Blind To The Zeitgeist

by digby

There’s lots of commentary on the new bank bailout out there, most of which is hinging today on the fact that the plan seems to be designed for the investors to game the system. Here’s economist Yves Smith commenting at Firedoglake:

I am told by someone close to Barney Frank that the details of the public-private partnership plan are still very murky, I get the sense mechanics will not be discussed. The comments get geeky, but you might have a look at this post (problem is someone will need to brief questioner a bit on retort). Basically, it looks like there would be TONS of ways to game a public private partnership plan. And even if they put rules in to try to prevent chicanery (doubtful, it’s a feature, not a bug), if there is no oversight mechanism, the provisions are empty words. I would like to give a hypothetical example to Geithner on the public private partnership and make him explain how it works. Who gets what, profits to each. If he can’t do it live, say the Congressmen will submit hypotheticals in writing, want details. For Geithner: NYT says many assets carried at 60 cents on dollar, market value now 30 cents. For purpose of illustration, say bank carries assets at $60 million, market only $30 million, assume value that can be realized over time is $45 million. How does process work? Banks presumably will not want to show a loss. How do you see this working? If they sell $60 million of assets for $50 million, even if it is over what the true value is, they still show a $10 million loss. How will the loss be made up? Or will banks be permitted to set a reserve or submit anonymous bids to prevent assets from being sold at less than their book value? Will the investors be permitted to pledge the assets acquired to TALF now that TALF will accept existing, not just new loans? Is this how the investors will realize a profit? Will banks be prohibited from subsidizing or insuring the public private partnership investors’ equity, such as through non-recourse loans to them, total return swaps, or credit default swaps? There is big time opportunity for collusion here. read on.

More on the same subject from Hilzoy and Karl Denninger and Joseph Stiglitz. And here is a NY Times roundtable with Krugman, Simon Johnson, Brad DeLong and Mark Thoma. What I’m gathering is that this plan will not fix the problem — and that it’s not meant to. That’s why there is so much consternation among the economists. They expected a serious, comprehensive plan and what they are getting is a piecemeal (and terribly expensive) plan. A plan which is pleasing only to the banksters who will make big bucks and the market which is in bipolar mode, swinging wildly back and forth. There is a slim hope that it will magically unlock the credit markets, but nobody really has much faith that it will.
The politics of this are probably more important than most people realize. The administration believes it is caught between the Wall Street Suicide Bombers and the Pitchfork Wielding Mob (congress) and have come up with this “plan” in the hopes that it at least staves off one of the groups from going off the deep end.
According to Brad DeLong, the administration is saying that they can’t get the congress on board for much of anything at the moment so this is all they can do. (And if that’s true then Geithner’s appeal for more authority today is kabuki.) But that doesn’t explain this plan, which has been in the works ever since Paulson first proposed it. The populist anger caught fire just last week and there is not a solid consensus about the financial sector even among Senate Republicans. I just don’t buy it.
And silly villagers like AB Stoddard on CNN today are confusing matters with explanations that both misrepresent the plan and make Obama look like a wimp:

Stoddard: What’s happening is that the president is at the mercy of the private sector, trying to keep the trust of the private sector, in order to use their money to successfully partner with the government to buy up these bad assets. He needs that money, otherwise he’s left with nothing, just another government bailout. And so, when he heard from these people in the middle of last week, you know the testimony on Wednesday with Edward Liddy of AIG and later on Wednesday and Friday, what he was hearing from Wall Street was “we don’t need this, we don’t need to come before congress and take a lashing, we don’t need to be retroactively taxed and punished, and we don’t know what kind of arrangement we’ll be getting into with the government.” So once he heard some cool heels in the insudtry, you saw him change his rhetoric.”

The fact is that this is another government bailout, probably with as little upside for the taxpayers as the earlier bailouts. Maybe it will work the way they think it wil work. Most economists from across the spectrum don’t think so, but they could be wrong.

But the argument is as much about the politics of this as it is about the plan itself —that is, whether Obama will have the ability to come back for more if this thing fails. And that’s where Stoddard’s description of Obama tugging at his forelock and bowing and scraping to Wall Street (even if true) is a big, big problem. Apparently, the village still doesn’t get that the political zeitgeist has shifted and that populist anger is real and legitimate.

The AIG bonus scandal was a watershed moment in this crisis. The White House did not handle it well (and should have known it was poison before they put it back in the stimulus in the dead of night in the first place.) The minute it hit, people all over the country viscerally understood what was happening and formed a new definition of the crisis, thus narrowing the options for the president. But the options weren’t narrowed the way these insiders think they were. This new populist environment made the plan they already had in the works less politically viable, not more. Doing a giveaway to these hold-up artists now is going to make it much, much harder for them to come back for another bite down the road.

I don’t believe the congress is the problem. And let’s just say that if it is, if the majorities the Democrats have, the amount of popular outrage and the magnitude of the crisis we face aren’t enough to push through real reform of the financial sector in the face of Wall Street screeching, then let’s kiss health care and everything else goodbye. If the political will isn’t there for something this vital, it’s not there for anything and we are simply screwed.

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