Election 08: The US Bailout, Kid-Gloved Key

This is crunch week for the US financial system, and the Democrats need to play hardball and vote against the $700 billion bailout plan. Because (a) the plan probably won’t work (b) isn’t fixable and (c) will be politically suicidal in the presidential race in November if the Democrats end up owning it in Congress.

Lets take the political suicide aspect first. Every American - and especially every person who has lost their home in the recession/subprime fallout because their bank refused to help them re-structure their debt - is furious that Wall Street is getting bailed out at their expense. Even worse, if the Democrats enable the bailout plan to pass, this will allow John McCain and every Republican in a marginal seat to run as outsiders and rail against Washington – even though it was their party and its loony zeal for de-regulation that made the crisis possible, and inevitable.

The Republicans know this already. Here’s Patrick Ruffini, writing on the Next Right site:

Republican incumbents in close races have the easiest vote of their lives coming up this week: No on the Bush-Pelosi Wall Street bailout.

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God Himself couldn't have given rank-and-file Republicans a better opportunity to create political space between themselves and the Administration. That's why I want to see 40 Republican No votes in the Senate, and 150+ in the House. If a bailout is to pass, let it be with Democratic votes. Let this be the political establishment (Bush Republicans in the White House + Democrats in Congress) saddling the taxpayers with hundreds of billions in debt (more than the Iraq War, conjured up in a single weekend, and enabled by Pelosi, btw), while principled Republicans say "No" and go to the country with a stinging indictment of the majority in Congress....

Oh, and beyond this suicidal enabling of the Republicans to campaign as Washington outsiders against the mess they have presided over for the past eight years….the bailout probably won’t work. Briefly, economist Paul Krugman in the New York Times lays out the four steps that caused the crisis, before concluding that the bailout plan focuses on just the last step in the chain. Here’s my (only slightly edited) summary of Krugman’s version of the causes :

1. The bursting of the housing bubble led to a surge in defaults and foreclosures, which in turn caused a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
2. These financial losses left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.
3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

OK. According to Krugman, the bailout plan is unlike the prior bailout of the mortgage giants Freddie Mac and Fannie Mae – which focussed successfully on step two. The bailout plan that is being promoted with missionary zeal by US Treasury Secretary Henry Paulson – and with Soviet-like exemptions from judicial challenge in the courts - addresses step four, the deleveraging vicious cycle. And it might well fail, and/or hand over windfall profits to the culprits. How come ? Well, Krugman explains -

….The prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

Meanwhile, there’s palpable rage building out in the heartland against bailing out Wall Street for its latest spasm of greed and folly. Here are some responses pouring into Krugman’s own newspaper :

If we taxpayers are going to be forced to bail out these lemming-like idiots on Wall Street (or Main Street), we should own the business not just the business's bad paper.

Radical free-market crony capitalism is just the same as Soviet communism--it only works in theory. We're seeing what happens when theory doesn't work in reality.

The cronies are circling around Washington like a pack of buzzards waiting for the next helping to be offered up to them at the people's expense. … I thought the U.S. was supposed to be an ownership society? Don't the rich have to "own" their losses? Oh? That's just for us poor and middle class suckers? Ah. I see. All animals are equal, I guess, but some are more equal than others, right?

Luckily, there is skepticism in Congress about the bailout.

The Democrats have to avoid making a few patch-up changes. That really would be putting lipstick on a pig. They should tough it out, at whatever (therapeutic?) risk to the financial markets. Otherwise, if the Democrats end up owning it in Congress, the bailout could well cost them the November election.

The double standard evident in the media treatment of Winston Peters and John Key this week has been breathtaking. With a few notable exceptions – eg, Mary Wilson’s fiery exchange yesterday with Key on RNZ’s Checkpoint programme – the media pack has largely bought Key saying ‘ Sorry. ” The trust and credibility issues raised by Key’s behaviour over the TranzRail shares are being quietly buried.

By contrast, Peters has been vigorously pursued for months for every sign of wrong-doing over his handling of the Glenn donation. Yes, he probably knew something about the Glenn donation, and his belligerent attitude didn’t help his case. But does anyone really think that if Peters had said “ Sorry, I forgot to file ” back in February, the media would have chosen to forgive and forget, as seems the case with its handling of Key ? Wouldn’t an apology from Peters in February ( or in July ) have merely amplified the calls for him to be drummed from his Ministerial post ?

Out on the hustings therefore, Peters will get some traction with his claims that he has been persecuted by his corporate enemies and by the elite media. As for Key, ‘Sorry, made a mistake’ doesn’t really cut it, not in an aspiring Prime Minister. How hard is it for any MP to work out that it is wrong to be pursuing the subject of Tranzrail in Parliament – or even being National’s associate transport spokesperson in the first place - while he or his family trust hold a significant financial stake in the rail operator ?

Every day in Parliament begins with a prayer and commitment to set aside personal gain. Yet Key’s family trust held 50,000 shares in Tranzrail at the same time he was asking parliamentary questions about it, twice in October 2002, and again in April 2003. Not to mention when he met representatives of Rail America on 20 May 2003 to discuss Tranzrail, barely two weeks after he himself bought a further 50,000 share stake in Tranzrail without disclosing it.

Key bought these shares on May 7. Barely two weeks beforehand on April 23, he had sought in Parliament the minutes of confidential meetings held between the government and Tranzrail, but was denied them on the grounds of commercial sensitivity. Three weeks after he had bought those 50,000 Tranzrail shares, Key appealed to the Ombudsman to help him overturn the commercial sensitivity decision.

Is this innocent ignorance – or sheer arrogance ? To Wilson on Checkpoint, Key conceded he had established by July this year just how many shares taken together, that he and his family trust had owned. Yet when challenged by TVNZ’s Fran Mold this week, Key at first offered her the wrong, lower estimate – between a third or a half the true figure. Only when Key belatedly realized that she knew the truth, did he shift up to the correct figure. It looked like he was lying to Mold. Especially if we use the standard that the NZ Herald editorial on September 12 used to condemn Winston Peters –

“It it is one thing to try to keep the truth confidential, it is another to deny it when directly asked. Then it becomes a lie. “

Not that the Herald has used the “L’ word with respect to Key. Rather, in the last 24 hours, its headlines have all but congratulated him on his ( much belated) frankness, not once but twice : as in “ Key Admits Mistake Over Shares” and “Off-Key Leader Admits His Mistake.” ( Off key, you understand, He really wasn’t being himself that day. ) TV3 did use the “l” word, but carefully attributed it to the Government. As in “Key Lied About Ownership of Tranz Rail Shares: Labour”

No one is accusing Key of insider trading. What the episode indicates is that Key has been consistently cavalier about the distinction between his business dealings and his public duties, and then tried to cover that up – both this year to Mold, and previously as well. How else to explain his curious statement to the House in October 16, 2003 when he seemed intent on presenting himself as a paragon on disclosure, while talking about the Pecuniary Interests Bill that has lately caused Peters so much grief :

“It might be a bit uncomfortable, but if I am a shareholder of Tranz Rail and I want to get up in this House and start talking about that company, then my shareholding is relevant."

This is really Freudian stuff, since Key had bought and sold ‘ relevant’ Tranzrail shares only months before, without disclosing them. Since Key says he knew it was relevant to disclose such holdings, why didn’t he do so a year – or six months before – when he had such holdings but didn’t disclose them ? When did he see the light ?

Leaving that aside… In the name of honesty and transparency, Key could have and should have disclosed his Tranz Rail “mistake” during that October 16, 2003 speech, by adding to the statement above something to the effect that : “ But until recently I had shares in Tranzrail, and didn’t disclose them as I should have, and I now want that put on the record.” He didn’t, of course.

Since Key has now had to be dragged kicking and sceaming into the full light of disclosure on these matters, this still has to put a question mark over his fitness for leadership. When for instance, did the National caucus that Key now proposes to lead by example, first find out that their associate transport spokesperson held a large bloc of shares in Tranz Rail ? Did he tell them – and if so, when – or did he just let them read about it in the newspaper ?

It is not simply that Key is wealthy, or that he has business interests. Phillip Burdon, a previous National Cabinet Minister and millionaire, juggled his personal business and public roles without giving any cause for alarm. It would be interesting to know what Burdon makes of the shares question. These current concerns about Key go to the heart of any future National government – if only because National is proposing to commit large sums of taxpayer money into PPP joint ventures between the government and the private sector.

At the best of times, these PPP contracts will be hard enough to manage in a way that safeguards the public interest. If it can be avoided though, the public shouldn’t be letting its interests be represented by someone who has played so fast and loose in the past with the conventions that surround personal gain and public service.

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