Cross Posted at Daily Kos (but also since edited.)
So far, as I have read through multiple diaries on Daily Kos and especially on Open Left, there seems to be a significant current of opinion that Obama and the Democratic leadership have already caved on the bailout-though no one has offered any real evidence that that has happened. There are indeed problems with the current structure of the bail out (which I discuss below). There are also significant risks and opportunities. What I would like to happen-Bernie Sander’s Plan (also reference Daily Kos is not going to happen-at least not in totality. That isn’t to say some elements of it couldn’t be enacted. I discuss below the fold.
How We Got Here
This crisis is a classic case of Hyman Minsky’s Financial Instability Hypothesis. The combination of deregulation and the real estate boom, coupled with securitization of mortgages (bundling and converting home mortgages into saleable financial assets)created a situation where the underlying value of financial assets could only be justified as long as real estate prices continued to spiral upwards. When real estate prices went down, interest rates rose and economic hardship began to spread, people began to default on their mortgages. All the normal checks on the value of financial assets were gone. For example, AIG was insuring some of its own debt. We now know the result.
The Plan Thus Far
The basic thrust of the plan is to resolve both the liquidity problem and the balance sheet problem by creating a kind of super FED with no regulatory oversight. The FED will buy up bad debt, thus freeing banks of bad loans and allowing the system to get moving again. It may wind up costing us somewhere between 700b and 1 trillion dollars.
As I have followed this discussion both here and on Open Left, I’ve been a bit disappointed in what I see as some cheap shots being taken against Obama and the Democratic leadership. First of all, they haven’t agreed to anything yet. Second of all, Paul Krugman and Brad De Long come from the same “orthodox” allegiance to mainstream economics as do Summers and Rubin.
If anything, Joe Stiglitz has been a much harsher and more consistent critic of orthodoxy than Krugman and De Long. To Krugman’s credit, he was critical in the 90’s of how Summers handled the various crises of the 90’s. At least this time, thus far, Summers has not advocated what his solution in the 90’s was (thank God) of raising interest rates and creating hard money.
That said, tt’s pretty unfair to attack Obama for consulting with the most prominent Democratic economists. I thought that Matt Stoller’s attempt to portray Hillary as a sudden economic populist who would buck Wall Street, and Obama as a Wall Street shill to be particularly unfair (Obama is, after all, meeting with the main economists for Bill Clinton’s administration).
While these economists may be “orthodox” and have in the past been more pro-globalization than I would like, they are not free market fundamentalists. They understand that we do need action and have in fact, been in the thick of handling economic crises before. To suggest that a Democratic candidate should throw away the advice of Democratic economists is way too much to expect. And it would be particularly foolhardy to throw away the advice of people who have been through financial crises and of Nobel Prize Winners like Stiglitz. I will also point out, that Obama has gotten advice behind the scenes from some pretty distinctive heterodox voices. Obama’s dilemma is not being viewed as too “leftist” and “out of the mainstream” even as he tries to be outside of it enought that he can pose solutions that aren’t viewed as tied to the past.
As of right now, people want to know that this crisis will not fall prey to partisan bickering. That puts Pelosi and Obama and Clinton and al other Democrats in a bind. There are problems with this plan as it has been formulated. First, there needs to be some mechanism of oversight for the FED. Second, there needs to be some guidelines so that the financial assets are bought at a price that is advantageous to the taxpayers. If it is done right, the costs could be far, far lower in the long run than 700 billion dollars. Democrats should push for the FED to take a tough stance in negotiations.
There is another danger-and that is that this particular issue-resolving the current crisis and preventing a melt down-gets locked up in Congress for two weeks. During this period the Republicans will portray this as partisan bickering, demand we get past it, and attack us for wanting to raise taxes in a crisis. If we put a bunch of Christmas Tree Ornaments on it, this is what will happen.
Where do we go from Here?
I think that the discussion (mostly) has been good and keeping up the pressure on Pelosi and Obama is a good thing. Fair enough. But we need to have something constructive that can be done in the next week. Then Obama needs to put forward a more comprehensive strategy for after the election.
