Well, the sausage factory worked overtime this weekend. What a bizarre result we got.
Secretary Paulson came to Capitol Hill about ten days ago with a very simple, three-page plan to do something I could describe in three paragraphs.
Congressional Democrats gave us over one hundred pages of additional weirdness that is either ineffectual, noxious, off the point, or will work against the goals of the original Paulson plan.
Congressional Republicans clawed back a lot of the weirdness, and added in some weirdness of their own.
In the meantime, the public was led to believe that their pockets were being picked in order to make a small group of exceptionally wealthy men even wealthier. If you really believed that, then why would you even consider supporting this plan? The fear of losing their jobs is what made the Congressional leadership act as they did.
It never made any sense to propose thoroughgoing alternatives to the Paulson plan. There just wasn’t time to do so. The original plan had been the Treasury’s red-button emergency plan for about six weeks now. They cracked the seals on it at a moment of dire stress, when global money markets looked set to melt down and freeze paychecks all over the world, in the wee hours of the morning of September 18.
The plan was limited in scope, conceptually very simple, and targeted at a single, highly-leveraged pressure point in the global financial system. It was a lot like hacking out the source of a festering infection that has started to threaten the rest of the body.
What did anyone think? That in just a few days, with the pressure on, that a lot of not-disinterested people would be able to walk in with better ways to do the same thing, than the people whose job it is to stay on top of the financial system every hour of every day?
Let’s be completely clear about what Congressional Democrats and Republicans did.
They started with a list of objections to the Paulson plan, and a list of unrelated legislative priorities. These included, among other things: punishing executives of failing financial firms; giving taxpayers a direct upside from the recovery of the financial system; making the bailout fully risk-free for taxpayers; giving Congress the opportunity to second-guess and modify the plan later; satisfying the demands of the AFL-CIO, which popped up with a laundry-list of extraneous items they’ve been trying to enact for years; allowing overextended homeowners to avoid foreclosure; and funding left-wing activist groups.
Then, in a marathon of acrimonious negotiations, Congress added some version of all of these things and more. Paulson and his negotiating team from Treasury were concerned above all that they retain the ability to execute the core of the original proposal. In case you’d forgotten, that was to borrow money from global investors to buy distressed mortgage securities, and either hold those to maturity or sell them at a profit.
So it appears that the Treasury negotiators were basically successful. As far as I can tell, the sausage makers kept in some version of almost all of their weird extras, but softened each one to the point that it would have little effect in the real world.
All Congress really wants is to be able to say they did all of these little things. Not that they did them in a way that will mean anything to anyone. And these meaningless extras will become the focus of the news reporting about the bailout.
This wasn’t an exercise in intelligent legislation. It was an exercise in butt-covering ahead of an election.
And everyone in Congress knows it, too. That’s why they’re all hanging their heads, saying that this was something they had to do, even though they all think it’s just dreadful.
Congress’s priority now will be to sell the bailout as a valiant response, lovingly written and carefully directed by our very own Dear Leader, Barack Obama, to a problem caused by eight years of evil Republicanism.
Heck, if it keeps everyone’s attention away from the implementation of the actual bailout itself, I guess that could even be a good thing.
In the end, Paulson will get authorization for his plan, with a few warts on it (including having the funds authorization broken into three pieces), and he should be able to proceed to implementation.
If you want to know what all of Congress’s extraneous priorities were here, you need look no farther than the upcoming public statements of Barack Obama. Throughout the early stages of the legislative miasma, early last week, Obama’s statements were elliptical, content-free expressions of concern. He didn’t really know what to think. But he knew from long experience that when he has nothing to say, the way he says it makes people think he’s the smartest man in the world.
So now Obama is taking credit for all the sausage that got added to the bailout plan. No word on whether he thinks the original core idea was any good or not. Hey, if it gets you elected President of the United States, you do it, right?
Whoever said America deserves the leadership it gets, was right on the money.
Market reaction this Monday morning is muted but mostly negative. The Chinese are not trading due to a holiday. Japan is down about 1%.
A major developing story in Europe is that three large financial institutions with exposure to real estate makets have failed and are being rescued by government regulators this morning. This crisis is growing. It isn’t just for Americans anymore.
There is an additional point related to monetary policy that is worthy of mention, and in fact deserves its own post.
The bailout legislation immediately gives Fed Chairman Ben Bernanke something he asked for two years ago, and was originally scheduled to get in 2011.
Starting next month, the Fed will now be able to pay interest on the deposits (reserves) that all banks are required to maintain with the Fed in order to ensure their solvency. Other central banks already have this ability.
This is a very technical point of monetary management, worth a longer explanation, but it basically means that the Fed will have an easier time adding liquidity when necessary, without creating unwanted inflationary pressure.