# Stock Market

How's that bailout working for us?

I wouldn’t mind Democrats passing an incredibly unpopular bill a few weeks before an election, if the bill solved a big problem.

Unfortunately, the Wall Street bailout Congressional leaders rushed to pass this fall doesn’t seem to have accomplished much, besides hand some Republican incumbents a great campaign issue.

We were told that the Bush administration needed this plan passed immediately, or else credit would dry up and the stock market would go into a tailspin.

But as it turns out, Treasury Secretary Henry Paulson had no idea what to do:

The Bush administration dropped the centerpiece of its $700-billion financial rescue plan Wednesday, reflecting the remarkable extent to which senior government officials have been flying by the seat of their pants in dealing with the deepening economic crisis.

Treasury Secretary Henry M. Paulson said the administration would scrub plans to buy troubled mortgage-backed securities but continue to devote bailout funds to restore liquidity to credit markets.


“You’ve had a tremendous amount of improvisation here,” said Douglas W. Elmendorf, a former Federal Reserve economist and an informal advisor to Obama’s transition team. “Even smart people get things wrong when they have no models to follow and are acting quickly, so it’s natural that there’d be some reworking.”

Or as Sen. Charles E. Grassley (R-Iowa) put it: “When you see so many changes, you wonder if they really know what they’re doing.”

Paulson, who originally dismissed emergency government investments in financial institutions as a recipe for failure, said most of the first half of the $700 billion had already gone to making emergency investments in banks and other companies aimed at reviving the routine borrowing and lending that are crucial to the economy.

Although Paulson said those actions had helped thaw credit markets and prevent “a broad systemic event” in the global economy, he acknowledged that most financial firms are still deeply reluctant to lend.

So, Paulson has been winging it, doing what he originally opposed, but credit remains very tight.

But no problem, because Congress imposed strict accountability measures in that revised version of the bailout, right?

Not according to the Washington Post: Bailout Lacks Oversight Despite Billions Pledged

In the six weeks since lawmakers approved the Treasury’s massive bailout of financial firms, the government has poured money into the country’s largest banks, recruited smaller banks into the program and repeatedly widened its scope to cover yet other types of businesses, from insurers to consumer lenders.

Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.

Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.

“It’s a mess,” said Eric M. Thorson, the Treasury Department’s inspector general, who has been working to oversee the bailout program until the newly created position of special inspector general is filled. “I don’t think anyone understands right now how we’re going to do proper oversight of this thing.”

To put that $290 billion in context, the U.S. spent about $170 billion on the war in Iraq during all of 2007. Yet the stock market is still swinging wildly and financial institutions are “still deeply reluctant to lend.”

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid got suckered into backing bad policy that was also bad politics. Barack Obama was eager to go along as well.

Next time leading Democrats want to pass something that expensive, could they at least make it something useful, like universal health care or high-speed rail connecting major cities?

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Department of untimely policy initiatives

Over at the Washington Monthly’s Political Animal blog, Hilzoy had a great comment on news that John McCain may soon propose “economic measures aimed directly at the middle class” such as “tax cuts — perhaps temporary — for capital gains and dividends”:

Because what everyone is really worried about right now is how they’ll manage to pay the taxes on their massive capital gains.

The biggest surprise for me this year is how poor a campaign McCain has run since locking up the Republican nomination.

This is an open thread on the dumbest policy idea or campaign tactic McCain has come up with in recent months.

Although McCain had no great options for VP, in my opinion, I still think picking Sarah Palin was one of his biggest mistakes.

UPDATE: The New York Times reports,

Despite signals that Senator John McCain would have new prescriptions for the economic crisis after a weekend of meetings, his campaign said Sunday that Mr. McCain, the Republican presidential nominee, would not have any more proposals this week unless developments call for some.

There’s a winning message!

Everyone who doesn’t think that current developments call for some economic policy proposals, please raise your hands.

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Oops--The bailout didn't stabilize the markets

When Congress debated the bailout package last week, plenty of respected economists argued that the bill would do little to fix the problems in the banking sector. However, others insisted we had to “do something” to avert a market meltdown.

Many people became reluctant supporters of the bailout because of the need to “do something.” Here’s how Tom Harkin explained his “yes” vote:

I reluctantly voted in favor of this bill because I believe our nation’s financial system faces serious challenges, and it is important for us to act.  However, I am under no illusions.  I firmly believe that Congress should not have been rushed into this action, but we needed to do something to calm the markets and restore confidence in our economy. While this package will do that in the short term, we must modify it early next year to strengthen and improve the rescue framework – and I will be leading the charge to do that.

Since George Bush signed the bailout bill into law, global and American stock markets have fallen sharply, with the Dow Jones industrial average now at its lowest point in five years.

The front-page headline on Tuesday’s Des Moines Register was apt:

Global markets plunge in response to rescue

Experts unsure what moves might restore confidence

But a week earlier, many of those “experts” insisted that disaster would strike if Congress didn’t jump on board the runaway train. Day after day, the Register’s coverage was slanted in favor of the bailout proposal.

The bailout was very bad politics, but that wouldn’t bother me so much if it had been good policy. Unfortunately, it is already turning out to be a very expensive non-solution to a big problem.

In the coming years, that non-solution will deprive us of the money needed for real solutions.

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The bailout may be the worst Bush administration proposal ever

If we’re talking about policy mistakes with disastrous long-term outcomes, it’s hard to top the Iraq War for loss of life and the 2005 energy bill for threats to the planet.

In fact, we could be here all day if we set out to brainstorm all the horrible things to come out of George Bush’s presidency.

But it does seem like the proposed bailout of failing banks is a contender for worst Bush administration proposal ever.

Here are a bunch of links on the subject.

Paul Krugman of the New York Times is updating his blog frequently.

Senator Bernie Sanders: Billions for Bailouts: Who Pays?

Former Labor Secretary Robert Reich: What Wall Street Should Be Required to Do, to Get A Blank Check From Taxpayers

Bonddad: This is one of the worst bills to ever be proposed.

Robert Borosage: Financial Crisis: Time for a Citizens’ Plan?

Devilstower: Three Times is Enemy Action

Ian Welsh: How To Bail Out Ordinary Mortgage Holders And Not Just Banks

8ackgr0und N015e wrote a funny piece on one angle of this story that hasn’t received as much attention.

Two of Josh Marshall’s readers ask really good questions.

This post by Matt Stoller includes an excellent statement from Senator Hillary Clinton.

As far as I know, no members of Congress from Iowa have issued public statements about the bailout, but I will post them as they become available.

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