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As I said before, I don't necessarily have a problem with the government intervening to help stabilize the financial markets if that's what's necessary for the economy. There's no sense letting a sense of spite directed at the wizards of high finance get in the way of doing what needs to be done. But surely Democrats could seize this opportunity to make the case for the rest of the social contract. After all, it was just a couple of months ago that the GOP was blocking efforts to temporarily increase food stamp benefits and extend unemployment insurance and doing so in the name of free markets and moral hazards.

It's preposterous. This is the time to be making the case for progressive taxation and for a safety net that works for the broad mass of people, not just a selective one for people who reap the windfall during boom times and then walk away from losses when things go bust.

Comments

Well said, Matt.

Posted by socctty | March 17, 2008 10:41 AM

YES!! Where is Clinton? People are worried about putting food on the table, not about Obama's preacher. Where is Obama? People are worried about putting food on the table, not about Clinton's tax returns. Why do we even have a Democratic Party if we're going to have this deafening silence on the causes and consequences of the financial meltdown?

Posted by Steve LaBonne | March 17, 2008 10:41 AM

What Matthew said.

-----

"Where is Clinton?"

You might want to compare the stimulus plans from Clinton and Obama from a couple of months back. Clinton had a plan with significantly more bottom up help, while Obama had his normal Goolsbee/GOP preference for tax cuts.

Posted by Petey | March 17, 2008 10:45 AM

Umm, I do have a problem with the gov't bailout of Bear Stearns. I mean, can't we at least be repaid by going after the hundreds of millions of dollars that I'm sure its CEO has made in the past few years? The problem is that there is no downside for these folks & as soon as there's a sunny day again, they'll be crowing to get the government of their backs - no regulation & no liability.

Posted by neilrlca | March 17, 2008 10:46 AM

i felt sure last night that both obama and clinton would jump on this, and would note something like how "bush-mccain" policies are totally unsuitable, but i guess it's like turning a supertanker: it takes a while.

Posted by howard | March 17, 2008 10:49 AM

Huh? The government prevented the financial markets from melting down so therefore we need to extend unemployment benefits for a few more weeks? It's a non sequitur.

Posted by Al | March 17, 2008 10:56 AM

I hope this puts an end to the folly of privatizing social security.

Posted by Jayhawk Max | March 17, 2008 10:57 AM

I hope this puts an end to the folly of privatizing social security.

Nonsense! The only possible path to prosperity is by implementation of four policies:

1. Privatize Social Security.
2. Lower taxes on rich people.
3. Return to the gold standard.
4. Establish a human colony on the moon, to be governed by the Pope. (This step will have the additional benefit of instantly curing cancer and AIDS.)

Posted by James Gary | March 17, 2008 11:04 AM

The other real urgent concern here is that, given that all signs now point to the fact that there's going to be a quite sizable wave of unemployment combined with almost universal state government insolvency, the federal government needs to be prepared to cushion the blow for people at the bottom of the economy. At some point, this is a zero-sum deal and money spent bailing out investment banks is money that can't be spent guaranteeing things like extended unemployment insurance.

Posted by dry_fish | March 17, 2008 11:06 AM

al, i'm happy we are returning to normal after our brief moment of agreement last night: don't be willfully naive.

the question is whether bush-mccain policies have created this mess that needs to be bailed out on an emergency basis, and whether bush-mccain can possibly be trusted to deal with the problems to come.

if bear stearns were LTCM, then we could talk about this as a one-shot deal.

meanwhile, bush's remarks friday showed that he is completely clueless about what is going on, which is the factor the market should focus on: this man will still be in charge until january, 2009.

for now, though, we've got the Fed playing a brand new role and the taxpayers taking on a brand new obligation on the say-so of paulson (from greg ip in the wsj: "However, the Fed sought and received agreement over the $30 billion loan from Treasury Secretary Henry Paulson, who informed President Bush"). you gotta love the unitary executive.

Posted by howard | March 17, 2008 11:13 AM

Can you imagine the outcry from conservatives if this government intervention was done by a Democratic administration, along with a Dem-appointed Fed chairman?

Posted by Slowloris | March 17, 2008 11:34 AM

1. Make investments based on shaky mortgages
2. ?????
3. Make profits!

Posted by Underpants Gnomes | March 17, 2008 11:42 AM

There would be no outcry Slowloris. It was something that had to be done.

And I think you guys are a bit hasty in your saying that the Bear Stearns workers who sank the boat are just going to be walking away alright. 1/3 of Bear Stearns was owned by its employees. All of that is worth essentially nothing now.

there are employees there who were millionaires and overnight became essentially broke. And their jobs are in jeopardy. Sorry, but I feel bad for the guys there. Just because they used to make a lot of money doesn't mean they aren't getting hurt. A lot of these guys just lost half of their life savings this week.

Posted by NM | March 17, 2008 11:47 AM

NM, you're kidding, right? just like there would be no outcry if a democratic president illegally extorted wiretapping from the telcos and then offered to immunize them.

please.

as for the bear stearns folks, i do feel sorry to some extent for them, especially the ones working well outside of the mortgage securitization area, but let's not shed too many tears: they worked for an investment bank. they took big risks in order to have a shot at big rewards. sometimes risks don't pay off. if they wanted certainty in their lives, they should have gone into a different line of work.

Posted by howard | March 17, 2008 11:51 AM

At some point, this is a zero-sum deal and money spent bailing out investment banks is money that can't be spent guaranteeing things like extended unemployment insurance.

This is a feature, not a bug.

there are employees there who were millionaires and overnight became essentially broke. And their jobs are in jeopardy. Sorry, but I feel bad for the guys there.

So, NM, could you explain how this taxpayer-backed takeover by JPMC helps those poor guys? The top dog at BS made over $200 million during his tenure. Do you think he'll be sleeping under a bridge, regardless of his stock holdings? No, he'll get another executive job. Meanwhile, JPMC has bought BS at a bargain-basement price, especially with taxpayers getting stuck with $30 billion of the worst of the shitpile as a condition of the rescue. The Fed and the Treasury will make sure that JPMC makes out just fine.

So you might want to take your breastbeating over the poor common joes at Bear Stearns back to an earlier thread, since this thread is about how this administration isn't interested in rescuing common people whether they work at Bear Stearns or not. Because that would be socialism.

Posted by mds | March 17, 2008 12:03 PM

I'm not sure how applicable illegal wiretapping is to trying to avoid the collapse of our financial system. I don't think there would be an outcry at all. If there was, the Republicans would lose what little credibility they have left.

Posted by NM | March 17, 2008 12:05 PM

NM -- I agree with you. Bernanke was dealt a tough hand and is taking bold action. And Paulson is a grown up -- we're fortunate it's Paulson and not Snow at Treasury now. This is a crisis of monumental proportions, and the problem is not government intervention, it's just whether Treasury and the Fed have enough remaining tools in the toolkit to prevent further disaster.

Here's my point: There is plenty of blame to go around, but the lack of regulatory oversight (read: Greenspan) contributed to this mess. We were lectured about how we have to let the free market work, and no additional regulation was required to manage our back-to-back financial bubbles. But, once again, the taxpayers will be left holding the bag. On that last point, I think we would hear more (disingenous) claims from conservatives about moral hazard if the Dems were in power.

To your point about the collateral damage: yes, the value of BS stock has been nearly erased, and many at the firm will no doubt lose their jobs. That is unfortunate, but it is part of the cyclical nature of Wall Street. Wall Street sheds job whenever there is a major downturn. It's risk-reward, and Bear was long known for being aggressive. I feel bad about that. But I also feel bad about the people who have lost their jobs from NAFTA, the workers whose jobs have gone offshore, the full-time workers who don't earn enough for a decent home, the 47 million people without healthcare, etc. etc.

Posted by Slowloris | March 17, 2008 12:06 PM

NM, the reason i raise illegal wiretapping is that there is a well-known tendency in the republican party (a lesser version exists among the dems) to accept things if they are doing them and complain if the other side is. there is simply no way that all these "government is the problem" types in the republican party would stand by while the federal government guarantees private debts without a single minute's discussion.

Posted by howard | March 17, 2008 12:11 PM

Slowloris,

"Can you imagine the outcry from conservatives if this government intervention was done by a Democratic administration, along with a Dem-appointed Fed chairman?"

The LTCM bailout happened during Clinton's administration (Clinton had reappointed Greenspan, so he counts as a Dem-appointed Fed chairman), and I don't recall a lot of outcry from conservatives then. There were the usual questions about moral hazard, but then, as now, the consensus was that the greater risk was that of a systemic meltdown.

"We were lectured about how we have to let the free market work, and no additional regulation was required to manage our back-to-back financial bubbles."

If you want to slam the free market, that's fine, but don't delude yourself that mortgage and real estate bubble was an example of unfettered free markets at work. There has been massive government involvement here. The federal government essentially created the secondary securitization market for mortgages in the first place, with its enormous Government-Sponsored Entities. Numerous government policies over the last decade designed to increase home ownership added additional fuel to the mania, e.g., Clinton's elimination of most capital gains taxes from residential real estate sales; Clinton's use of the Community Reinvestment Act to bully lenders into providing more mortgages to marginal borrowers in minority areas; Greenspan's decision to keep the Fed Funds rate at 1% for so long in the wake of the dot-com bust, Bush's zeal to get U.S. homeownership to record levels (mission accomplished), etc.

Had there not been so much government involvement in the mortgage sector, mortgage rates would be higher now, a smaller percentage of Americans would be homeowners, and most of the folks defaulting on mortgages would have been renters all along. There would have been no credit crisis.

Posted by Fred | March 17, 2008 12:28 PM

Fred, the reason you don't recall an outcry on LTCM from conservatives is twofold: first, you have forgotten; second, the New York Fed organized a private bailout.

that's a little different than an actual committment of $30B to cover shoddy assets.

and LTCM could be seen as a one-off; the problem here is systemic.

it's only friday that bush was telling us how the government shouldn't get involved: that is the normative right-wing reaction.

we'll save discussion for what constitutes a free market for some other time....

Posted by howard | March 17, 2008 12:36 PM

Since the Republicans are going to throw their hands in the air, crying about free markets, can we start calling them Sons of Hoover if this whole thing turns into a massive, unwieldy shitstorm?

Posted by Paul | March 17, 2008 12:51 PM

NM --

I actually agree with most of your points and analysis. I don't mean to slam capitalism and certainly agree that the mortgage market is not unfettered capitalism, for all of the reasons you cite (and more).

But I do stand by my political observation. In the Clinton era, conservatives were in a fury about Clinton administration's move to make loan guarantees to Mexico during the tequila crisis.

And here's an excerpt from a September 25, 1998 Wall Street Journal editorial regarding the LTCM bailout which of course slams . . . the Democrats:

"It is somehow appropriate that Bill Clinton should preside over the decade of moral hazard, the term the financial community uses to describe the distortions introduced by the prospect of not having to pay for your sins, in this case financial ones. The prospect of government bailouts leads to abandonment of credit standards and assessments. As moral hazard grows you get a market so skewed by the expectation of bailouts that vital signals about genuine risk no longer get through. Eventually, the danger turns into one of systemic collapse.

"Systemic risk, of course, is the rationale for the bailout. A collapse of Long-Term Capital, and a fire sale of its assets, would mean losses to both its investors and lenders, whose own balance sheets would be endangered. There are already large losses rippling through the financial system from Russia and emerging markets. This introduces "counterparty risk" -- will someone you trade with be solvent at settlement. If no one knows, no one trades, and markets freeze as they nearly did in the wake of the 1987 market crash. Systemic risk is surely real, if often exaggerated, and surely scary.

"Still, a hedge fund? No one, you learned at your mother's knee, should put money into that kind of risk unless you can afford to lose it. How did we arrive at a point where the riskiest game in town is considered "too big to fail?"

"Well, in general, through the Clinton-Rubin-Summers-Camdessus management of the world economy. And in particular, through the enormous increase in moral hazard they have produced."

Posted by Slowloris | March 17, 2008 1:20 PM

Where is Clinton? People are worried about putting food on the table, not about Obama's preacher. Where is Obama? People are worried about putting food on the table, not about Clinton's tax returns. Why do we even have a Democratic Party if we're going to have this deafening silence on the causes and consequences of the financial meltdown?

Actually, I think a commenter in last night's thread answered this question pretty well.

Basically, the Bear Stearns execs together with all their other Wall Street friends cashed out something well over $100B during the last few years. Most of the money went into mansions, yachts, and Bermuda hedge-funds, but they (wisely) spent a tiny slice to buy up all the biggest Democratic politicians.

Now THAT was a "hedge" well worth their small investment!

Posted by RKU | March 17, 2008 1:33 PM

Re "Most of the money went into mansions, yachts, and Bermuda hedge-funds, but they (wisely) spent a tiny slice to buy up all the biggest Democratic politicians."
--------
Yep. Opensecrets.org lists $115,000 going to Hillary Clinton from Bear Stearns in just this election cycle.

Posted by Don Williams | March 17, 2008 1:48 PM

Actually, this raises another interesting point...

Everyone seems to *assume* that whichever Democrat is nominated will easily be able to take advantage of the looming economic disaster by shifting towards "economic populism" against McCain (who's not really identified with any particular economic position).

But if that were actually the case, why wouldn't they be doing this shift NOW, since such a position would be so much more popular within the Democratic primary electorate than in November? And if they're "scared" to do so now, imagine who much more "scared" (their major donors will ensure) they'll be in November.

Posted by RKU | March 17, 2008 2:13 PM

RKU,

The problem with trying to rile up the proles with the financial crisis is that it is a wine track recession at this point: shareholders and employees in investment banks such as Bear Stearns are the ones losing their money and their jobs. Meanwhile, the Fed's response in lowering interest rates -- by weakening the dollar further -- is spurring domestic manufacturing (even as it makes European vacations and imported wine and cheese more expensive for wine track Obama voters). The only way the lunch pail crew is getting hurt right now is with higher gas prices, but these should moderate by the end of the summer driving season, as inventories start to overshoot demand.

Posted by Fred | March 17, 2008 2:29 PM

Gee, and here I thought that lots of ordinary Americans had 401-K "retirement" plans! Which may end up losing a really big chunk of their equity AND bond-fund values in the very near future.

Sure, Hillary and Obama could wait until the really big market crash---maybe on Thursday or whenever---but politically, it would be much smarter to start talking up the issue NOW, so as to "stake their claim on it" *before* then.

And anyway, the markets have *already* fallen quite a bit in the last few months. And food+gas+regular living expenses have risen much more than the (fraudulent) government inflation rate. And many millions of homeowners are deliquent on their mortgage, which many more millions are underwater.

Such populism would work politically with the proles---especially the Democratic Party proles---but it would really hurt the candidates with the MSM and their big donors and their consultants/pollsters/speechwriters (who get paid by the donors), so it hasn't happened.

Any reason those same conditions won't continue through to November?...

Posted by RKU | March 17, 2008 2:42 PM

The effects of the collapse and the costs of the buyout will become evident during the next administration, which almost certainly be a Democratic one. If the Democrats don't start demagoguing the issue and waving the bloody shirt NOW, the Republicans will start doing it on January 21, 2009.

We need to play the blame game. There cannot be a civil, bipartisan resolution of this. This is going to hurt a lot of people, and they're going to blame someone, and if it's not the Republicans, it will be the Democrats.

It's already almost certainly true that none of the people responsible in the world of finance will pay any costs at all. Vindictiveness would be sweet. but we can't pull it off. But at least we can put an end to the Republican Party.

And after that, rejigger the tax structure in a way to redress the balance as much as possible.

Posted by John Emerson | March 17, 2008 3:31 PM

RKU, what are you talking about cashing out 100 Billion in the last few years. Bear Stearns has never been worth over 20 billion dollars. How could their executives take out 5 times more money than the company is was worth at it's peak 12 months ago?

Posted by NM | March 17, 2008 3:32 PM

RKU, what are you talking about cashing out 100 Billion in the last few years. Bear Stearns has never been worth over 20 billion dollars. How could their executives take out 5 times more money than the company was worth at it's peak 12 months ago?

Posted by NM | March 17, 2008 3:33 PM

NM:

Please note my use of the phrase "together with all their other Wall Street friends".

I think Street bonuses---overwhelmingly concentrated among the more senior execs---were something like $30B annually for the last few years. And that doesn't even count all the non-IB financial execs at hedge funds and such. I wouldn't be surprised if the total recent cashout across all the "higher ends" of the financial-services industry (limited say to the top 5% of recipients) weren't actually a factor of several greater than my very crude figure.

Posted by RKU | March 17, 2008 3:42 PM

Here's Jim Cramer of CNBC's "Mad Money" pathetically trying explain why he told viewers Friday explicitly not to sell Bear Stearns stock:

Cramer clarified his remarks on CNBC’s March 17 “Street Signs”:

“Look, let’s understand two things,” Cramer said. “I said the common stock was worthless on Friday, as soon as this thing was at 36 because we saw a look at the bonds. If you kept your money in Bear you made out. You got the liquidity. Keeping money at Bear – I guess I could have caused a run on the bank and said take your money out of Bear. I guess people could say hold it, he’s saying buy the common stock. I mean, what the heck. I cannot cause a run. It turned out the Federal Reserve guaranteed the money. I’m not going to tell people to pull money out of these places. The Federal Reserve is guaranteeing the money. They are not guaranteeing the equity. I got a lot of things wrong in my life, but I don’t regret the fact when I said don't take your money out of Bear. If you have your money in Bear you still got it today. Remember, there’s Bear Stearns the common and that person was going to pull the money out of Bear. We got a guarantee. J.P. Morgan is now Bear.”

Posted by dry_fish | March 17, 2008 3:56 PM

dry_fish: thanks for posting, i needed a laugh.

that was truly ludicrous.

i don't spend any time watching the likes of cramer: is he always like this?

all he had to say was "i thought your money was save in bear stearns. it turns out i misread the situation and i was wrong: only 7% of your money was save at bear stearns. i apologize to everyone and i remind everyone that no one - not even warren buffett - gets them all right."

so easy, and yet quite obviously beyond him....

Posted by howard | March 17, 2008 4:24 PM

Re: but these should moderate by the end of the summer driving season, as inventories start to overshoot demand.

That's a long time off and my guess is that those high summer prices will still be fresh in memory on election day (as was the case two years ago despite a dramatic fall in gas prices right after Labor day 2006)

Posted by JonF | March 17, 2008 7:28 PM