October 3, 2008

Jonathan Schwarz at A Tiny Revolution tells a story I didn't know, one that would have made some difference to my opinions had I done so.

Back in 2000, when Hank Paulson was CEO of Goldman Sachs, he testified in front of the Security and Exchange Commission. Among other things, he lobbied the SEC to enact a "change to self-regulation" for Wall Street. He also urged them to change the "net capital rule" which governed the amount of leverage investment banks could use. The net capital rule was indeed changed in 2004, and is now blamed for the investment banks' collapse.

...Who murdered the American economy? It was the CEO, in the 13th Floor Conference Room, with the Prepared Testimony.

Paulson, in other words, was the point man for the finance industry's push to deregulate leverage rules, so that the big banks could increase their debt-to-net-capital ratios from 12 to 1 up to, in some cases, 40 to 1.

I had until now assumed that Paulson was nothing more than the usual run-of-the-mill right wing economist. "I'm alright, Jack". It appears he was far more dishonest to the American public than even that. He pushed then for the very thing that he knows now brought down the economy, and seems to have no intention of admitting this.

I've also been getting some schooling from my Newshoggers colleague Fester, who is a real brain on economic issues in a way I'm certainly not. He writes that the bailout:

...addresses a symptom, horrendously crappy balance sheets instead of the insolvency issues that permeate the global economy. The last of the cheap land and cheap oil booms created too many promises based on unreasonable premises and backed by wild policies and supported by skewed, perverse short term incentives. Those promises are failing because there is not enough money or reasonable accessible future income streams to maintain those promises.

This crisis is at its base an insolvency crisis, then a counter-party risk crisis, then a credit crisis and finally a balance sheet problem. We are addressing the top layer with crappy incentives. And that plan was put together in panic and haste without viable alternatives such as the Swedish model being advanced. So I don't think it will work.

And goes on to quote Ian Welsh at FDL, who also hates the "rescue" plan because, among other things, there's nothing to stop the big banks making new toxic waste to sell the Fed at prices they'll never get elsewhere. I think there's going to be a lot of that going on, but there's also going to be a smaller amount of bankers deciding they can make more money for themselves from using their own money to inject liquidity into the system than by letting the government do it at a cost in shares. That, on a far smaller scale than Fester or Ian or I would have liked, is the bit that will actually help unfreeze credit.

But still, like in the foreign policy arena which is my own favorite subject, there's a difference between "real" and "idealist" economics. Somehow, the Right always manages to put it's ideological fanatics in charge of policy with nary a murmur while the Left has to content itself with the "realists" who say we can't have what seems to us is obvious, that we're being "unrealistic".

It was obvious from word one that a plan that actually worked for the Common Man wasn't going to get backing on the Hill and even if by some miracle it did Bush would veto it. The financiers have not the least interest in your ass, it's all about theirs - and their $2 billion in bipartisan donations (44% to Dems, 56% to Repubs) since 1990 ensured that they were going to get theirs saved first.

Finance Sector Contributions

Those who voted for the bailout have received consistently more from financial sector donations than those who didn't - in the case of House Dems by a massive margin.

In this election cycle, Democrats backing Treasury Secretary Henry Paulson's proposal have collected 78 percent more from the finance, insurance and real estate (or FIRE) sector than those in their caucus who opposed it and, over time, 88 percent more. In dollar figures, the 140 Democrats who supported the bailout proposal have received $792,744 over their careers from the FIRE sector and $188,572 in this cycle, on average. The 95 Democrats who voted against the bill have received $420,686 over their careers and $105,878 in the 2007-2008 cycle. (CRP's campaign finance data goes back to the 1990 election cycle, or the calendar year 1989.)

Given that, I always only pinned my hopes on Dems being slightly more moral and slightly less bought than Republicans - thus that Dems under pressure from the very few true progressive idealists would insist on including some handouts to the non-rich as part of a rescue plan that was always just for financiers. That's what happened and, it's very sad to say, that's as good as we're likely to get in the forseeable future.

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