Photo from Bartcop
So McCain will have no more mail, TV, or staff in Michigan, though the Republican independent expenditures arm will still be running a campaign on his behalf. Larry Kissell is leading by 11 points in his North Carolina district, just one more data point this crisis has been great for Democrats (something Lieberman echoes in lauding the passage of the bailout as good for McCain). The polling lead for Obama has expanded, but now, if the economy settles down, the race can tighten up again. Jointly pushing this bailout could take the economic crisis off the table, and bring back Wright and the nonsense of the conventions.
Meanwhile, what we're learning about this crisis, in a terrifically reported article by Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews and Joe Nocera, is pretty awful. One thing that confused me is how small dollar donors and ordinary people thought this was a travesty, but elites and wealthy progressives were absolutely panicked and crazed that it had to go through. This article clears that right up; the crisis was essentially a bank run by hedge fund managers and billionaires. One way to think about investment banks is as basically banks where rich people and companies put billions of dollars; when the Fed let Lehman fail, billions of dollars in those accounts were frozen. If you are someone with tens of millions of dollars, some of your money at Lehman was inaccessible, and it was supposed to be liquid. Hence, panic. This panic was directly Bernanke/Paulson's fault for letting Lehman go under after bailing out Bear Stearns and AIG.
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| Now, normally you don't put a billion dollars into an account without insurance (people like you and me get FDIC insurance, but that only goes up to $100k), but there's no 'real' market for this insurance, because no one except the Fed has the resources to insure the deposits at any of these major investment banks. Still, a market for something called 'credit default swaps' developed, which were marketed as insurance for these accounts, even though everyone knew that the people selling the insurance couldn't actually guarantee anything. It would be as if my neighbor claimed his house was worth a billion dollars, was able to borrow money against his house and bet at the track, and I offered to insure his house at a billion dollar rate for ten thousand dollars a week (selling him what's known as a credit default swap). He and I would know it was a farce, that I couldn't insure his house and his house wasn't worth a billion dollars, but if he could borrow the money against an asset and bet at the track, why wouldn't he? Someone else is going to be stuck with the bill if he loses, and if he wins at the track, hey, he's got a billion dollars, for real this time.
If everyone pretends that the house is worth a billion dollars, the system works. But once that pretense goes away, the system collapses, and that's essentially what happened here. The collapse of Lehman, after the toxic assets and overleverage (aided by a rule change pushed by Paulson as CEO of Goldman) caused it to lose billions betting with money borrowed against overvalued assets (housing stock), created mass panic, because unlike AIG and Bear Sterns, Bernanke decided to just let Lehman go under. He didn't just punish the stockholders and bondholders of Lehman, he punished the institutions with money in their account at Lehman, which were other banks and very very wealthy people.
And it turns out, none of their vaunted insurance was valuable in a crisis, and they knew it. You see, most Wall Street types assumed that investment banks were too important to fail, so like my insurance against my friend's billion dollar house, they underpriced the insurance and knew it couldn't actually insure anything. When the Fed let Lehman fail, credit default swaps skyrocketed in price and credit froze up, because no one knew if any of their normal accounts were safe. Of course, no one can actually afford to be the insurer of last resort, except the government, so in a sense, these credit default swaps are just a profit stream for the unscrupulous willing to tell you they can insure your money without being able to do it. When investment banks like Goldman Sachs become unsafe to hold money, then money floods into treasury bonds, the only safe place in a storm; this was the credit crunch, a run on the banks for the mega-wealthy.
As for the $700B bailout plan, it really doesn't make any sense as a solution for this problem. What is needed is government insurance of the shadow banking system, regulation of that system (which has happened sort of with Goldman and Morgan becoming bank holding companies), and a winding down of the credit default swap market, as well as a recapitalization of the banks. The $700B can simply be used as a cash injection to take toxic assets off the books through holding companies, and my guess is that this cash is going to be used to help out the Arabs and Chinese, who hold our toxic paper and can at any point stop lending us money.
The politics are almost rote in their routine of bad faith. Paulson and Bernanke, who screwed everything up in the first place by letting Lehman go under and freezing up all the accounts, thereby setting in motion the bank run, had their 'break the glass' plan ready for the crisis, and after credit began freezing up because of Lehman, Bernanke lied to Congressional leaders (or simply panicked.)
That Thursday evening, however, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. "If we don't do this," Mr. Bernanke said, according to several participants, "we may not have an economy on Monday."
Well, obviously, he was wrong, the economy did fine on Monday. One thing the article makes clear is that Congressional leaders want to pass this. Schumer clearly doesn't care that Bernanke was wrong and dishonest, neither does Dodd, Pelosi, Frank, etc. They don't know what they are doing, and so are listening to their panicked big dollar donors, who are the depositors making a run on the bank.
For one moment, the wealthy saw that they had lost control of their political leaders, and absolutely panicked. Warren Buffet bought in to Goldman and GE, and says that he's relying on this bailout to make sure that investments pay off. We have no idea how many toxic assets these firms own, and we don't know what these assets are worth. All we know is that Hank Paulson, and whichever Treasury Secretary Obama or McCain appoints, will have a basically unlimited budget to take them off the books of these extraordinarily wealthy people (as well as the foreigners lending us money), and put them onto our backs. And yes, we will pay for this, deeply.
The monetary system is deeply broken, and this may stave off a crisis for another few months or years, but this won't be the only shot to reform the system. Let's just hope that the crisis is enough to fully sink McCain's chances. |
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