ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Monday, September 29, 2008

What Are Our Sugar Daddy's Thinking Right Now?

This excellent analysis of "What now?" is provided by Gerald Seib at the Wall Street Journal:

Dysfunction in Washington Exacts a Heavy Price

The country has learned in recent weeks the price of financial failure. Now it will learn the price of political failure.

The collapse of the financial-rescue package in the House on Monday may well be reversed, at some point. Discouraged House leaders yesterday sounded as if they hoped the Senate could lead Congress back out of the wilderness in the next few days, giving the plan a second crack at passage.

But even if senators manage to revive the bailout plan, a great deal of damage already has been done[.]
Beyond that, the hope that Washington had gotten the message in this campaign year that Americans were yearning for an end to gridlock and partisan warfare has been shattered. There will be plenty of blame to go around. House Republicans demanded changes in the plan last week, got some of them, and yesterday delivered just 65 votes -- a third of their members -- for a rescue package that their party's president, their party's Treasury Secretary and their party's House and Senate leadership all called vital to the nation.

Then on Monday, it was Democratic House Speaker Nancy Pelosi's turn to hurt the effort. She chimed in with a bizarrely timed and distinctly partisan floor speech blaming Republicans for the market mess, just minutes before her party needed scores of Republican votes to make the bailout work. Whether she turned votes against the plan, or gave Republicans a convenient excuse to vote against it, was being hotly debated in the Capitol late Monday. But either way, the atmosphere is even more sour as a result.

As it happens, Democratic leaders also failed to convince 95 of their own members to back the rescue plan, showing that the splintering of support was widespread in the halls of Congress.

Now, though, the consequences of simultaneous political and economic breakdown ripple well beyond Wall Street and Washington. The effects could well be global.

The U.S. -- meaning both parties and the public and private sectors -- has to worry about what global investors make of the picture of disarray they now see in the U.S. That's a crucial consideration because the U.S. now depends on foreign capital to finance both a trade deficit of more than $700 billion and a $400 billion federal budget deficit. Today, foreign lenders hold about half of America's public debt, and the nation relies on them to finance more than 70% of its new debt, the nonpartisan Peter G. Peterson Foundation estimates.

The reason foreign investors have been willing to pony up this cash has been their basic, longstanding belief that the U.S. system -- financial and political -- makes America the ultimate safe haven.

At what point does that basic belief start to erode? And what are the consequences of that possibly happening? The question is even more acute because of the likelihood that even more foreign capital will be needed, at least in the short term, to help the American government finance the very bailout now being debated.
And, as someone who's currently living in this "ultimate safe haven," I have to say that any number of countries are looking like better bets for the long run... take Ireland, with its 15% income tax for businesses, as a simple example.

Capital - financial and human - will move from places it is punished (e.g. America) to places where it is appreciated (any number of countries that are economically freer).

And you just know that the Chinese, with an eye on the financial meltdown and the expectation that the American consumer is going to do some much needed belt-tightening for the next months, years, etc, I'm not so sure I'd want to plunk down more cash so Wimpy could keep the hamburger binge going.

This post at the Corner (from one of their emailers) provides some excellent prescriptions for restoring confidence in our situation. One of the best suggestions is an immediate freeze in discretionary spending, with an eye towards spending reduction in the near term.
And as for alternatives:

- how about reinforcing FDIC to give people confidence in their savings? Maybe more support for money markets?

- How about cutting corporate taxes or cap gains taxes?

- How about buying up (or financing the purchase of) the AAA securities that currently are having trouble moving but are not “toxic,” in order to increase liquidity and help with possible insolvency for healthier institutions rather than the old line investment banks?

- How about doing something about the silliness of the $62 Trillion Credit Default Swap market (e.g. the margin requirements, etc…)?

- How about immediately changing mark-to-market rules?

- And – heaven forbid – how about belt-tightening in Washington? Don’t hold your breath – but imagine what a signal that would send – a freeze in discretionary spending, a moratorium on earmarks and a real plan to educate America about entitlements and talk about the need to get our fiscal house in order.

I won't hold my breath for anything reasonable.

We live in the Age of Unreason after all... I'm just going to start looking for Galt's Gulch.

Your Co-Conspirator,
ARC: St Wendeler