Wrong time for populist push-back

Agreed:  Wall Street fat cats shouldn't be rewarded for recklessness and failure while working people are losing their homes and retirement funds.

But Congress is playing a dangerous game by injecting populist issues into this debate at this particular moment in history.  If the Dems push back too hard or cause delay, they could end up being blamed for something far worse than what we've glimpsed so far.

As we have seen, prosperity doesn't necessarily trickle down, but pain most assuredly will.

This is not just another fiasco in the long history of free-market screwups requiring a bailout at taxpayers' expense (see my previous post http://www.opednews.com/articles/opedne_joel_tho_080314_the_proud_legacy_of_.htm).  This could be the big one.  It could turn out to be the watershed moment of our lifetime -- even more consequential than 9/11.

There's something huge lurking behind the headlines.  I'd give a money-market buck to know exactly what Paulson told Congressional leaders that left them in "stunned silence" (see http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html).  Congress has never sat in "stunned silence" in its entire previous history.  On the Sunday morning talking-head shows Paulson declined to repeat what he told them, and was evasive answering questions containing the word "collapse."  To date, no news organ I'm aware of has been willing to repeat his warnings in print.  Schumer said only that "history was sort of hanging over it, like this was a moment.  ... Well, I'll leave it at that."

I suspect what Paulson warned about was political instability, the possibility that events might spiral dangerously out of control on a global scale.  Just my theory...  But if anyone knows how the land lies, he does.  I don't have the sense that he's trying to scare people to aggrandize power or reward his cronies.  He's trying to avert the train wreck he sees looming dead ahead.  He's certainly bending over backward to avoid scaring the public.

Economic catastrophes change the course of history.  The French Revolution was triggered by a financial collapse which threw half the population of Paris out of work, caused by Louis XVI's war debts.  Hitler's rise was made possible by the collapse of the German economy, giving us WWII and the Holocaust.  The Federal Reserve Act was a reaction to the Panic of 1907.  The New Deal was enacted because the "powers that be" were worried that the rise of angry public sentiment following the Crash, and the bank panic that followed, might lead to civil unrest that could destabilize the nation.

There's a reason why, following the Fannie / Freddie seizure, Bernanke and Paulson have tried to avoid more outright takeovers.  The Fannie / Freddie takeover wiped out the shareholders, thereby avoiding the "bailout" stigma and "moral hazard" arguments -- but had an unintended consequence:  the organization representing dealers in credit default swaps (CDSs) ruled that federal conservatorship constituted a default event, requiring payouts by anyone who had sold swaps on Fannie and Freddie credit risk.  I still haven't seen anything indicating who was left footing the bill, or how big it was.  I suspect it played a direct part in the Lehman and AIG blowups, which followed almost immediately.

So the Fannie / Freddy outcome removed the "conservatorship" tool from Paulson's arsenal.  That's why AIG was done as a loan, to avoid triggering more CDS defaults, leaving common shareholders bloodied but still standing.  The current rescue package has likewise been concocted in a way that avoids triggering CDS defaults -- which makes it, too, smell like a bailout.  Paulson's previous comments indicate that he'd do almost anything to avoid the bailout stigma.  He simply doesn't have any choice.

Efforts to find a private-sector rescue for Lehman failed, and it ended up in default anyway.  I'd like to know where the Lehman default chips are falling.

The world isn't home free even if the rescue measure is passed quickly.  If it's defeated or delayed, the consequences are probably catastrophic.  Worrying now about executive compensation is pure symbolism; most of the plunder was paid out in incentives and trading bonuses over the last five years and has been socked away in offshore bank accounts.  It dwarfs whatever windfalls the CEOs might still be in line for, and it's long gone.

Fixing things to prevent future problems can wait till the dust settles.  Congress needs to take action now to stem the immediate crisis.