Hullabaloo

Shrill Politics

by digby

If you haven't had your Krugman yet today, his column is very worthwhile, as always. But his blog posts have been very helpful these past few days and today's are no exception:

First:

In Manhattan, at 85th Street and West End Ave., there’s an apartment building going up; the sign advertises “21st century prewar living!” which only makes sense if you spend a lot of time in New York. But I found myself thinking about that sign when reading this terrific WSJ article about how the fall of Lehman triggered global panic.

One lesson of the article is that Paulson screwed up very badly by letting Lehman fail; it’s not clear where Bernanke stood, but it seems clear that Tim Geithner of the NY Fed was on the other side.

What the article really adds, though, is the details of the chain reaction that did the damage.
Read on ...

Interesting, no? I don't actually get why Paulson was so intent upon letting Lehman fail in this environment. Maybe it was an experiment. Whatever it was, it seems to have made things worse, although that doesn't necessarily translate into the kind of massive bailout he subsequently proposed either. Perhaps King Henry is clueless?

And here's Krugman's reasoning as to why it's better to hold one's nose and vote for the plan than not let it pass:

I’m being asked two big questions about this thing: (1) Was it really necessary? (2) Shouldn’t Dems have tossed the whole Paulson approach out the window and done something completely different?

On (1), the answer is yes. It’s true that some parts of the real economy are doing OK even in the face of financial disruption; big companies can still sell bonds (and have lots of cash on hand), qualifying home buyers can still get Fannie-Freddie mortgages, and so on. But commercial paper, which is important to a lot of businesses, is in trouble, and I’m hearing anecdotes about reduced credit lines causing smaller businesses to pull back. Plus there’s a serious chance of a run on the hedge funds, which could make things a lot worse. With the economy already looking like it’s headed into a serious recession by any definition, the risks of doing nothing look too high.

It’s true that we might be able to stagger through with more case-by-case rescues — I think of this as the “two, three, many AIGs” strategy; in fact, we might not be at this point if Paulson hadn’t decided to make an example of Lehman. But right now it’s not even clear who to rescue, and the credit markets are freezing up as you read this (1-month t-bill at 0.04 %, TED spread at 3.5)

On (2), the call is tougher. But putting myself in Barney Frank or Nancy Pelosi’s shoes, I’d look at it this way: the Democrats could start over, with a bailout plan that is, say, centered on purchases of preferred stock and takeovers of failing firms — basically, a plan clearly focused on recapitalizing the financial sector, with nationalization where necessary. That’s what the plan should have looked like.

Maybe such a plan would have passed Congress; and maybe, just maybe Bush would have signed on; Paulson is certainly desperate for a deal.

But such a plan would have had next to no Republican votes — and the Republicans would have demagogued against it full tilt. And the Democratic leadership cannot, cannot, be seen to have sole ownership of this stuff.

So that, I think, is why it had to be done this way. I don’t like it, and I don’t like the plan, but I see the constraints under which Dodd, Frank, Pelosi, and Reid were operating.

I see the politics of this the same way he does. The problem for Democrats is that they are pretty much the only governing entity working today. Bush and his boys are lame ducks who have no political stake in the outcome. The Republicans stand to gain by being obstructionists in this environment either in this coming election and almost certainly the next one. This is an opportunity for them. Democrats have a different set of problems because they will be held responsible for economic failure because they are the majority.

That is not to say that I think they've handled this correctly. I think they've been far too willing to accept that responsibility --- you can see their hunger for leadership power written all over their faces. They're wonky types who like this stuff. But if they felt they had no choice (a debatable point, to be sure) they should have been holding their noses and refusing to do anything in public without Paulson, Bush and the Republican leadership standing arm in arm with them every single time. If they have some kind of illusion that this is politically helpful to them, they are nuts. Before the Republicans are through with them, Bush will have been disappeared and Bill Clinton, Nancy Pelosi and Barack Obama cooked this crisis up together during a white house coffee with Jeremiah Wright back in 1997. (And don't think it won't work.)

A lot of bloggers are asking their readers to call their representatives to vote no on the bill. I think it's a good idea, but I have to be honest and tell you that I don't think it will make any difference. Polls are showing that people in general are pretty supportive of Obama and the Democrats on this so far:

The higher scores of Obama and the Democrats in Congress relative to McCain and the Republicans in Congress are mainly owing to differences in intraparty support for each side. Nearly 8 in 10 Democrats approve of the way Obama has responded to the Wall Street crisis, compared with only 7 in 10 Republicans approving of McCain. Similarly, 65% of Democrats approve of the Democratic leaders in Congress, in contrast to 55% of Republicans approving of the Republican leaders in Congress.

If the bill is going to fail it will be because of Republicans who have decided to follow Newt Gingrich's advice and reanimate the GOP corpse on the backs of faux fiscal responsibility.

However, it is important that the Democrats understand that some of their constituents are as dismayed by this bail out as the Republicans' are. Otherwise, they are likely to think that taking ownership of this crisis is in their political interest and it most definitely isn't. And frankly, I'm as scared by that as I am by this crisis. If the Democrats don't fully grasp what the political stakes are for the next generation then they are even bigger fools than I thought they were. This is one of those defining moments and if they persist in showing up at press conferences high fiving and congratulating themselves publicly for bailing out rich people, they are signing their own death warrants. This economic crisis isn't going away. They'd better figure out the right politics of this right now because that popular support isn't going to last.

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