Bank Bailouts Round 2 and Washington's Challenge

Image via Wikipedia With Bank of America set now to receive a second wave of bailout funds -- $20billion in cash and another $118billion in loan guarantees, I'm struck with the lack of details in the "announcement" that a deal had been struck. Apparently we have to wait until today to find out. A contributor to one of my favorite blogsites, Angry Bear, suggests we may learn details today. It's still notable that the spate of articles everywhere about the beginning of this second round of handouts to institutions too big to fail make little to no note of why such an announcement could be made without knowing that measures to ensure accountability and transparency will be in place.

The New York Times correctly calls a spade a spade in noting that we are seeing the nationalization of our major banks, a political and economic truth which few in Washington would like to admit. As a friend of mine likes to point out, Wall Street has moved to Washington, yet I wonder if we -- citizens and those on the Hill and the White House -- are fully prepared to stomach that reality. I'm not much consoled by the Senate Hearings for Obama's choice for new SEC Chief, Mary Schapiro, which hint at the real challenges of coordinating our regulatory structure in this country. Nor by Ben Bernanke's remarks Tuesday at the London School of Economics that "we need stronger supervisory and regulatory schemes" while backpedalling for those in Wall Street and Washington who still believe in a perfect market that we must take care not to take actions that forfeit the economic benefits of financial innovation and market discipline." I love the comment of one contributor to Angry Bear who tartly observes that this is "an interesting viewpoint, since just about everybody would give their eyeteeth right now if they could indeed 'forfeit the … benefits of financial innovation'”! See a nice summary there of the GAO's recent report on regulation deficiencies of financial markets by rdan with this excellent comments and others.

Enter our hero Paul Volcker -- consistent truthsayer -- riding again to the rescue with the beginnings of a plan to harmonize our own fragment financial regulatory structure both domestically and within the context of the global economy. Towering in stature and viewpoint, and having reached the stage in life where he can afford by reason of age, experience, and accomplishment to say what needs to be done, we begin to see that a two-track domestic and global response to this crisis will be sorely needed in the months ahead.

Wrestling with Chicken Little

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U.S. Automakers currently sent home to re-think their requests for a bailout package from Congress have run into two major problems bode poorly for the U.S. and the global economy.

First, the policy drift in Washington that's taking place as we all hold our breath for the Bush Administration to pack its bags couldn't have come at a worse time: the speed at which the economic fallout is now coming back to depress the stock markets has been a matter of weeks, not months, and I really shudder to think how much worse it can get between now and January 20, 2009. And, frankly, our Congress just doesn't seem up to making a decision, whether for pure fright at the enormity of the consequences, or because we're just in the political doldrums until Obama's inauguration.

The second problem is a kind of "Chicken Little" problem. Our American automobile manufacturers have been back to Washington over and again for help to "stay competitive", "to retool" or otherwise to stay in business. Patience among taxpayers and their reps in Washington is wearing understandably thin, but all signs actually point to the sky falling this time. At a time when we have shudders at hearing of over 200,00 layoffs on Wall Street alone, imagine the tsunami effect if Detroit, the poster child for supply chain economics, fails: best estimates are millions of 2.5 million to 3 million jobs lost -- in the heart of the country.

In the broader contest of the debate between conservatives and liberals over how much intervention, how much regulation, how much government should be involved -- and over the fundamental soundness of our financial system, the reality of an entire industry sector poised for failure is sobering for its fear factor alone: witness yesterday's stock market plunge. The ripple effect that will be quickly seen spreading out among Detroit's supply chain will have a corollary effect among all industries. Will others follow Detroit? The last thing we need is for Washington to go numb in the brain at a time when action alone has a psychological calming effect. The less of Chicken Little is that his call is so disturbing that people just shut down and tune out, and while no one is tuning out, fear of action in the face of the enormity of the consequences is the equivalent.

January 20th can't come soon enough, but I really worry about what's in store for us over the next 8 weeks.