The Democratic "Alternative Bailout": Lipstick on a Pig

Let's be straight about what this bailout involves. Banks made a bunch of bad loans where there was no down payment and no documentation of the borrower's income because such loans were mega-profitable as long as housing values were going up. A lot of other financial products were sold based on these loans, which were also mega-profitable as long as housing values were going up.

Now that housing values have gone, and continue to go, down, all of these loans and financial products are worth a small fraction of their original value. Nobody wants to admit these losses because to do so would expose the fact that a lot of people don't have as much money as they and others thought they did. Because of this, nobody really knows exactly how much unrecognized losses are out there, but it's clearly measured in trillions.

For a while, the banks just kind of ignored the presence of these unrecognized losses on the books and kept doing business as if they weren't there. But as the losses piled up, the weaker players became unable to cover their day-to-day expenses, and the bankruptcies, bailouts and buyouts began. Now, people don't want to do business with anybody with these losses on their books because they don't know who's going to go down next and leave their creditors holding the bag.

So, now Mr. Paulson, the former chair of Goldman Sachs, is riding to their rescue with trillions of federal dollars (potentially) in tow. The money is to be used to pay these banks presumably something close to the full original value for these loans, thereby converting the losses from private Wall Street losses to public federal government losses.

The problem is that the federal government can no more afford to take these losses than Wall Street. The federal debt is already approaching 10 trillion dollars, with another 500 billion being added annually. The bill for the Iraq War continues to mount, with the veteran's costs just starting. "Crisis" or not, Social Security and Medicare payouts are rising faster than tax receipts. Our infrastructure has been neglected for decades.

Taking on trillions in additional debt (and no $700 billion is not the limit, that's just the limit at any one time, the authorization allows the Treasury to take on new debt as old debt is sold off) will be devastating to the federal budget. If we're lucky, it will simply mean that there will be no new money for federal programs for a generation, no universal health care, no "Apollo" alternative energy project, middle-class tax relief, etc. If Obama is elected, he'll inherit nothing more than a pile of debt to find a way to service, and the "progressive agenda" will be a moot point.

If we're unlucky, the foreign investors who we rely upon to buy $2 billion a day in Treasury notes will decide that the U.S. federal government is itself no longer a safe bet to make good on its obligations. That would mean a federal bankruptcy, something that has never before happened in our nation's history, not even during the Great Depression. It's impossible to know what a federal bankruptcy would look like, but I have to believe that it would be 100 times worse than anything that would result from a few more Wall Street bankruptcies.

It seems crystal clear to me that this is the final play in the cynical Republican strategy to "starve the beast" of government by removing so much money from the Treasury that there is simply no money left for anything progressive. Having granted themselves two trillion dollar tax breaks, then wasted probably another three or four trillion on various post-9/11 activities, not the least of which is the Iraq War, which have not made us safer, now with mere weeks left in his term, they want to siphon off the last couple of trillion left in the coffers (or at least under our debt capacity) for one final gorging of cash at the trough for their friends and cronies.

Why in the world any Democrat would even think of going along with this I have no idea. What good could it possible do if we were to inherit a bankrupt federal government in January? Why would we participate in this scheme to bankrupt our government in order to prevent Wall Street from collapsing of the weight of its own greed and stupidity? And even to the extent that this measure does stave off a bit of suffering for a few more weeks, doesn't that just help McCain?

But I hear Chris Dodd on NPT this morning praising Secretary Paulson as a fine public servant, boasting about how closely Democrats are working with Republicans on his plan, and pledging to pass it before the Congressional recess, scheduled for next week. I cannot imagine a more stupid and self-defeating line to be taking right now. The Democrats cannot go along with this. Please call your Senator, your Congresspeople, the Obama campaign, Sen. Biden, and let's put a stop to this before it puts a stop to us!!!

Oh...and if you want an alternative...Let the chips fall where they may on Wall Street and use a fraction of those billions to create a federal program to give grants and loans to municipalities and nonprofit organizations to buy vacant and abandoned foreclosed properties, fix them up, and either sell or rent them at affordable rates depending on the conditions of the local market.