Thought Theater

2008 Election: Wall St., White Knights, White Noise, & White Light genre: Econ-Recon & Polispeak

Best as I can tell, John McCain and the term "maverick" is simply another way of describing the "cowboy diplomacy" we've endured for nearly eight years under George W. Bush. The move by John McCain to suspend his campaign and race to Washington on his white horse is all too familiar. The only distinction that remains between these two men is that John McCain has yet to find his "dead or alive" moment.

Frankly, McCain's antics are reminiscent of an impetuous and aged diva demanding one last leading role...despite the fact that his sphere of influence has waned and he can no longer deliver his lines coherently...let alone a last minute deal. The degree of miscalculation on the part of McCain is astounding...and informing.

To understand the magnitude of his tin ear, one need look no further than the brick wall he encountered upon his descent into Washington. While McCain imagined himself as the negotiator in charge, his Republican congressional counterparts were moving towards full-scale mutiny. A moments perusal of the alternate proposal offered by a number of conservative house Republicans provides ample evidence of the disconnect.

Here's the bullet points directly from the House GOP plan:

• Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.

• Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.

• Have Private Capital Injection to the Financial Markets, Not Tax Dollars. Instead of injecting taxpayer capital into the market to produce liquidity, private capital can be drawn into the market by removing regulatory and tax barriers that are currently blocking private capital formation. Too much private capital is sitting on the sidelines during this crisis.

• Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, we should allow for a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.

• Immediate Transparency, Oversight, and Market Reform. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.

• Wall Street Executives should not benefit from taxpayer funding. Call on the SEC to review the performance of the Credit Rating Agencies and their ability to accurately reflect the risks of these failed investment securities.

• Create a blue ribbon panel with representatives of Treasury, SEC, and the Fed to make recommendations to Congress for reforms of the financial sector by January 1, 2009.

OK, one can view McCain's misguided judgment from two perspectives. First, one could speculate that McCain believed he could go to Washington and convince these house Republicans to abandon their ill-conceived alternative...a goal fully contrary to the tenuous relationship he has had with the conservative wing of his party. Secondly, one might assume that McCain thought he could convince those who had been working to craft an acceptable revision of Secretary Paulson's proposal to abandon it and embrace a brand new approach.

By any rational calculation, neither of these goals were plausible. The fact that John McCain admitted on Tuesday...one day before suspending his campaign...that he hadn't even read the three page Paulson proposal only magnifies the seeming suspension of judgment. With that said, it's even hard to imagine the basis upon which McCain felt his ploy could succeed.

Notwithstanding the above, there is another possibility...one that is far more concerning. That explanation is that the house revolt was part of an orchestrated performance intended to raise the stakes and allow McCain to be seen as the taxpayers white knight rushing in to champion the introduction of a new plan at the eleventh hour and rescue us from the excesses of government intervention. Yes, part of me finds this hard to imagine since today's outcome seems to have failed to demonstrate that McCain has played any pivotal role in reaching or reshaping the agreement that will ultimately be approved.

Regardless, I realize the GOP believes they can once again dupe the voting public into thinking they have our interests at heart. It's my hope that this latest stunt will elicit what will eventually be seen as the defining phrase of this campaign, "Give me a frickin' break". If so, it will be the pivotal moment in the rejection of a fully flawed economic philosophy.

Returning to the above proposal from the house Republicans, I want to highlight a couple points. The premise of the plan is intended to suggest that taxpayers shouldn't foot the bill for the bail out. On its surface, this is a noble endeavor. Unfortunately, the means they propose to achieve this objective is to remove what little regulatory oversight exists and grant further tax breaks to Wall Street. Essentially, the goal is predicated upon the belief that unbridled greed will lead the financial markets to dig their way out of a mess that was created by that very unbridled greed.

The plan completely fails to recognize the immediacy of the need for capital. In this convoluted approach, it will take a tremendous amount of time for the players to raise capital and it does nothing to identify the worthless paper, those who are holding it, and the means to remove it from the equations that facilitate the flow of money from those who have it to those who need it.

The lending bottleneck we're facing is partially predicated upon uncertainty. That uncertainty comes from fears about the solvency of other financial institutions and the reticence it creates. Until there is more transparency in the balance sheets of the players and their uncertain liabilities are purged, the skepticism will continue and the motivation to lend money won't exist.

One must also recognize that the addition of an insurance mechanism provides little motivation to correct flawed lending practices. In many ways it provides an endless means to create and dump ill-advised debt. If lenders believe the government will insure whatever paper they write, where is the motivation to stop writing bad paper? To do this, all they have to do is pay the insurance premiums. To pay those premiums, all they have to do is add it to the costs that borrowers will pay...borrowers who are taxpayers. Hence, this model simply encourages the financial industry to do more of the same...and to pass the costs onto the public.

In the end, the proposal is laughable...but that leads me to identify the sentence that best expresses the fundamental objective of this approach...unrestrained profits for the wealthy.

Wall Street Executives should not benefit from taxpayer funding.

Note how this sentence is crafted...especially what it does and doesn't state. By realizing that one of the prevailing voter criticisms of any bail out is focused upon exorbitant executive compensation, the house Republican proposal states the obvious. What isn't stated is that this is to be achieved not as a means of restrictive oversight...the kind that was intended in the plan that was already being negotiated...but by the construction of their plan.

You see, they are proposing the insurance route in order to allow them to suggest that it isn't a taxpayer funded mechanism. If they can argue that their plan isn't directly funded by taxpayers, they can make the kind of equivocal statement contained in the above sentence...while still allowing corporate executives to pay themselves whatever they choose. In other words, they achieve the intent of this sentence not by restriction or oversight; but by claiming that the program isn't taxpayer funded. It's little more than white noise intended to distract.

What they don't tell us is that the entire reason for their insurance approach is to prevent the kind of regulation and oversight contained in the other plan...the kind of regulation that might place limits upon the unbridled greed that led us into this fiasco.

At the same time, the premiums for this insurance approach will be paid for by those who borrow money...the taxpayer. Simultaneously, it still puts the government on the hook for the inevitable failures that will continue to happen under the insurance umbrella...but it doesn't restrict the pursuit of outrageous profits.

Imagine if you could start a business whereby you could arbitrarily charge your customers for the cost of the premiums to have the government insure your ongoing success and profitability. You get to sell whatever products you determine will return the profits you want, allow yourself to take the executive compensation you choose, and then have the government stand behind it all if you fail.

When it's all said and done, this alternate proposal is little more than the culmination of nearly thirty years of seeking to enrich the wealthy at the expense of the hard working middle class. In this final hour, they continue to cast their efforts as an attempt to help the taxpayers...all the while plotting the culmination of a plan that will insure that those who have wealth will always have wealth. This alternate proposal is characterized as the means to avoid socialism. Instead, it is the final step towards plutocracy.

If they succeed, voters will have facilitated a strategy that was premised upon the belief that the dumbing down of America could be achieved in the course of a single generation. This election is undoubtedly about change. On the one hand, it will be the final step over the finish line for those who have run a marathon of misdirection and manipulation. On the other hand, it can be the first step in many years towards restoring the intent of representative government...power to the people.

The notion of white light has two prevailing meanings...one posits it's what we experience as life comes to an end...the other suggests it's what we see at the end of a dark tunnel. The 2008 election will either be the end of life as we've known it or it will be the moment at which we found our bearings and began our march towards a better place.

Perhaps this is actually our "dead or alive" moment?