September 26, 2008

The Roads Must Roll, Along With a Few Heads - slight UPDATE

Hatched by Dafydd

Here is the bailout problem in a nutbag. There was indeed a deal before John S. McCain arrived... a completely bicameral deal between House Democrats -- and Senate Democrats. The deal also included (evidently) the White House; and the Senate Republican conference climbed aboard the bandwagon.

The outlines of the deal were that President George W. Bush gets the Paulson-Bernanke emergency rescue plan -- and the Democrats extort a number of their domestic welfare programs:

  • Long-term extension of unemployment benefits, so that fewer people will go back to work;
  • A "housing trust fund" that would funnel taxpayer money to ACORN and other radical groups;
  • Salary caps on everyone who makes more money than members of Congress;
  • A secret, back-door restoration of the ban on shale-oil development, which Majority Leader Harry "Pinky" Reid (D-Caesar's Palace, 85%) tried to sneak into the rescue bill;
  • Fascistic government ownership of the banks, and so forth.

Of course, if you pore over the list above of participants in this deal, you will of course notice one missing piece: House Republicans. The House Republican conference is consistently more conservative, free-market, and even libertarian than any of the other four groups... and not surprisingly, they completely rejected this deal.

But nobody was speaking for the House Republicans; in fact, it appears that nobody was speaking to them, either. So despite the fact that McCain is a senator, not a representative, he nevertheless realized that without the House Republicans (HRs, from now on), no deal would ever be inked. Even though Democrats have a majority in the House (and no filibuster rule), they refused to pass legislation without the "cover" of a majority of the HRs along for the ride. (Which itself is a telling sign: The Democrats did not want to "own" the package.)

Thus, McCain thought it important enough to temporarily (for a few days) suspend his campaign, fly back to D.C. -- which is where his actual job is (and Barack H. Obama's too, by the way) -- and see if he could restart the dialog between the HRs and Everybody Else.

I believe every element of the House plan is worth some consideration in itself, and several would probably help the situation; but I do not believe that even all of them put together would actually resolve the illiquidity of the mortgage markets.

The core of their plan is to get the financial institutions to buy the toxic assets themselves by federally insuring them:

Under the alternative Republican plan, the government would set up an expanded insurance system, financed by the banks, that would rescue individual home mortgages. The government would not have to buy up the toxic mortgage-backed assets that are weighing down financial institutions.

They've also proposed a two-year suspension of the capital-gains tax -- which might actually be counterproductive in the short-term: These toxic assets are of course worth much less than the institutions paid for them; which means if they sell them, they would actually have a capital loss, not gain. Under the current system, they can claim a deduction for that loss; but if we suspend the cap-gains tax for two years, the financial institutions won't be able to deduct their losses.

In the long run, reducing or even eliminating capital-gains tax is a great idea. But it's not going to help in the present crisis.

In the end, I suspect the HRs will relent and compromise: They will accept the guts of the Paulson-Bernanke proposal in exchange for some significant trimming of the Democrats' grab-bag of socialist-populist goodies, particularly including the "equity stake" that the federal government would take in the affected institutions; my reading of the tea leaves tells me this is something that Senate Republicans love but of which House Republicans are very, very skeptical, for the same reasons I enunciated yesterday.

There is already some movement towards a compromise:

Cantor said that some of the "exotic sliced and diced" mortgage-backed securities at issue for the financial institutions are of such little value -- because the underlying mortgages are already in foreclosure -- that using the Republicans' preferred approach of federally insuring them is pointless. "So you've got to go with Paulson's model," Cantor said today, endorsing the federal purchase of those securities to clean up the books for financial firms in distress.

In exchange, Cantor said he is seeking some sort of assurance that that the Treasury secretary would be allowed to create an insurance program for the other mortgages, charging premiums to the firms holding securities tied to those mortgages.

There are some other proposals floating about. Steven Pearlstein in the Washington Post has a very interesting one... Treasury sets up a resolution corporation (as per Paulson-Bernanke); but then instead of buying the illiquid securities with cash, they swap them for preferred stock in the new resolution corporation itself:

My own suggestion would be to structure the rescue around a new government-owned corporation that would be capitalized, initially, with $100 billion in taxpayer funds. The company would use auctions or other mechanisms to buy the troubled securities from banks and other regulated institutions, but instead of paying for them in cash, the government would swap them for an equal number of preferred shares in the new company. (Preferred shares are something of a cross between a bond and common stock.) Those preferred shares would pay a government-guaranteed dividend and could be redeemed by the government at any time. But they could also be used by banks to augment the capital they are required to maintain by regulators.

The beauty of this arrangement is that, rather than protecting taxpayers by having the government take an ownership stake in hundreds of privately owned banks, it would be the banks that would own a stake of the government's rescue vehicle. The government would suffer the first $100 billion in losses from buying and selling the asset-backed securities, but any further losses would be borne by the other shareholders. And should the rescue effort actually wind up making a profit, then the banks would share in that as well.

I don't believe this would have happened without John McCain's presence: It took the support of a man so universally respected on the Republican side, even by those Republicans who frequently oppose him -- ironically, the very same House Republican conservatives whose cause he champions today -- to get the corrupt Democrats and the blowhard Senate Republicans to pay their House brethren any attention at all.

My guess is that many of the HRs' proposals (and several proposals of other critics, such as Pearlstein's "preferred shares" swap) will be rolled into the plan; much of the Democratic garbage will be stripped out; and the guts of the Paulson-Bernanke plan will be enacted with near universal support in both the House and Senate, to be signed by the president into law.

The liquidity crisis will be averted; companies will stop going under; the stock market will rebound (it hasn't dropped all that much, really); the Democrats will be exposed (well, by us, at least) as the venal rats who caused the problem in the first place; President Bush will seem a bit more presidential; John McCain will seem a lot more presidential.

The biggest loser will be, I think, Barack H. Obama, as more and more voters start to ask -- "Who is this guy anyway?"

And he'll lose tonight's debate, too.

UPDATE:

These two videos are making the rounds; they fit so perfectly here, I just have to include them.

First, here is the blunt Rep. Roy Blunt (R-MO, 96%), official negotiator for the HRs in the Big Blowout, discoursing on how helpful John S. McCain has been during the negotiations, appointing himself Speaker to Animals... that is, guardian angel for the House Republicans. Watch this one first...

 

 

Now, here is the "same" video -- as creatively edited by the Barack H. Obama campaign, or some surrogate. Notice a few very subtle excisions, almost too small even to notice:

 

 

Team Obama is pointing to the truncated video to claim that even Roy Blunt agrees that McCain has been nothing but a roadblock, toppling a done deal and plunging America into a dark night of the financial soul.

Want to know just how corrupt, mendacious, and dishonorable is the campaign by the One We Have Been Waiting For, campaigning by what we call "Chicago rules?" That's how.

If in fact they have nothing to do with this disgraceful knife-job on Blunt's praise, there is a simple way to show it: The campaign can denounce this bearing of false witness. Let's see if any such denunciation forthcomes.

Hatched by Dafydd on this day, September 26, 2008, at the time of 6:03 PM

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Comments

The following hissed in response by: BlueNight

I just came from the Wizbang blog, and they have posted a link to this video explaining the sub-prime mortgage / housing bubble / credit crisis.

As to the content of your post, that last option sounds even better than the straight bailout plan.

The above hissed in response by: BlueNight [TypeKey Profile Page] at September 26, 2008 10:49 PM

The following hissed in response by: Pam

Hey, what's your take on the debat that only 30 million or so saw? And please tell me if you think McCain can still pull this out?

The above hissed in response by: Pam [TypeKey Profile Page] at September 27, 2008 3:30 PM

The following hissed in response by: Michael Babbitt

Between the corruption of the Obama campaign and the full cooperation of the MSM, I can't see how Obama can lose this election. It's over. We have a Leftist fascist take over of our society.

The above hissed in response by: Michael Babbitt [TypeKey Profile Page] at September 27, 2008 8:19 PM

The following hissed in response by: Dafydd ab Hugh

Pamela, MIchael Babbitt:

Ignore any instant polls; that's not where a debate shows its results, unless one or the other debater completely blows it. That simply measures partisans -- who may be calling themselves "undecideds," so that they will get called back frequently.

The time to check the polls is about a week after the debate, just before the next one. I think McCain will be ahead at that point, albeit by a small number.

Dafydd

The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at September 27, 2008 10:02 PM

The following hissed in response by: hunter

Obama does know his Orwell.

The above hissed in response by: hunter [TypeKey Profile Page] at September 28, 2008 2:56 AM

The following hissed in response by: Pam

Thanks Dafydd; I needed to hear that. I read over at Powerline that one of the guys thinks maybe that there is a headway toward Obama, and that no matter what McCain does the country is tuning him out and it is over.

I still have to believe that when all is said and done a majority of Americans will realize that Obama is just not prepared to be president. I know people are mad right now, but to put the government into his hands along with the Dem idoit running congress; WOW! But hey, I've been wrong before!

The above hissed in response by: Pam [TypeKey Profile Page] at September 28, 2008 4:18 PM

The following hissed in response by: Pam

Thanks Dafydd; I needed to hear that. I read over at Powerline that one of the guys thinks maybe that there is a headway toward Obama, and that no matter what McCain does the country is tuning him out and it is over.

I still have to believe that when all is said and done a majority of Americans will realize that Obama is just not prepared to be president. I know people are mad right now, but to put the government into his hands along with the Dem idoit running congress; WOW! But hey, I've been wrong before!

The above hissed in response by: Pam [TypeKey Profile Page] at September 28, 2008 4:18 PM

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