demandside

Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street

Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets

Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN

Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable — protecting American taxpayers and Main Street — and these elements will be included in the legislation

Protection for taxpayers, ensuring THEY share IN ANY profits

Cuts the payment of $700 billion in half and conditions future payments on Congressional review

Gives taxpayers an ownership stake and profit-making opportunities with participating companies

Puts taxpayers first in line to recover assets if participating company fails

Guarantees taxpayers are repaid in full — if other protections have not actually produced a profit

Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families

Limits on excessive compensation for CEOs and executives

New restrictions on CEO and executive compensation for participating companies:

No multi-million dollar golden parachutes

Limits CEO compensation that encourages unnecessary risk-taking

Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate

Strong independent oversight and transparency

Four separate independent oversight entities or processes to protect the taxpayer

A strong oversight board appointed by bipartisan leaders of Congress

A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse

An independent Inspector General to monitor the Treasury Secretary’s decisions

Transparency — requiring posting of transactions online — to help jumpstart private sector demand

Meaningful judicial review of the Treasury Secretary’s actions

Help to prevent home foreclosures crippling the American economy

The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year

Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures

Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks

The outline ends without mention of the Republicans strange and still poorly described scheme of somehow insuring bad paper after it has turned bad, cutting the tax on capital gains, and further deregulating.

Now comes the vote in Congress.

Best for all these politicians if a broad majority of both parties joins in on the Aye side.  Bush, Paulson and Bernanke stand ready as lame ducks to accept blame for failure.   But better for individual Congressmen to break ranks and stand up to Wall Street on behalf of their angry constituents.

I see this as a purely political exercise.  Be aware, my political analysis is far more suspect than my economic analysis.  Economically, this may work for awhile and it may not.  It depends on the internal conditions of a banking system that is opaque.  This plan is certainly not a comprehensive answer to the systemic problem.  We’ll quote from Nouriel Roubini tomorrow.  A comprehensive answer must include cracking open these institutions, exposing them to the sunlight and then reconstructing them into their Glass-Steagall form.  This is very far from what Bernanke and Paulson, negotiating on behalf of the financial sector, are trying to do here.  They are continuing their strategy of muddle through on the supply side.

Much more hopeful is the opportunity to deconstruct the toxic paper and get down to the individual mortgage level where rational workouts and writedowns can begin, one at a time, to find the bottom to the price.

Politically, however, it is clear that House Republicans and John McCain are in a position to take a fall if the measure fails to pass and the financial system melts down as a result.  It certainly turned out badly for McCain’s grandstanding when instead of agreement, the White House meeting produced breakdown by Republican rebels.  Democrats are in the position of looking like adults in the case of success and not worrying too much for their political fates if it doesn’t pass.

Notice the House Republicans insurance scheme didn’t make it into this outline.

We’ll go back to economics tomorrow.

This is Alan Harvey, from the Demand Side.