The Basics
The “Public Option” Debate:
I agree 100% with Bob Herbert’s August 17, 2009 New York Times article, that without the option of buying your insurance from a government plan, the insurance companies stand to make a windfall with the mandatory requirement for everyone to buy insurance. With a massive increase in customers and no incentive to lower prices, what could be better for them? As Obama has pointed out, the Republican’s argument that the “public option” will drive the insurance companies out of business is inherently contradictory. If a government plan is fundamentally too inefficient then the insurance companies have nothing to worry about. And if it is more efficient than the private sector, then that’s a plus for the American public and people should have that option.

The Republican argument is fundamentally flawed:
If the Republicans are worried that health care reform is bringing socialism to the U.S., then they should also be against Medicare. But in fact they are arguing the opposite. They are trying to scare seniors that they will lose benefits if the reform is passed. They are tacitly acknowledging the public wants socialized medicine (e.g. Medicare), but hoping nobody notes the inconsistency of their argument. Although I’m not sure I agree with his interviewing techniques, Lawrence O’Donnell in his interview with Rep. John Culberson (R-Texas), makes it really obvious that the Republicans are very afraid of exposing this contradiction. Below is a clip from the interview:

Obama Is Outsmarting Everyone?
It is interesting that at the same time that the White House has indicated that they may have to try to pass the bill without Republican support, they are also saying that the “public option” is not a necessary component of the bill. On the surface he looks conciliatory, ready to cave in to the Republicans. But in actuality, he is purposefully enraging the “left”, leaving them to do the dirty work of fighting to push through a bill supported by Democrats only.

The administration is now floating the idea of sending 2 bills to the senate, the less controversial part by normal means, and the “public option” and other controversial measures by “budget reconciliation”. Obama may very well get the bill he wants and make the Republicans look bad at the same time. We will soon see.

This is a meeting with Rep. Mike Castle, a Delaware moderate Republican. The whole thing leaves me a bit speechless. I’m tempted to draw conclusions about the basic psychological functions of humans. We all believe something because everyone else believes it. I have to admit that I was drawn into it myself, thinking that there must be something to this. But in fact there is no basis at all to the whole “Birther” movement, just read here. Also, here is a link that Ben Smith provides, which is where I originally found this video.

Amazing.

A little bit of levity is okay sometimes.

It’s a little bit painful to watch. But I think it’s important to realize that we came close to Sarah Palin becoming Vice President of the United States. How can that be?

For anyone who is even thinking about agreeing with Cheney, watch this video first.

Jason Jones learns Barack Obama will have to work much harder to earn an honorary degree from Arizona State.

I think Adam Posen states the obvious quite clearly. The insolvent banks should just be shut down or temporarily nationalized. Currently, they are not doing anything good for the financial system. The key, which I’ve tried to emphasize before, is transparency. Nobody will do anything until people know what the balance sheets of these banks really are. Along with that, shareholders, bank management, and private investors should not be benefiting from taxpayer money. The potential upside of these “bad assets” should go to the government. Adam Posen says all of this better than I could.

I think basically I agree with Mr. Sirota that the bailout money hasn’t been used efficiently. Here is a link to a column he wrote on the same subject.

Here’s my analysis of the bailout before congress.

Surface Appearance

Jon Stewart makes a good case in this clip that it sure appears that were being tricked. In addition, this article in the New York Times notes that constituents are 95% against the proposal. Possibly, the average person doesn’t know what’s in the public’s best interest, but it does make one a bit suspicious.

Overview
At a Princeton Lecture (on YouTube), they note that the financial sector has grown to 25% of the total economy.

If the only function of this group is to provide liquidity (pass money around) , possibly we don’t need one out of four people doing this. At some point the group has to shrink. A second issue is that in the current situation they are refusing even to provide this function. Naturally, eventually a huge group of people behaving in such a dysfunctional manner is going to have problems. My opinion is that we are headed for some sort of disruption in the financial markets no matter what.

Paulson’s Plan
The rationale for this bailout is that the credit markets are frozen and we need this to restore liquidity to the markets. My guess is that this is trying to forestall the inevitable. The federal government doesn’t have the resources all on its own to keep the world financial markets liquid. A good example is the recent takeover of AIG, which is a major player in the credit default swap market, a $31 trillion market. The government now being 80% owner in AIG, is now on the hook to keep the credit default market from crashing, which is clearly beyond the federal government’s capacity. Once the dollar falls, the government has lost all it’s leverage of pumping the market with cash. We are rapidly reaching this point.

As for Paulson’ plan, his original plan was merely 3 pages long and included no provisions for oversight of the money, making it at least appear like a naked power grab. More importantly, the stated goal of taking the toxic securities off the books of the banks to solve the liquidity crisis, was a complete misrepresentation of what he was actually trying to do. There’s no problem with taking the loans off the books, the problem is doing so without the banks declaring a reasonable market value for them, which would cause huge losses and therefore a need for more capital to stave off bankruptcy. Paulson’s plan then, by definition, if it is to accomplish anything, is to buy these securities at above market prices, amounting to a direct infusion of capital to the banks, a huge giveaway to all the financial institutions that managed their money least successfully, Paulson’s friends I might add.

A side issue is the SEC’s recent actions. If the major problem is liquidity in the markets, their actions seem to be working in the opposite direction. Both their decision to ban short selling (needed in normal option trading) and to guaranty 100% of mutual funds (which in the long run would cause people with deposits of more than $100,000 to move their money out of banks into mutual funds) are exacerbating the liquidity problem.

Three Alternative Solutions
Weed out the Bad Banks
To address the liquidity problem head on, the fundamental problem is that banks are refusing to lend money. Since the banks are dependent on the Fed for their short term borrowing, which they then turn around and lend to smaller banks, etc., my solution is to simply bypass the banks that aren’t doing their assigned job in the financial system. As I see it, the Fed could just expand who it is willing to lend to, to include small banks and other institutions that are not afraid to lend the money.

Also, since the lack of transparency is an important reason why the banks are afraid of each other the Federal government should simply send in armies of auditors to figure out where everyone stands. The head of Pimco, William Gross, offered to do exactly this for free, in order to help loosen up the market.

Direct Capital Infusion
Even conservatives are derisive of Paulson’s plan. Glenn Hubbard of Columbia suggests that the money could be much better spent by providing direct investments in the banks for a preferred equity stake in the bank. Paul Krugman in his September 27, 2008 blog and Nouriel Roubini seem to agree with this approach. This would be a much more efficient way of providing capital without the problems associated with buying bad loans, which would reward only the bad players in the market.

Government Buys Loans Directly
This is the plan I favor, with Alan Blinder of Princeton and Frank Partony in Saturday’s September 27, 2008 New York Times both agreeing with me. The government should buy up the loans underlying these securities and then renegotiate them with home owners. This would alleviate the source of the problem and would put the government’s money more in line with providing for the general welfare of the public. Note that $700 billion dollars would provide 7,000,000 home owners with a down payment of $100,000 on a home. Theoretically increasing the percentage of households who own their homes appreciably. This is a much better plan than hoping that the banks, with their bailout, would then turn around and help the average person. We know how well the trickle down theory works from the Reagan years.

This New York Times editorial of September 25, 2008 makes a related point, that home owners are the only people who can’t challenge the terms of their loans in bankruptcy courts. This is an outrage and should be changed.

Conclusion
Don’t buy it. Paulson’s Bailout Plan is nothing more than a cynical way of cashing in before the administration leaves. There are much better ways to alleviate the stress in the financial markets than giving away money to imprudent investors. The Bush administration is determined to leave the government in ruins and it’s doing a pretty good job.

McCain doesn’t really have a very good handle on anything, including foreign affairs. Apparently, he was confused about who the President of Spain was in an interview with a reporter from Spain. Something you might want to know before going into such an interview. Then, he would rather create an international incident rather than admit his mistake. Pretty sad.