

U.S. News Digital Weekly

A weekly insider's guide to politics and policy — in a multimedia, digital format. 52 issues for $19.95!

U.S. News & World Report

6 months of U.S. News & World Report's print edition for only $15. Save up to 67% off the cover price!