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September 29, 2008
Why the bailout package failed
Here are the headlines from just two pages in today's Wall Street Journal:
- "Financial troubles humble U.S."
- "Tighter terms for car loans promise to deepen troubles for sluggish sales"
- "Jobless report likely to show gloom beyond Wall Street"
- "Rescue may not revive economy"
- "Bailout gives Fed, Bernanke key roles"
Those weren't even the front-page headlines.
Those headlines are a backdrop everyone can understand in this big and complicated story. Yet, today's historic vote in Congress for a $700 billion bailout of Wall Street failed on a vote of 228-205.
Why? One clear reason was the most important backdrop: the story of what the bailout would do. The most important story is always the first one. When we first learned about the bailout, the story we heard was that Treasury Secretary Henry Paulson would have unquestionable, czar-like authority (by a former head of a Wall Street firm, no less). There would be no review process or transparency about the administration of the program. There would be no (initial) curbs against Wall Street CEO pay, which everyone knows is outrageous and symptomatic of the greed that got us into this mess in the first place.
Those three story points stoked vast numbers of citizens to call their congressional representatives to reject the bailout, no matter how much the plan matured or was made more sane by Republicans and Democrats working together. (One report said calls to congressmen were averaging 100-1 against the bailout.)
Those initial three, easy-to-comprehend points reinforced the existing storyline we've come to know all too well the past eight years: rich, out-of-touch, transparency-unfriendly fat-cats who become bureaucrats, and vice versa, are manipulating the levers of power behind a cloak of secrecy to further enrich themselves. It's a storyline most of the American public has come to find revolting and, frankly, dangerous.
Maybe what this financial crisis will finally change about American business and government and the interplay between the two is the unquestionable need for transparency. A Google-friendly form of governance. Let's hope the secret-keepers in charge are finally, and forever, driven from power.
Update: Bob McTeer, former president of the Federal Reserve in Dallas, on why the vote failed:
Every "ordinary American" I talked to about the plan, including family and neighbors, misunderstood the plan and hated it. They viewed it as using their tax dollars to bail out rich corrupt Wall Street types. Despite repetition over and over on TV and in the press that the bailout did not involve ordinary government expenditures but involved a purchase of assets that would be resold, most likely at a profit, that message never sank in. The legislators faced almost unanimous negative feedback from their constituents.
Despite the repetition on TV and in the press (let's call it "the advertising"), the details of the revised bailout never sank in because the first story was the one everyone remembered.
The importance of the first story of a new company, product or initiative can never be overestimated. The first story is the benchmark. It's an encapsulation of greatness, evil or indifference. It's the context for word of mouth, which will almost certainly carry the most credibility.
Other blogs that reference Why the bailout package failed:
You're just one of the very very few who get this. There is absolutely no discussion of this in any newspaper outside America, and I doubt inside America. You have to listen to talkradio and read blogs like this to understand why this was rejected. Otherwise the only thing you hear is: stupid Republicans (usually Republicans are blamed) just caused Armageddon.
The name 'bailout plan' pretty much condemned it from the beginning. Paulson certainly didn't introduce it with that name. It was at first called the Rescue Plan. It's harder to vote against a rescue plan I think.
Somewhere, in the media or amongst politicians it became known as the bailout plan. I suspect that's the single most important reason why it failed.
Berend -- Agreed. It'd be difficult to label this a partisan issue given that 133 Republicans voted against the bill as did 95 Democrats.
Richard -- Good point. "Bailout plan" became the de facto story title.
Great points brought up in the article and in the comments section. This is beyond distressing that our own country can't get their act together and I agree that the name doomed it from the start. I can't say I have much faith in anything this country is deciding on (or not) at this point.
Nice take on the issue. People instinctively know Congress and the resident fool in the White House are pimping us out to the greedy bankers and the thieves on Wall Street. Frankly, although the vote seems like a repudiation of the disasterous policies of the past, it was driven by political survival. The elections are a mere 5 weeks away and many of those fools are up for re-election . My fear is the politicians will lose their nerve and vote to bail out the uber-rich. After all, who is going to finance their compaigns and lavish Washington, D.C. lifestyles?
Thank you for your succinct article on why the bailout package failed to clear Congress. Like most people, I have been following the credit crisis closely over the past year and was especially following the progress of this bailout package. The way you opened the article with five especially gloomy headlines from a single day’s Wall Street Journal (and not even on the front page!) really painted a picture of just how dismal our economy is right now and put the entire bailout package into context perfectly.
In the body of your article, I liked how you very clearly laid out the three reasons why you believe Congress voted against the bailout. It was clear, concise, and eye-opening. I agree that the biggest issue with this bailout package was the lack of transparency in the system, especially given how much power Paulson would have been given. It is as if the government is trying to test the phrase “power corrupts, absolute power corrupts absolutely.” It was heartening to hear how the public became involved in this legislation, and I found your statistic that calls were averaging 100-1 against the bailout especially interesting. It solidified your statement that “vast numbers of citizens” were calling their representatives to reject the bailout and added credence to your argument that this financial crisis might bring about transparency in business and government.
Though I loved the article and I liked the way you started your article, I think you would have benefitted by saying what the front page headlines actually were. I understood your intentions behind what you did, but I believe it is more confusing that it has to be. Also, do you think that some of the outrage came from the fact that the government was giving money to the companies that caused this crisis rather than the people who have been hurt by it? The way you talk about rich fat-cats makes me think that you are one of the people who would rather see the money go into a stimulus package than bailing out Wall Street.
Good points made in the article. We should have no bailout. No stimulus program.
Let's get back to basics and start deflating the balloon economy that gave rise to this failure.
The one thing that everyone is missing is that this is not a problem with the companies, corporations or the banks. This is a problem with the PEOPLE of America. Remember? This is about banks having debt that is at risk of default. Who do they think is defaulting? The American Citizens! The citizens are the ones that need the bail out. If they had jobs, if they had price (value) security, if they could actually afford the debt that they have, these companies would not be in the position that they are in. These banks, and firms squeezed every possible nickel out of the economy, and now there is no more to squeeze, and they are hurting. The citizens have squeezed every nickel out of their paychecks and there is nothing left, if there was, there would be no risk of default, no credit crisis. Everyone has heard of the underemployed guy living in a $300,000 house driving a new car every year, who gave him that loan? What about the person who has 2x gross income in credit card debt? Who issued that new card, or extended the limit? I bet who ever it was is begging for this law to pass.
Bottom line, the big fish are starving and dieing off(getting divested, and broken up more likely ie. C and WB) because there is less money in the economy to gobble up. Put the money back in PEOPLES pockets (not that stupid "economic incentive" crap that just pumps inflation). Tax cuts, big ones. Afterall, the government can afford $700 billion to companies, why not give it back to those whose money it really is? Remember how trickle down didn't live up to expectations? Trickle up sure sounds better.
We need to all take a collective Xanax about this. I am glad this bailout failed. Legislation passed in haste is usually poor legislation. Anyone remember the authorization of the Iraq War. This is a very similar situation with the main difference being that Wolfowitz/Rumsfeld have been replaced by Bernanke/Paulson.
My belief is that in the end we need to create an economic version of the First Amendment - a separation of business and state. When politics and business come together the result will either be fascism or socialism. I am for neither.
Kevin -- This is like a highway speed issue. We don't allow everyone to drive at any speed they desire on the freeway because the truly reckless ones would endanger the rest of us. So, too, with economic issues like deregulation of financial markets: With speed limits removed, that encouraged lenders to sell mortgages to people who otherwise couldn't afford them. The combined recklessness (hey, everyone was making money, right?) eventually combined to create a huge liquidity crisis. A financial pileup 1,000 miles long on the interstate.
Ed -- I see this crisis in the same way: An opportunity to push through sweeping legislation that's barely understood yet monstrously expensive. Naomi Klein calls it "disaster capitalism," and I think she makes a good case in her book "Shock Doctrine" of why it's dangerous. She lays blame for the rise in disaster capitalism at the feet of Milton Friedman, whom I recall as being the subject of an earlier discussion we had :)
Ben, do the "fat cats" you refer to include the Clinton democrats that chose not to listen to Bush's warning several years ago about this very crisis? Or are you only after Republicans who don't want our country to become a socialist state run by Nancy Pelosi? Just curious.
Ben: interesting to see the different takes on this stupendous problem. To be honest, the rapid deflation of the mortgage bubble has been the longest telegraphed punch in Hollywood history (so, no, Nancy, this didn't creep up on anybody...).
However, a few interesting take-aways might be in order:
1. Don't restrict the blame to Capitol Hill: the culprit is greed and the culture of entitlement & celebrity that seems to be the norm (until a few days ago) in the country. Greed on Capitol Hill caused congressmen to turn a blind eye to oversight lapses because of cosy (and financial) relationships with poorly run financial institutions. How many in congress were on Fannie/Freddie's payroll in one form or another? Greed on Wall Street made quick bucks more important than professional stewardship. And greed on Main Street meant people undeserving of massive amounts of credit were given loans they shouldn't have qualified for.
2. Labels are terribly important: "bailout" versus "rescue" indeed. How can you not be both "Pro Life" and "Pro Choice," after all? They both sound fair, don't they?
3. Don't piss off the people you need: oh, Nancy, was that a smart thing to do? Of course not -- that's why her approval rating is dwarfed by the president's. She had what she thought was a narrow and fragile coalition, and then she took the opportunity to insult them with a slew of hastily assembled (and factually incorrect) verbal sewage. In the private sector, we fire people like this.
All this being said, isn't it in everyone's best interests to do this right instead of doing this fast? Let's hope we see a better plan -- loaded with accountability looking backwards as well as forwards -- on Thursday.
Regards.
People are so outraged based on principles and they don't want this bill to pass, yet they don't understand the implications of it not passing, and don't have any alternatives. This is foolishness. We are stuck because the matter is urgent so we can't give it sufficient analysis to make the best decision.
It's interesting how many of the congress-people who may have believed in the necessity of the bill voted against it to assure that they would get re-elected. (I can't believe the Republicans who blamed Pelosi's letter as to why they didn't vote for it. How childish is that? Were their feelings too hurt to do what they felt was right for the country?).
And it's Republicans who believe in less regulation and "less government". That's like letting children decide on what they eat for dinner everyday without rules and supervision. It's ironic how lack of regulation and hypercapitalism can lead to the need for socialist type maneuvering. More controls earlier would have prevented this. A loan is not a bail-out and greed shouldn't be rewarded, but we're all in the same sinking ship, and it's a global one. I do hope the controls on salaries and golden umbrellas get stronger in this next version of the bill now that it's already failed to pass.
And this has been floating around on the internet but it has one major error. It says $425,000 per person when the real number would be $425 per person. I don't know if the miscalculation is intentional or not, but viral marketing can help bring a bill down too.
**********************
I'm against the $85,000,000,000.00 bail out of AIG.
Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000
bona-fide U.S. Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman
and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a
We Deserve It Dividend.
Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.
Repay college loans – what a great boost to new grads
Put away money for college – it'll be there
Save in a bank – create money to loan to entrepreneurs.
Buy a new car – create jobs
Invest in the market – capital drives growth
Pay for your parent's medical insurance – health care improves
Enable Dead-beat Dads to come clean – or else
Remember this is for every=2
0adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other company
that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of
trickling out
a puny $1000.00 ( "vote buy" ) economic incentive that is being
proposed by one of our candidates for President.
If we're going to do an $85 billion bail-out, let's bail out every
adult U S Citizen 18+!
As for AIG – liquidate it.
Sell off its parts.=20
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can "never work."
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in
Washington DC ..
And remember, The Family plan only really costs $59.5 Billion because
$25.5 Billion is returned
instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
Kindest personal regards, , A Creative Person & Citizen of the
Republic
Thomas -- I recall Clinton leaving Bush II a budget surplus! :)
Stephen -- The fish rots from the head first, no? And yes, a plan (in whatever form it becomes, something I see as necessary as opposed to doing nothing) must be fully transparent, with full-metal-jacket accountability and no opportunity for Wall Street profiteering. Then, launch criminal investigations.
Ben,
You are correct we discussed Friedman previously and we will disagree once more. Friedman would never have been for this bailout! In fact, he asserted that the Fed should not be the one to set interest rates. He was right, and it is one of the significant contributing factors to the mess we are in. The Fed artificially held down the rates. This is a government created problem which requires a free market solution, not a free market problem that requires a government solution.
Also, Naomi Klein is a disingenuous fraud. All of her arguments in her book have been completely debunked by the folks at Cato and AEI. See --> http://www.cato.org/pub_display.php?pub_id=9384
Free minds! Free markets!
Ben- Not saying deregulation, just regulation with common sense. Of course there should be oversight in mergers and acquisitions. OVERSIGHT. Not iron grip control. In recent history XM and Sirius, although this was the FCC, not the FTC, the regulation resulted in a delay of nearly one and a half years. Now who thinks that true monopoly is a serious risk in luxury goods? The same "over control" is happening in this crisis. And No, not everybody was making money. Way too many people THOUGHT they were making money, they were just borrowing so much that it looked like it.
Ed, I agree with you. The Fed is guilty of the over control. Before it was ever an entity in 1913, the debate over whether it was best established as a private entity with minimal regulatory power or a public entity with broad regulatory powers was very heated. Concessions were made, and the result, IMO, is a very much a public entity(all of the board is appointed by the president), with private levels of accountability. Unacceptable, and helps give rise to situations such as these.
Let the market clear. It's going to hurt, and this "bailout" is just pain killer, and will only delay the inevitable. Not to mention the signal to Wall Street that there's a new way to hedge.
And this has been floating around on the internet but it has one major error. It says $425,000 per person when the real number would be $425 per person. I don't know if the miscalculation is intentional or not, but viral marketing can help bring a bill down too.
**********************
I'm against the $85,000,000,000.00 bail out of AIG.
Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000
bona-fide U.S. Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman
and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a
We Deserve It Dividend.
Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.
Repay college loans – what a great boost to new grads
Put away money for college – it'll be there
Save in a bank – create money to loan to entrepreneurs.
Buy a new car – create jobs
Invest in the market – capital drives growth
Pay for your parent's medical insurance – health care improves
Enable Dead-beat Dads to come clean – or else
Remember this is for every=2
0adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other company
that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of
trickling out
a puny $1000.00 ( "vote buy" ) economic incentive that is being
proposed by one of our candidates for President.
If we're going to do an $85 billion bail-out, let's bail out every
adult U S Citizen 18+!
As for AIG – liquidate it.
Sell off its parts.=20
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can "never work."
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in
Washington DC ..
And remember, The Family plan only really costs $59.5 Billion because
$25.5 Billion is returned
instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
Kindest personal regards, , A Creative Person & Citizen of the
Republic
Ben,
I completely agree. I think it was under promoted that the taxpayers would be receiving money back. If the government cares so much about this financial crisis, why did more than have the house vote no? Because transparency from the government will never be achievable because the power and one-minded man will never see that happen. I comment about this and your book I am reading more in my blog!
Please visit, it would be a pleasure to have your comments, tips, and opinions. ~ http://www.prwithrp.blogspot.com/
-Renee Pirolozzi
Great post and a topic many are passionate about. The "bailout" didn't pass as you mentioned for a number of reasons, and until more information is forthcoming I hope that a bailout plan doesn't pass. I don't trust our leaders in Washington any more than the corrupt folks on Wall Street. We need more information and I think government needs to become more transparent to its constituents. We're paying - we need to know what we are paying for.
Ed -- You and I will have to disagree on that since I consider Cato and AEI about as credible as you consider Naomi Klein :)
UH2L -- Glad you were able to get that off your chest!
Renee -- When our leaders allow knowingly allow the kettle to boil over, then start screaming fire when it does, of course it causes panic and disruption and uncertainty. In a crisis, we need a "fast" solution. That's where things can get cynical. A solution for Wall Street, devised and applied by Wall Street.
What we're seeing here is the byproduct of a deregulation run amuck -- when power is too strongly concentrated in the hands of the few. This isn't a market solution. This is a powerbroker solution.
With the stock going under and our economy slowing down, we need all the financial options we can get. Although there have been many plans to bail out banks and try to get the economy running, there isn’t any kind of relief coming for many months ahead of us. We, as Americans, should try and start to get on our feet without the help of the government. When something unexpected arises, such as a flat tire or little Jimmy needing stitches, there should be a valid, quick, easy, and affordable option for anyone who would need temporary relief without the lending of taxpayers money. The payday loan industry is a great way to try and get that temporary relief we all have been searching for. They can provide the satisfaction that you need quickly, providing such perks as online application so you can get one anywhere, anytime, with direct deposit, so when you are quickly approved, you can use the money in a matter of hours. They work with you and the amount that you get paid, so you don’t have to worry about getting in over your head.
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It’s a quite difficult decision for any politician choosing between more bailout packages or letting the free market economic principles take care of the failed businesses, whether it is the financial institutions or automakers. The main focus should be defending the interests of middle-class Americans and creating a stable economic system that will guarantee long-term stability and sustainability. But here we also can face more challenges, since right now the Washington politicians are talking about the second large bailout package. If we bailout financial institutions and other industries again, when are they going to ask for the third bailout package? Or fourth? Maybe this is a time to let free market economy work rather than keep bailing out large, failed corporations? After all, it is the small and medium size businesses that create vast majority of middle-class jobs in America, not the large corporations. Maybe the government is better off to replace banks in lending practices and directly give loan packages with low interest rates to small and medium size businesses? That might work better and have a direct, immediate impact on economy and the middle-class America…
it is the small and medium size businesses that create vast majority of middle-class jobs in America, not the large corporations. Maybe the government is better off to replace banks in lending practices and directly give loan packages with low interest rates to small and medium size businesses? That might work better and have a direct, immediate impact on economy and the middle-class America…
