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The bail-out plan

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Starting with the collapse of Lehman Brothers in mid-month September 2008, the US economy started showing signs of distress. Looked like all of the bragging about the successes of Bush's economic stewardship weren't true after all. The trouble with the housing bubble actually started back during the Clinton Administration and with Alan Greenspan's habit of talking in vague, indecipherable mumbles.

Federal Reserve Board chairman Alan Greenspan deserves much of the blame. He was grossly negligent in allowing both the stock and housing bubbles to grow unchecked. He decided to just let the bubbles run their course, expecting to pick up the pieces after they burst.

Further explanation from Dean Baker of CEPR:

Everyone should understand that we are in this mess for two reasons. First the financial regulators, both in the Bush administration and more importantly at the Fed, were completely asleep for most of the decade. As the housing bubble grew to ever more dangerous proportions, and lenders adopted increasingly questionable lending practices, the regulators did nothing.

The other reason we are in this mess is that the Wall Street banks got themselves hugely leveraged in real estate and other assets. In many cases they had no appreciation of the value of the underlying assets. They also apparently did not understand the complex financial derivatives that they had themselves created.

As Paul Krugman of the NY Times explains, the current problems stem directly from the housing bubble's collapse:

The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn't so much reduced as hidden: all too many investors had no idea how exposed they were.

Unfortunately, it doesn't seem as though Bush was very educated about how the economy worked before he entered the Oval Office. During a talk on the 23rd, he sure didn't talk as though his economic knowledge was very wide or deep.

"Well, my first instinct wasn't to lay out a huge government plan. My first instinct was to let the market work until I realized, upon being briefed by the experts, of how significant this problem became.

"And so I decided to act and act boldly. It turns out that there's a lot of interlinks throughout the financial system. [emphases added]

The full talk is at the link, but I read that and I'm like "Wow! Did this guy not know that the economy was very highly 'interlinked'?!?!?!" And when someone doesn't know much about the economy, is it really a good idea to "act boldly"?!?!? Really?!?!

Actually, the final bail-out plan that was voted on appears to have been a pretty good one. Krugman did not like Treasury Secretary Paulson's initial plan.  Baker also didn't like it:

The bailout is about taking money from the school teachers and cab drivers and giving it to incredibly rich Wall Street bankers, who are so incompetent that they drove their banks into the ground.

But Krugman approved the re-worked plan that was voted on upon the 29th:

Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that's not a chance we want to take. So the grown-up thing is to do something to rescue the financial system.

Why didn't the bill pass?

Mr. Paulson never offered a convincing explanation of how his plan was supposed to work

And let's also consider the Bush Administrations record in handling huge amounts of cash. These guys have a well-documented record of flushing billions and billions down the toilet.

Many people also noticed Section 8 of the bail-out plan:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency. [emphases added]

This section simply made any trust in the administration absolutely impossible and made it necessary for Democrats to extensively re-work the proposal. That wasn't enough to save the plan, though.

The Republicans tried claiming that they couldn't vote for the bill because Speaker Pelosi was mean to them. A claim they later backed off on. Other conservatives came up with similarly unconvincing reasons as to why the crisis occurred in the first place. As the blogger emptywheel says:

It's bad enough Bush $#@%ed up the economy so badly. Now his party wants to use his own failure to beat Democrats over the head for their plans to fix the broken economy.

Personally, my answer is that first, we have to remove Republicans from power. Getting Blue Dog Democrats out would be a good thing too. But there are simply no good solutions possible with the current crew in office.
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PN3(Ret), USN, 1991-2001. Done a number of clerical-type jobs. Computer "power user," my desktop is a Windows machine, but my laptop is an Ubuntu Linux. Articles usually cross-posted at Personal details at (more...)
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