Seeking to strengthen the Left-Right coalition of Democrats and Republicans who defeated the Paulson bailout on Monday, progressives introduced a bailout alternative at a Capitol Hill press conference on Tuesday afternoon. They outlined the No BAILOUT Act, which would strengthen financial industry regulation of short selling and other speculative gamesmanship through the Securities and Exchange Commission, change accounting rules to let banks show more assets, and empower the FDIC to open up banks' books, restructure bank management, and provide short-term liquidity to the credit markets - with no automatic outlay of taxpayer cash. The bill already has the support of the Service Employees International Union, and the political strategy behind the initiative is shrewd: It aims to solidify all of the Democratic and Republican "no" votes against any bill still structured like Paulson's $700 billion giveaway, and includes admirably progressive themes.
In terms of details, the upside of the alternative plan is two-fold: It not only introduces the concept of re-regulation into the bailout debate, it also proposes a much more measured way of providing prudent, public-minded taxpayer support to the financial sector than simply turning on the U.S. mint's printing presses and handing over blocks of cash to Manhattan and Greenwich millionaires.
The plan is modeled off concepts outlined in the Washington Post by both former FDIC Chairman William Isaac and University of Texas economist James Galbraith and conceptually supported by some House Republicans because it costs no taxpayer money up front.
According to a bill summary, the legislation would require the FDIC to survey the banking industry and issue short-term loans (through an exchange of "net worth certificates" and bank promissory notes) to those banks that qualify. In exchange for the short-term infusion of capital, banks would "be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management." As Isaac noted, this exact program was enacted by Congress during the S&L scandal of the 1980s and helped "resolve a $100 billion insolvency in the savings banks for a total cost of less than $2 billion."
According to a bill summary, the legislation would require the FDIC to survey the banking industry and insure banks additional loans by basically buying IOUs from banks that qualify. But because this program would technically be an exchange of FDIC "net worth certificates" and bank promissory notes, no money would change hands unless a bank failed. Banks could simply assume they have the capital loans from the FDIC for purposes of their own lending and balance sheets. In exchange for this short-term infusion of capital and government guarantees, banks would "be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management." As Isaac noted, this exact program was enacted by Congress during the S&L scandal of the 1980s and helped "resolve a $100 billion insolvency in the savings banks for a total cost of less than $2 billion."
The tricky part of the plan deals with the accounting rules.
Right now, federal law mandates that banks assess their assets on a "mark-to-market" basis - that is, what their assets could be sold for right now, rather than what they could be sold for in the future. The theory is that during a housing and financial crisis, the "mark to market" value of mortgages is artificially low, even though those mortgages represent houses with actual value (for instance, because no one wants to buy mortgages right now, many mortgages are valued at zero on a mark-to-market basis, even though they represent homes that could ultimately be sold for value). Because what a bank can lend out is a multiple of the assets they own, proponents of the accounting change argue that the mark-to-market system is forcing banks to devalue their assets and therefore contract credit. They say that changing the accounting rule to allow banks to list their assets at an "economic value standard" (ie. higher than mark-to-market) will therefore loosen up credit.
The problem with this accounting change is that it would allow banks to leverage even more against assets whose value is still unknown. That, says some opponents, could simply push off - and potentially make more intense - an inevitable day of collapse in the banking system.
LIKELY OUTCOMES: FOUR POSSIBLE PATHS
This morning, Barack Obama and John McCain both reiterated their support for the Paulson bailout plan, but also called for a wide expansion of the FDIC's authority to guarantee bank deposits. The Wall Street Journal now reports that House leaders are considering a re-vote on the plan that was rejected on Monday, only with this expanded FDIC authority tacked on. For lawmakers who will be asked to switch their vote, that change - though positive - seems like thin gruel to justify such a monumental reversal to constituents back home.
With all this in mind, there appears to be one of four likely outcomes:
1. Congress Does Nothing: Under this scenario, House leaders bring the bill back for another vote, perhaps with the FDIC expansion on it, and the "no" votes do not switch, either because the changes aren't enough, or because they support the No BAILOUT Act instead. Though the media has billed this outcome as Armageddon, many economists think this is a better solution than simply dumping $700 billion of taxpayer cash on Wall Street. Ultimately, the Treasury Department and the Federal Reserve would be able to use its authority to nationalize banks and restructure them, much like Sweden successfully did in the early 1990s. As economist Dean Baker has said, "There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression."
2. Congress Passes the No BAILOUT Act With Bipartisan Support: If House leaders agree to allow a vote on the progressives' alternative (a big "if"), it could pass with the same coalition of Republicans and Democrats that voted "no" on the Paulson plan.
3. Congress Passes the Paulson Plan With Bipartisan Support: Depending on the strength of the corporate lobbying campaign, House leaders could re-vote on the Paulson plan and change 12 votes. This, however, would require 12 lawmakers to switch their votes on the most monumental and high-profile economic legislation in a half century - likely meaning electoral retribution at home.
4. Congress Passes A Progressive Bill With All Democrats: There remains a chance that House Democratic leaders will restructure the Paulson plan to give the Treasury Secretary far less money and authority to address the credit markets' liquidity problem, and also tack on key progressive priorities including bankruptcy law reforms, aid to homeowners, economic stimulus (infrastructure spending, etc.), financial regulations and a financial industry tax to pay for any losses to taxpayers. As historian Rick Perlstein notes, this is exactly the kind of strategy Franklin Roosevelt employed in the face of the Great Depression. He used the crisis as the rationale and vehicle for true progressive reform.
THE BOTTOM LINE: WHAT PROGRESSIVES MUST DO
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