Four out of San Diego County's five representatives in Congress—Democrat Bob Filner and Republicans Brian Bilbray, Duncan Hunter and Darrell Issa—held their ground and voted against the so-called Wall Street bailout bill last Friday for a second time in a week. They may have been justified in doing so.
Supporters of the bailout pressured holdout members of Congress partly by citing the 778-point Dow Jones loss immediately following the bill's failure to pass on Monday, Sept. 29. But after the bill's passage, the Dow slid another 370 points, suggesting that investors' fears weren't exactly allayed. Of course, the stock market isn't even the appropriate gauge when it comes to what's become a global credit crisis, but it does seem to being telling us that there ain't a whole lot of confidence that the bailout is the right medicine.
There's good reason for lingering concern. No one really knows how the bailout is going to work. No one knows what crappy bank assets Treasury Secretary Henry Paulson and Neel Kashkari, the interim chief of the new Office of Financial Stability, are going to buy, when they'll start buying them and how much they'll pay for them. And we really don't know what effect these purchases will have on the credit market.
What we do know is that there was another option that was never really even considered, an option that, reportedly, was seen by many economists as a much better deal for the taxpayers in the long run. That was the so-called stock-injection plan, which would give taxpayers ownership of preferred stock in the banks themselves, so not only would the banks get an infusion of cash, but the taxpayers would get something in exchange other than these “toxic” mortgage assets we've been hearing about.
We've learned from Adam Davidson, National Public Radio's economics reporter, that a mention of stock injection actually found its way into the bill that passed Friday. But what are the chances Paulson and Kashkari will go that route? Not likely, even though New York Times columnist Paul Krugman, for one, thinks it'll eventually have to happen.
In our view, this is the plan the Democrats, who control the House and the Senate, should have pursued. The Republicans wouldn't have gone for it—because it sounds to them like socialism—but so what? If there's a group of people that the American public holds in lower regard than congressional Democrats, it's congressional Republicans.
President Bush might have threatened veto, but how hard would it have been for the Dems to apply pressure to a few Republicans facing tough reelection campaigns? All they had to do was frame the debate in terms of taxpayers getting something for their money.
So, why didn't the Democratic leadership even consider the stock-injection plan, which Davidson reports was favored by a majority of the economists he talked to, regardless of ideology? We don't know for sure, but it might have something to do with the fact that the powerful banking lobby was dead-set against it because it could have resulted in bank executives losing control of their institutions. According to the Center for Responsive Politics (CRP), which tracks campaign donations, individuals and political action committees associated with commercial banks have donated nearly $206 million to federal candidates and the two major political parties since 1990, $82.3 million of which (40 percent) went to the Democrats.
Who do you think House Speaker Nancy Pelosi listens to? Far and away, the financial-services sector is her largest set of donors—$515,000 in the current election cycle alone, according to CRP. How about Barney Frank, who chairs the House Financial Services Committee and led the charge for the Paulson plan? CRP says he gets an even larger portion of his money from the financial-services sector—$711,000 in this election cycle alone. These donations are what give the banking lobby its power in Washington, D.C. They are why, we believe, banking regulation has been an absolute joke.
But, hey, like Sarah Palin said last Thursday night, we Americans want government to get out of the way, right? Get out of the way so banks can lend money to people who can't pay it back, and so Wall Street can package these bad mortgages, sell them as securities and then insure them with credit-default swaps without the capital reserves necessary to protect the buyers.
Perhaps we got what we deserve.