Friday, September 26, 2008

The GOP is imploding; get the "concepts" right before doing the bailout


Stocks opened moderately down Friday morning (Sept 26 2008) upon extensive media reports that the bailout talks had broken down. It could be much worse, and it sounds as though Wall Street believes that Congress will come up with something at least over the weekend before going home to campaign for re-election.

There are reports that the House Republicans broke off in order to disrupt the process, possibly over ideology, or perhaps to give John McCain a chance to look like a white knight.

President Bush reassured the public this morning “there will be a plan.”

Media reporters are particularly concerned about the global appearance of both executive and Congressional leadership. This sign of weakness can invite retaliation by investors overseas or even create security issues. The normally objective and sedate Anderson Cooper said, on his 360 Program last night on CNN, that “President Bush just wasn’t there” where giving his address Wednesday night, “It was like his post Katrina speech at Jackson Square in New Orleans.” I thought, could Bush be the subject of a Coen Brothers movie, another “Man Who Wasn’t There”, another part for Billy Bob Thornton? And media reporters were characterizing John McCain’s behavior as disruptive. The GOP seems hardly to be putting “country first.” Where is McCain’s “serving a cause greater than self”?

This is terrible for me. I thought of myself as a Republican, or the Log Cabin type, for years, and moved into libertarianism in the 90s. I’ve never seen such recklessness in government as in the past few years. Yes, I enjoyed listening to Ron Paul, and of all the candidates entering either party’s primary I felt Rudy Giuliani was the best qualified to be hired to do the job as president. I hoped to see a subway election. And I thought that Giuliani would be OK with eventually lifting “don’t ask don’t tell.”

It seems as thought the Republican Party is imploding. It's falling for every mechanism that Princeton University professor David Callahan described in his 2004 book "The Cheating Culture" shortly after this subprime Ponzi scheme had started.

Nevertheless, the public seems opposed to the bailout, and the libertarian community is particularly vocal, as expected. Don’t reward bad behavior. Let people reap the consequences of their own foolish decisions and investments. The trouble is, their behavior really does effect others. Are we all to run back into the arms of Jennifer Roback Morse (who now claims to be a libertarian) and “marriage culture” or “family first” where individual self-definition is derailed by the hidden activities of others?

Steven Pearlstein, has a perspective on p D1 of the Business Section of the Sept. 26 Washington Post, “Gut Check” that is well worth reading. The most important sentence (from a “My Weekly Reader” perspective, perhaps) in the op-ed is his “Fourth, this isn't primarily a bailout for Wall Street -- it's an attempt to jump-start certain credit markets that have broken to the point that nobody is buying, driving down prices to the point where they are well below any reasonable estimate of their long-term economic value.” Yes – go back to Jennifer Roback Morse – this is about the Prisoner’s Dilemma. You can’t simply expect people to sort this out on their own when they don’t trust other’s motives. The link is here. Pearlstein hosts an online discussion at the Post today at 11 AM EDT and has other perspectives, such as “The Words Left Unspoken in the Bailout Debate” – “we’re sorry”. (Search for “Pearlstein” at the Post home page to find all the individual links).

It is true that the House Republicans have a point. There should be private insurance set up. And smaller banks are not necessarily drying up the credit markets, as feared. See Binyamin Appelbaum, “Smaller Banks Thrive Out of the Fray of the Crisis: People Shift Money from Wall St. to Main St”, link here.

There are other pieces in major newspapers (including WSJ) today that articulate a lot of different points of view. Most of the best pieces deal with properly characterizing what needs to be done and how to make sure that the taxpayer and small investors recover as much value as possible. One problem that still worries me is that it does mean more regulation, like it or not. Markets can only work when there are some rules of the road, particularly to guarantee permanence and sustainability – which the subprime loan device grossly violates. Regulations need to place some importance on people – big and small – taking account for their own mistakes, and force people to deal with the practical reality that they have to take responsibility for others, or else they will expose others to unarticulated risks without even realizing it. That’s scary, because it can move into other areas.

"Mad Money's" Jim Cramer, on The Street, is saying that the ideologues just don't get what is happening, that investors are making an "invisible run on the banks" (the money market funds) already, and that the FDIC limit needs to be increased from $100000 to $2.5 million. Link is here.

Update: Sunday Sept. 28, 2008


CNN has released a copy of the proposed bailout bill in Discussion Draft PDF format, 106 pages, from the House of Representatives, link here. It is to be called the Emergency Economic Stabilization Act of 2008.

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