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September 26, 2008

McCain Will Present Alternative Plan?

I hope this isn't true.


According to Gingrich and Dick Morris on Hannity and Colmes, McCain has killed the Paulsen bailout and will present his own version, which will require the government to lend, not give the money, and regulations will be reformed and taxes will be loosened to help them pay us back.

Both Gingrich and Morris were giddy. They both said McCain has shown that he will stand up to anyone--including the president--to fight for the country, and he's changed the argument: Now, the Dems support giving a trillion dollars to the Wall Street "fat cats," as they called them over and over, but McCain has refused, in the name of the taxpayer.

Both Gingrich and Morris said that McCain had utterly and totally pwned the Dems, who will be forced to support McCain's plan.

McCain will then go to the public and explain that Obama supported the bailout, but McCain crafted an alternative, despite immense pressure from the president and the Department of the Treasury.

As a bonus, McCain stood up for the conservative wing of the party, not the moderates, as everyone expected him to do. Both Gingrich and Morris said McCain has totally won the argument.

Let's hope it all pans out this way.

Morris said that he's never seen anything like this: McCain, the man of principle, united with the most effective campaigners in the history of American politics.

He was as excited and happy as I've ever seen him.

I gotta say that while of course I'd like to see some political advantage coming out of this, it's really not my top priority.

Seriously, I hope it's not.

U.S. Sen. John McCain, R-Ariz., may be throwing a monkey wrench into efforts to pass a $700 billion bank bailout, instead favoring alternative plans that looks to free up capital and credit markets via tax and regulatory relief while allowing financial institutions to temporarily skip dividend payments to shareholders.

Republican and Democratic officials in Washington said McCain was offering alternatives Thursday to the $700 billion plan backed by the Bush administration, Federal Reserve chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson.

That plan has the federal government acquiring bad mortgage assets from struggling banks with the goal of keeping them afloat and allowing more credit to flow.

McCain appears to be siding with conservatives and House Republicans who question the bailout and its costs to taxpayers as well as government rescuing private lenders and perhaps taking ownership stakes in rescued banks.

The alternative plan allocates less public money and relies more on tax breaks, lifting regulatory barriers and using less bailout-oriented mechanisms to free up capital and credit. It also seeks to create a privately funded mechanism to ensure mortgages and mortgage-backed securities.

One Republican official said McCain is standing up for taxpayers as he, President Bush, congressional leaders and presidential foe Sen. Barack Obama try to hash out a deal. A deal was close to being finalized Thursday but House Republicans and McCain are looking to get alternatives considered.

Bernanke and Paulson have warned that without action the flow of credit could totally freeze, more banks could fail and the rough economy sink into a recession.

I hope it's not true because it's bullshit. The Paulson plan, despite its obvious drawbacks, is an unambiguous shock to the system that immediately restores confidence in the markets and almost immediately starts trading illiquid assets for cash that can then be lent.

Everyone knows immediately the problem is solved.

This plan? What is it, exactly? For one thing, it's a phonied-up claim of a "private solution" which is actually just a big government intervention. Explain to me how the government creating a "privately funded mechanism" to ensure mortgages and MBSs. What? The government's creating it, right? To ensure mortgages and MBSs? Who knows how long that will take and whether it will work, but this government intervention can be falsely labeled as a "free market approach" to be contrasted with the direct asset purchase, which, of course, is "socialism."

Everything else is a series of small levers. Decrease regulation? Um, sure, that could be... helpful. But I don't think that confidence in a system about to break down is going to be restored by less regulation. The big problem is that they need liquidity and don't have it. Regulations always allow them to have as much cash and liquid assets as they want; regulations prevent them from having too little. So, the problem is not that the laws prevent them from having more cash. Reality prevents them from having more cash. How is loosening up regulation going to get them more cash?

Tax breaks? These companies are going bankrupt; what tax breaks could they have in mind? The only one that makes sense is to afford a special very low tax rate on realized capital gains from purchases of this type of toxic asset.

That would create an inducement for people to buy them (very low taxes when they appreciate) and could prompt them to pay a bit more for them... maybe enough that their holders will sell them. Which is again in the "helpful" category but not exactly in the "slam the hammer into the nail that's needed to hold up the collapsing wall" solution.

But... I doubt this is anything close to what is necessary. You can drop the tax rate to 0%; no one's going to buy risky assets when there is still the fear of full financial meltdown and subsequent depression. In a depression, obviously, these already-junky assets will be worth zero (as will be much sturdier assets, too); a low tax rate on zero value is not a deal.

I'm sure many people will cheer this as a "free market solution," all to eager to embrace some alternative they can claim isn't "socialism' and is therefore permissible. And they will overlook that everything about it is more of that dreaded government interference/intervention/picking winners and losers/not allowing companies that should be allowed to fail to fail sort of behavior that they find so terribly socialist about the Paulson plan.

And, quite frankly, if I thought this series of small-bore lever-tippling would work, too, and conservatives could at least support it as they pretend that this is "free market" and not "socialist," I'd support it too. If it takes some kind of idiotic marketing scheme to sell a crucial product, whatev's, count me in.

The trouble is that I do not think this will work, and those decrying "socialism" are about to get all excited about a "free market" solution that has virtually no effect whatsoever and hence will be the vehicle for carrying us over the cliffs.

But at least we can say we didn't buy into "socialism."

If anyone can reassure me that this shit sandwich has any chance of actually working, please do. Because it looks like a pile of CYA nonsense that House Republicans can point to and say, "See, I tried" when the economy goes to pieces.

This sounds... like something that could have been helpful a year ago.

A very low tax rate on these assets, a year ago, could have started moving product.

Now? I don't see a tax rate even of 0% being likely to move them, given the uncertainty that the economy could completely collapse.

And I have no idea why people would pour money into a pool for "privately funded mortgage guarantees." Pour my money into a pool to insure mortgages everyone's panicking will default? Sign me up!

I suppose the idea is, of course, to pay a hefty percentage (tax free, again, I'm guessing) to those who contribute to this fund, but with everyone panicking that the economy is about to blow up, the odds of simply losing all or most of your money skyrocket, and no plausible rate of return can possibly make up for that risk.

It's a cobbled-together series of kludges from plans of days past. And in the past, they the kludges might have had a chance to work.

But now? To me, it doesn't appear to be serious effort to solve a problem, but merely either a hopelessly naive trust in any measure so long as it can be merely branded "non-socialist" or a viciously cynical effort to fashion a fig-leaf of political cover.

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posted by Ace at 05:24 AM

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