Small Is Beautiful

Two things we should keep in mind as we discuss the financial crisis:

1. Banks and stockholders are desperate to see some sort of pledge from the US government that there is ready money to help remove toxic assets from the balance sheets of banks.

2. George W. Bush is still President, and the GOP House caucus consists primarily of shit-flinging howler monkeys.

It's those two factors that lead me to disagree with the always erudite Hunter, who dismisses the idea that a "miniaturized" bailout could stabilize Wall Street and open up credit markets. To the contrary -- it's only a small, band-aid bill that can get through Congress, past Bush's veto pen, and effectively tamp down the panic in the market while at the same time preserving the ability to develop a far more progressive and far-reaching solution to the broader crisis.

Now I'm not an economist, so my opinion is just the opinion of a reasonably well-educated layperson. That puts me right in line with most Kossacks, most trad med talking heads, and most Members of Congress.  But it seems to me that a lot of the objections to the bill which was defeated yesterday stemmed from its sheer magnitude.  The idea that American taxpayers would be giving $700 billion -- $2300 for every man, woman, and child in the United States -- to the big brains that got us into this mess . . . well, that just wasn't going to fly.  But given that we've been talking about $700 billion for two weeks, if you now take that number and drastically cut it, it seems a lot more palatable.  

And cutting the number is certainly doable. Paulson is on record as saying that, in order to have the freedom that it needs to accomplish the task, Treasury must be able to spend $50 billion per month to purchase toxic securities.  If Congress were to pass a $200 billion bill that explicitly is intended to be a first chapter in a rescue package -- carrying Treasury's activities through till the end of January -- we would still be furnishing Paulson with the $50B/month that he's said that he needs in order to act in an effective manner. To the extent that the financial sector wants to see a real commitment to the crisis, we'd be providing it. But we'd also be acting in recognition of the giant elephant in the corner of the room: the fact that we are very likely to have a Democratic President and an even more Democratic Congress in less than four months time. Everyone involved in this saga, from the politicians to the bankers to the shareholders to regular Americans, knows that an Obama Administration would handle this problem very differently than Bush and Co. Hell, that's probably one of the key reasons that Obama is opening up a double-digit lead in the polls. Even Wall Street can understand that it's simply unrealistic to tie Obama to a slapdash proposal cobbled together by a lame-duck President and his tired cronies. And Wall Street also knows that Obama won't let the situation go the hell come January.

That said, most economists, including patron progressive saints Krugman and DeLong, agree that we gotta do something to stabilize the situation. Now a number of folks, including the also-always-erudite Devilstower, are arguing that the Democrats should develop an aggressively partisan bailout model that includes the bankruptcy provisions generally believed to be a poison pill for Congressional Republicans and for Bush. And I agree that there's a certain political appeal to that course of action, as it demonstrates that the Democrats are willing to take a bold leadership position. But I don't see such a bill actually getting enacted into law and addressing the crisis. Like I said, George W. Bush is still President, and his party is controlled by partisan lunatics who aren't about to play ball with Democrats one month before an election. So to the extent that we want to get something done soon, that's probably not our best tack. But if Congress takes the Dodd/Frank/Paulson bill, makes it an explicitly short-term $200 billion measure, adds needed meaningful oversight, and strengthens the equity warrant provisions, my guess is that you'll easily get enough Democrats on board to pass the bill -- and maybe even a couple extra Republicans. And Treasury will have the money in hand to soothe the desperate Street, which will be relieved and grateful that a deal has finally been approved.

At the same time, this plan would preserve the ability for an Obama Administration to come into office with a decisive, progressive, long-term solution to the crisis -- one that could include strong measures to assist homeowners, and relief for Americans strapped by consumer debt. It would certainly provide an empirical look at how well the Paulson approach works. But most importantly, it would stabilize the situation, while keeping options open for President Obama. And that should be goal number one.