Insomnia (insomnia) wrote,
Insomnia
insomnia

Stock market comeback = the first sign of Obamanomics?!

So, the Treasury Secretary, Henry M. Paulson, Jr., announced that the U.S. government would work with Congress to create a non-partisan entity to  to buy distressed mortgages at deep discounts from banks and other institutions, in order to get these mortgages off the books of ailing financial institutions.

In one sense, it is being viewed as a government bailout, but the Congress is also trying to see how it could be a worthwhile investment that hopefully will pay dividends in the future, because what they are doing, essentially, is offering to buy people's debts at a fraction of the total cost of that debt, somewhat like a collection agency might do. This could certainly be unprofitable, but it also could be VERY profitable, due to the panic devaluation of these debts, because investors had no way -- due to deregulation -- of knowing how much these debts were really worth, or whether they could be collected!

They're still working out the details, but stocks shot up sharply, as fears of financial companies going under due to such questionable debts greatly diminished. 

In short, a success for the Bush administration, right?! Well... not exactly.

As Paul Krugman wrote yesterday, one economics giant -- Barack Obama advisor and former Fed. Chief Paul Volcker -- has been suggesting a solution for some time... one which could've been implemented much earlier, saving untold billions of dollars... if only the Bush Administration was proactive and paid much attention to economics. 

Indeed, while Bush was silent, Volcker once more put his solutions out there  in the Wall Street Journal, in an article co-credited with Reagan-era economist Nicholas F. Brady and Clinton-era economist, Eugene A. Ludwig. Clearly the intent was to pressure the Bush administration to put forward *some* kind of solution to stop the hemmoraging. Well, looks like it worked.

From the WSJ article:
"The fact is that the financial system needs basic, long-term reform, but right now the system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times.

Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions. This contraction will undercut the financial system, and with it, the broader economy that so far has held up reasonably well.

There is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management."

...and this is exactly the advice that is going to fix the problem! 

So, while the Bush administration initially froze like a deer in the headlights of a Mack truck, the Democrats saved Wall Street, in large part because they *DIDN"T* rely on the Bush / McCain era economists who screwed things up in the first place! Instead, they got together the best bipartisan minds, put together the best, tested ideas, put pressure where it was needed, and set out to fix what Bush, McCain, McCain's economic advisor Phil Gramm, etc. broke.  

Indeed, the stock surge yesterday began after Senator Charles E. Schumer, Democrat of New York, announced a Democratic proposal for a government rescue on the Senate floor, in ways that rapidly restored confidence in the markets.

It should be noted that Nicholas F. Brady, the seasoned Republican economist who played a role in Volcker's call-to-action, is a registered, heavily donating, Reagan-era Republican... but not a John McCain supporter or advisor. He didn't even sign on to John McCain's list of 300 economists who supported his jobs plan.

Poor McCain. It must be hard to champion corporate greed and faux rustic authenticity over intellectual excellence, and still be the party of ideas, I guess... 

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