The Need For Speed?

Today, President Bush announced that the whole world is watching to see if we can act quickly to resolve/contain the U.S. finical crisis. The message he was trying to deliver was not directed at the American public, but at Congress, to act quickly in passing his 700 billion dollar bank bailout proposal. Bush felt that this was necessary as many congressional democrats and a fair number of republicans have questioned the wisdom of the Bush bailout in its current form.    

It is clear that Bush wants to react quickly to this financial crisis, but a key question to consider is whether speed at this juncture creates more problems down the road. In other words, while waiting to take action in the short term main cause additional drops in the stock market, if we take the time to work out a compressive rescue and correction for what went wrong in the financial markets, will we be better off in the long term?    

I am not an economics expert, so it is difficult for me to offer a real analysis of this inherent economic tradeoff. However, from a political standpoint, the current situation is rife with potential political gains and losses. To understand the likely outcome of this situation, it is important to take a look at the different political motivations for several key players: President Bush, congressional democrats, the Republican Party, McCain, and Obama.    

For President Bush, a large part of his legacy as president will be affected by how this economic crisis unfolds. If the crisis leads to another great depression, then regardless of any good he has done in his political career, he will always be remembered as the president who failed to prevent a great depression. President Hoover’s legacy supports this point of view. Hoover was an extremely accomplished public servant before he became president, and he was an immensely popular president until the economic downturn in 1929. The result of his presidency coinciding with the start of the great depression is that his legacy is forever tied to that event.  Thus, beyond any personal conviction Bush has regarding  the best present course of action, from a political motivation stand point, Bush is best served by having a short-term solution rather than a more long-term comprehensive fix.    

Congressional democrats have competing political interests. From one perspective, they should be in favor of a short-term fix because if it temporally rights the economy, they can go back to their districts and say "see I was there to protect you. I saved the economy." However, initial responses by the democratic base have been very negative towards the Bush bail out plan. Thus, if they were to fast track the bill with just an up or down vote with no amendments, they risk being seen as weak to these key supporters.    

In addition, congressional democrats don't want to be seen as obstructionists (because they held up necessary legislation at a critical juncture) or partisan (since conventional wisdom argues that economic downturns favor the party out of power for the presidency), as it could result in an electoral backlash from voters who are hurt by an increasingly worsening economy. A key fact to remember is that even after the election, the new president will not take office till the end of January. If no action at all is taken, a lot could go wrong in those four months. As a result, if we weigh all of these pressures, it appears that the motivation for congressional democrats would be to pass some package to rescue the economy, but likely some altered form of the Bush Plan.    

As for the Republican Party, its motivation is quite similar to that of President Bush. Survey research has shown that up until Carter, the Democrats were consistently rated as more competent in handling the economy. When experts studied this empirical regularity in detail, they found that this opinion was the result of the Republican Party's association with control of the White House at the start of the Great Depression. For voters who lived through the Great Depression, the Republican Party was, in their minds, inextricably linked with economic failure. Thus, the Republican Party should do everything in its power to make sure we do not enter another depression while it holds the presidency. Therefore, republicans should also be in favor of quick action to ensure that the economy doesn't slide into recession or depression while they are in control.    

The last two actors to take a look at are the two presidential candidates. As both are senators, they are both going to have to cast votes on the Bush Plan. This is one of the few opportunities that voters are going to get to see how both candidates act at the same time and at the same level of policy making. Both candidates are running on a message of change. Well, I can almost guarantee that the bail out plan is going to get spun as more of the same in Washington. So the question becomes whether both candidates can take the comprehensive change approach and vote against a simple bailout of the banks and get away with it with their supporters.    

In looking at Obama, he clearly cannot support a simple bailout; that would go against all of the themes of his campaign about reform in Washington. However, he cannot be seen as not working to find a solution for the crisis. The problem for him is that he is not the President of the United States in the senate. Thus, he is just one of 100 and it would be difficult for him to dictate a completely different plan. As a result, it would appear that Obama's best course of action would be to vote against the Bush Plan, but support any modification that provides some regularity reform. This way he can say "I have fought for reform in good and bad times and if you elect me, you will keep seeing reforms coming."   

In the case of McCain, he is in a much tighter spot than Obama. If he is truly a candidate for change, then how can he simply vote for the Bush Plan? He has tried so hard to distance himself from Bush, and there is no way he could cast a “yea” vote for the Bush Plan and win the presidency; in the minds of most voters that would be the same as saying he endorses how Bush has handled the economy for the past eight years.    

However, McCain also could not easily vote for a Democratic Party sponsored bill that calls for reforms and regulations. If he were to sign on to the bill, he would look like a follower of the Democratic Party and a deserter of the Republican Party. In addition, a lot of his support comes from fiscal and small government conservatives who are outraged over the level of government spending and intervention that democratic reform plans for the finical markets call for. As a result, McCain is stuck in a hard position of not being able to support the Bush Plan, but also being equally unlikely to support a democratic reform bill. His best bet is to try to sponsor a bill himself, but in a democratically controlled senate, that is very unlikely to happen.    

Taking all of this analysis together, it seems that the likely outcome of this crisis is that the democratic controlled Congress will write their own bill that incorporates large aspects of the Bush Plan (so that they can move quickly), but that also provides for additional regulation and protections for the taxpayers (thinking more long term). I am not sure this is the best outcome as it may rush the passage of critical reforms for the finical markets, but given the nature of the crisis, it is probably the best-case scenario.   

Ah, What A Mess

I don't have much time for a post today so this one is going to mostly be posing a question for everyone to ponder for the remainder of the weekend. Feel free to post your thoughts on the matter below. 

On Friday, President Bush announced that he wants congress to pass a 700 billion bailout of the financial markets. The basic idea is that the government will buy all the bad loans and mortgages that banks have on their balance sheets from homeowners defaulting on their loans. Most analysts agree that if all of these bad loans were taken off the hands of the banks, then they would once again be able to turn a profit.

There are two key points to notice here. First, when Bush says the government is going to use 700 billion to buy these loans, the government doesn't just print more money, it has to generate it from somewhere. To raise this amount of money, it can do three things. One, it can raise taxes to cover the cost (very unlikely in this case). Two, it can cut current spending levels in social programs or a war effort to off-set this new cost (again very unlikely in this case). Three, it can take very high interest foreign loans to finance the deal (most likely option). In essence, this last option is how the Bush administration has financed the wars in Iraq and Afghanistan without raising taxes at home. The take home point is the money doesn't just appear, it has to come from somewhere.

The second point to note is that there is another way to solve this crisis that hasn't been discussed. The Bush plan focuses on saving the banks, but does nothing for the home owners who have these loans. A viable alternative would be to have the government either help homeowners make their payments, or restructure of all floating loans that have been made in the last five years to fixed rate loans with affordable monthly payments (i.e. lower fixed interest rates and perhaps extending payment periods beyond 30 years) so that people can make their payments. The effect would be that banks would not be making big profits (and perhaps might even be taking small losses as opposed to their current huge losses), but they also would be able to remove the bad debt off their books, since payments would be coming in. 

So, the big question is which plan is better? I personally come down on bailing out homeowners over bailing out banks, or at least having a combination of bailing out both.  The idea that only the banks should be bailed out with my money seems both morally wrong and financially unsound. I completely agree with idea that these banks can't simply be left to fail. They are too integrated into the financial system. However, that doesn't mean the solution to the problem has to let the banks completely off the hook, while individual homeowners get nothing and are led to financial ruin themselves. It seems to me if you are going to use taxpayer dollars to solve this problem that the solution better address both sides of the crisis. 

In the end, the question comes down to who should get rescued: the banks, the homeowners or both? Both banks and homeowners are guilty of greed and have both made mistakes, but why should only one side get bailed out?