The Sausage Factory

The bailout passed, and has already been signed by the President.

It wasn't easy, and required some extra "help" if you know what I mean.

You don't?

Oh.

CNN lists the special earmarks included that made it just a little easier for House members to vote for the bill this time around, having voted against it just a few days earlier.

They include favorable tax treatment for children's arrows (I am NOT making this up), accelerated deductions for race track owners (ditto) and a wool subsidy that was probably created three wars ago.

It all brings to mind German Chancellor Otto von Bismarck's famous quote about laws being like sausages. It's better not to see them get made.

Happy Friday!

The Bailout: Corporate Treasurers Report In

According to the team at the Baseline Scenario, the treasurers at America's leading corporations got together to share their current experiences in the credit markets.

The picture is not good:

almost 100 corporate treasurers held an emergency conference call yesterday to discuss the challenges they are facing rolling over lines of credit with their banks. In some industries, lines of credit are the lifeblood of even completely healthy companies. They operate like home equity lines of credit: you draw down money when you need it (like to make payroll), and you pay it back when your customers pay you back. (In most business-to-business transactions, money changes hands some time after goods are delivered; hence the pervasive need for short-term credit.)

Now, however, banks are demanding much higher interest rates, lower limits, and stricter terms when lines of credit expire, or are even pouncing on forgotten clauses in contracts to force renegotiations of terms... The banks aren’t doing this because they think their borrowers are in any danger of not paying them back; they’re doing it because they want to hold onto the money because they are afraid of liquidity runs...

This is how fear in the banking sector translates very quickly into higher costs and less cash for healthy companies in the real economy.

I am not even sure when the last time that 100 corporate treasurers took the time to get on the phone to speak to one another like this. It sounds like they're sharing information more freely than I could ever imagine at the usual trade association meeting. That this call even occurred should clue policy makers into understanding what's happening in American businesses (which, by the way employs the taxpayers about whom so many profess concern).

Judging the Debates - How To

In today's papers, we get the usual smattering of nonsense about who "won" the VP debate last night.

* The Politico things Biden did ("it is hard to count any objective measures by which Biden did not clearly win the encounter").

* The Wall Steet Journal's Peggy Noonan in her own, beautifully written way disagrees - "She (Palin) killed."

* Pollsters are rushing to ask the American people their views: (CNN says Biden 51 - Palin 36).

What is this? A high school debate? A football game?

I think we can do better than that if we ask ourselves two questions. What did the candidates need to do to help their chances, and did they accomplish it?

For Senator Biden, it was fairly straight forward. His ticket leads in the polls by an average of almost 6 percent. As Gerald Seib of the Wall Street Journal put it:

those who thought Sen. Biden would wander off into the rhetorical excesses,overstatements and verbal excesses for which he is sometimes prone were...disappointed. He was, instead, disciplined and evenly modulated.

For Governor Palin, the bar was set much higher. After some (I am told) painful interviews with Katie Couric (isn't that like getting mauled by one of those cute little house dogs?), Palin had to show a strong grasp of issues and that she could stand credibly next to one of the Senator Factory's (you know, the place where you get the smile and voice put in) smoothest products.

Again, Gerald Seib's take:

Those who were eager to see Gov. Palin lapse into incoherence were disappointed; she didn't...she decided to debate as a voice of old-fashioned common sense rather than a voice of deep knowledge.

In short, when watching candidates debate, avoid making the sorts of simplistic judgments that most commentators make about who "won." Ask yourself, what did this person need to do tonight, and how well did they do it?

So now, the only question is who won the face off among analysts?

I'm calling it for Seib.

Changing Fortunes for the Bailout

The bailout appears to be gaining momentum on Capitol Hill. The Senate is expected to pass it tonight, and opposition in the House, which just voted it down, is said to be dissipating:

(CBS/AP) The Senate pushed toward passage Wednesday of a $700 billion financial industry bailout, and opposition to the package among House Republican conservatives appeared to be softening as well, thanks partly to a provision to increase insurance for people's deposits.

Still, too many Americans remain unclear on why Washington (and Wall Street) believes it needed. Here's as coherent a justification as I've seen:

One major reason a significant proportion of public opinion is against the rescue plan is the general failure to make the connection between panics in the financial sector and the ordinary lives of everyday people; simply saying that the plan is necessary to prevent (or moderate) a recession smacks too much of “trust me” to be credible.

The connection is that much of the ordinary activity in the real economy relies on credit - think no further than the volume of purchases made using credit cards. (Although banks have been reducing credit limits, there is little risk for now that credit cards will stop working overnight.) And in today’s conditions, when many financial institutions are potential victims of liquidity runs, lending has virtually ground to a halt.

Many businesses rely on short term lending to run their day to day operations. Many items that were once purchased are now leased. That activity is bound to dry up. As companies find that they can't find buyers for their products, they'll begin to lay off more and people. Even those who retain their jobs will stop spending on all but the essentials, and those people who provide other "non-essential" goods an services will lose their jobs, etc., etc.

Wise Words

from a wise man - Leon Panetta - on yesterday's failed vote in the US House to enact the bailout:

Democracy can be ugly, depressing and frustrating but it is what determines our fate as a nation. We govern by leadership or crisis. Unfortunately, today, we largely govern by crisis. If there is to be a way forward in resolving this crisis, it will only happen when the leadership of the nation, both Republican and Democratic, decide that governing is more important than winning.

Remember one thing: no matter who you're angry at right now, we collectively elected them.

The Case for the Bailout

A colleague of mine told me the current proposed legislation to allow the US Treasury to spend up to $700b to purchase troubled assets from financial firms was either a "rescue" or "bailout" depending on whether you supported or opposed it.

The main editorial from the Wall Street Journal labels it a "rescue," but for Main Street - not Wall Street.

Perhaps that's the best way to characterize it - a bailout for Wall Street but a rescue for Main Street.

Here's the Journal's case for it:

it deserves to pass because in reality it is an attempt to shield middle America from further harm caused by the mistakes of Wall Street and Washington...With this vote, Congress is at last taking some ownership for the mess its policies helped to create by fueling the credit housing mania earlier this decade...We agree with those who say there are better ways to provide this public capital, but Treasury Secretary Hank Paulson's plan should do some good, and if executed properly shouldn't cost taxpayers anything close to its $700 billion showroom price.

The Bailout: A no brainer, better than nothing or a bad deal?

The Politico's Arena contains responses to the weekend's news about the bailout package. I really couldn't care less about what the lawyers and politicos think, but they do have some people worth listening to:

Professor and Former Treasury Official Gary Clyde Hufbauer:

The vote in favor should be a no-brainer. The Congressional rank and file can choose this bill or a great big crash. But the national financial cleanup has just started. Come April 2009, this week's rescue bill will be seen as the end of the beginning

Columbia University Banking Professor Charles Calomiris:

The bill is better than nothing, so I would vote yea, but it is a close call. The right approach, which the vast majority of economists who have studied such matters supported, was preferred stock injections into financial firms. This was rejected without a hearing by Congress, and the scandal in this process was the complete absence of independent testimony.

Center for Economic Policy Research Co-Director Dean Baker:

The bailout is a classic case of Washington herd mentality in which all right-thinking people know that they are supposed to support the bailout, but none of them really knows why.

We have been given several different rationales for the bailout, including the claim that it is needed to prevent the collapse of the system of payments; that it is necessary to prevent a Great Depression; and it is a form of anti-recession stimulus.

None of these claims is true...This deal taxes middle income people to support incompetent Wall Street bankers. That’s a bad deal.

Where We Are...

Today's Financial Times sums up where we find ourselves this morning:

The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street’s follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether.

Why should the average person on Main Street who saved and scrimped to put one third down on her home with a fixed 30 year mortgate support the bailout? The Times answers"

Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return? Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system. The answer is “yes”. The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer.

Finally:

Capital markets clearly need better regulation but policymakers should guard against unintended consequences. Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.

This is a difficult time to defend free markets. Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.

That's not to say we don't need to take a hard look at our current financial system and the regulations it operates under. But this will take some time to do it right. What's most needed after the bailout is a commission to look into the whole subprime meltdown and the resulting credit crunch and propose the necessary revisions to our current system. But that's the next stage. Right now we need to get the bailout right.

Lobbyists and Special Interests

Full Disclosure: Although lobbying is such a small part of my job I actually don't even need to register as a lobbyist, I have done so in compliance with my employer's policy of adhering to a "gold standard" of political transparency. Therefore, I am technically one of "them."

Both candidates have made a show of how they'll control Washington's "special interests" and the lobbyists who represent them. But, we know that many of McCain's top advisors are lobbyists, and we recall that Obama's VP hunt was initially led by Washington fixer and pre-eminent insider (and former Fannie Mae CEO), James Johnson. Others on Obama's team were lobbyists before coming on board, and presumably may return to that vocation.

Lobbyists are a part of how Washington works. That's a good thing, because what lobbyists mostly represent is information. With Washington regulating the smallest details of our lives (Congress recently outlawed the traditional lightbulb, but the prohibition won't kick in for a few years), it needs to understand how what it is doing will affect US businesses, the jobs they provide and individual consumers. Although Members of Congress have staff, and some supporting agencies such as the Library of Congress and the Government Accountability Office, they don't have nearly enough information to do the job without a lot of bad, unintended consequences.

That's where lobbyists come in. We provide information, and occasionally advocate for a client, much like a lawyer does in court. Rather than represent clients before the judiciary, lobbyists represent them before the executive and legislative branches. As a profession, it is very highly regulated at the national, state and local levels, and became even more so a couple of years ago after enactment of new ethics laws that were supposed to address recent abuses, but in fact, had little or nothing to do with them.

Like any job, lobbying can be done well and ethically, or poor and unethically. Our government benefits from the former as much as it suffers from the latter. Rather than talking about lobbying as something that needs control, then, we should ask candidates for office to specify what lobbying activities concern them and how what solutions they propose will solve them.