Someone once described a Platypus as an animal designed by a committee, a description which also applies to the Failout Bill that supposedly was agreed on last night by the Vichy Democrats and the Bush Administration. As readers have come to expect of this blog, I sat up last night and read all 110 pages of it. Normally reading a Congressional Bill after midnight is as good as a sleeping pill for putting me out, but this bill contains so many outrageous provisions that instead of sleeping the darned thing kept me awake. I don’t think I have been this outraged over a piece of legislation since the Patriot Act.

Like the Patriot Act somehow the Democratic Party finds itself in the bizarre position of supporting the Republicans’ latest bad decision. Once again these Democrats fell meekly into line backing a decision–which as we shall see–creates unprecedented dictatorial powers. Even more Bush’s solution to the problem is not even endorsed by his own party! Some people have taken to referring to them as Republicrats, but my new nickname for them is Vichy Democrats, in honor of those French people who collaborated with the Nazis.

Nancy Pelosi’s Stake

That the opposition party should bailout a sitting President from the opposite party over such a significant piece of legislation is, I believe, unprecedented in American history, certainly in the last hundred years or so. The villain in this piece–as it she has been in so many Vichy-type collaborations–is one Nancy Pelosi, a millionaire who according to opensecrets.com ranks ninth on the list of the richest in the House with a net worth of $38 million in money from resorts, real estate, wineries and other assorted ventures.

According to a disclosure form marked hand-delivered May 15, 2008 at 4:41 here are some of the financial ties of Pelosi in alphabetical order: AIG ($250-$500,000)–yes THAT AIG that recently was bailed out, Bank of America ($15-$50,000), Financial Leasing Services ($100-$250,000), Fourty-Five Belden Corporation ($1-$5 million), Granite Ventures ($250-$500,00), Interactive Brokers Group ($100-$250,000), Mathews International Fund ($50-$100,00), McGratth Rentcorp ($250-$500,00), Morningstar ($250,000-$500,000), Robert Half ($50-$100,000), Union Bank of San Francisco ($100-$250,000), Union Bank Investment Services ($100-$250,000), W. R. Hambrecht (%150$50,000), Wells Fargo ($100-$250,000). This yields a grand total of several million dollars in financial investment companies.

The real clincher in Pelosi’s disclosure form is the section on liabilities which lists over $40 million in mortgage liabilities! No wonder she wants a mortgage bailout. She also maintains $12 million in lines of credit from various banks.

It is important to know the stake Pelosi had in the bailout because it helps you to understand how such an atrocious piece of legislation could have passed the United States Congress.

The Vichy Democrats

Over the past few years there have been many low points for the Democratic Party, but perhaps none matches this unprecedented collaboration with a lame duck–or lame platypus, incompetent President in the midst of the worst financial crisis since the Great Depression. Mark my words, the Democrats have handed the GOP a campaign issue on a silver platter.

To give one example, the woman running for reelection in my district, a loose cannon named Michele Bachmann, was considered highly vulnerable before the Vichy Democrats sprung into action. But with Pelosi trying to protect her AIG investment, Bachmann has been making the rounds of the usual Faux News talk shows trumpeting her opposition to the bailout. What formerly ranked as one of the more competitive seats in Congress, one the Democrats hoped to win and increase their majority, has now become a relatively safe seat, all thanks to one Nancy Pelosi.

The Vichy Democrats, like the Vichy French, use the excuse that someone had to do something and this was the best alternative. They probably did not expect anyone to read the one hundred and ten pages of Congressional legalese. Well, this writer has and what is in there was enough to keep me awake half the night.

That someone needed to do something has been obvious for at least a year or more, but this bill is the wrong solution for the wrong problem at the wrong time putting the wrong people in charge. If you have nothing better to do with your time you need to call your representative and tell them what you think. If you are a Democrat you might call Nancy Pelosi and tell her she may just have cost the Democrats the White House by supporting a sitting Republican President.

The Platypus Bill’s Key Assumption

Scientists only recently have figured out the genetics of a platypus. With a bill like a duck and a body that resembles a beaver it appears to have been put together by a clever taxidermist bent on playing a cruel joke, which is exactly what people first thought when they saw specimens. The platypus turned out to be real, but this bill looks like it is a cruel hoax played on the American people. Perhaps time will prove it otherwise, as it did with the platypus, but right now it is a fraud.

Pelosi and others kept evoking none other the Republican Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke as the chief experts in this crisis and their chief reasons for supporting the bill. Both told anyone who would listen, the crisis was desperate and needed a bailout. Some dropped dark hints that behind closed doors the two painted an even gloomier scenario.

The standard line in defense of the bill goes something like this: if this crisis continues the average American stands to lose their shirt and a lot more. But data from a study by the Economic Policy Institute show a different picture. According to the study:

It probably would surprise a lot of people to know that less than half of American households are invested in the stock market in any form–either directly or indirectly through mutual funds or 401(k)s. [My emphasis]

Stock ownership remains concentrated among the wealthiest households. The wealthiest 20% of households own over 90% of all stock value.

The study found that for most of us:

The one area of most consistent good news is home ownership. In 2005, nearly 69% of households owned their own homes, a significant increase over the 64% ownership rates of a decade ago. Since 1999, the most dramatic increases came for Hispanics, whose home ownership grew to 49.5% or by 4 percentage points in 2005.

So, in short, stock market problems are not a problem for the average American. They are problems for the Nancy Pelosi’s of the world. What is a problem, as it has been for some time, is the real estate crash.  The Platypus Bill does little to solve this problem. That is why I say it is the wrong bill for the wrong problem.

What’s In the Bill

What is in the bill of this platypus? Even if we do grant the Vichy Democrat’s defense that this bill was needed, does the bill itself cure the problem or does it contain provisions that should have us all staying awake at night? Let’s run through a few key sections.

The bill begins with one of the more grammatically tortuous sentences to grace a piece of legislation:

To provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, and for other purposes.

Whenever you see that phrase “for other purposes” hold onto your wallet. But note the laundry list of purposes that come before that. In one neat stroke of the pen this bill will provide stability to the economy, prevent disruption of the economy AND protect taxpayers. It’s as if the entire New Deal were wrapped up in one piece of legislation! Even for Congressional hyperbole this has to be at the top of the list, for it sounds like one of those middle-of-the-night infomercials that promise if you just call this toll-free number you, too, can be as rich as Nancy Pelosi.

Authority of Treasury Secretary

The first real eye-opener comes in the section titled “authority,” referring to the authority of the Secretary of the Treasury. Here is the actual language:

The Secretary is authorized to establish a troubled asset relief program (or ‘‘TARP’’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.

Like a lot of bills, my guess is that those who wrote did not think people would spend much time reading it, because there is language in this paragraph that makes this bill already one of the worst pieces of legislation ever passed. Note that the paragraph gives the Treasury Secretary, not some bipartisan group, not some nonpartisan equivalent to the SEC or other financial regulator, the authority to “make fund commitments” and “purchase troubled assets.”

Then comes the clincher, “on such terms and conditions as are determined by the Secretary.” No Treasury Secretary in history has received this power. Had FDR proposed such a thing during the New Deal they would have called him a dictator.

But it gets worse in the final phrase of the paragraph: “the policies and procedures developed and published by the Secretary.” In essence we are handing to one person the authority to control the entire bailout process. This is why I call the Democrats who support this legislation Vichy Democrats because they are like the French who caved in to a dictator.

If we are going to invest the ability to solve this crisis in one person let us at least pick Warren Buffett, who has at least shown he knows how to invest a dollar rather than some political hack appointed by the worst President since Herbert Hoover. Henry Paulson could hold a Nobel Prize in economics, but the idea of entrusting one person with such economic power is sheer madness. No cabinet official has received such sweeping powers since the Patriot Act gave the Secretary of State the power to declare who is a terrorist.

The Bush Administration may be enamored with dictatorial solutions, but that does not mean that the rest of America has to accept them. For once the right wingers are on to something: this is a growth in federal power that is dangerous and wrong-headed.

Later on in the bill you begin to see how far-reaching this authority becomes:

Upon request of a financial institution, the Secretary may guarantee the timely payment of principal of, and interest on, troubled assets in amounts not to exceed 100 per- cent of such payments. Such guarantee may be on such terms and conditions as are determined by the Secretary, provided that such terms and conditions are consistent with the purposes of this Act.

So in plain English, the Secretary of the Treasury may decide who to bail out and determine the terms and conditions of the bailout!

The Bailout Fund

Two pages later we find out:

There is established a Troubled Assets Insurance Financing Fund that shall consist of the amounts collected pursuant to paragraph (1), and any balance in such fund shall be invested by the Secretary in United States Treasury securities, or kept in cash on hand or on deposit, as necessary.

This is the notorious bailout fund and it contains another clause to keep you awake at night allowing the Dictator of the Treasury to keep the fund in “cash on hand.” Now you don’t need to be a wingnut to wonder about the federal government being given the authority to keep “cash on hand.” The law does not stipulate how much or what percentage may be kept “on hand,” how long it may be kept there, or–get this–even putting any restrictions on its use. This is simply amazing. What idiots could have drawn up such legislation. A group of first year law students could do better.

After this shocker, the bill goes on to grant us some relief, listing twenty-some pages of required reports, as if reports will somehow resolve the issues raised by creating a Dictator of the Treasury.

Waiving of Contracts

As long as we are going to create a Dictator of the Treasury why not give that person the ability to waive all contract procedures, which is exactly what this bill proposes:

For purposes of this Act, the Secretary may waive specific provisions of the Federal Acquisition Regulation upon a determination that urgent and compelling circumstances make compliance with such provisions contrary to the public interest.

PLEASE, PLEASE if you read nothing else in this essay or this bill read this paragraph; then read it again. The language needs no explanation, but it should inspire the anger of every American who still has an ounce of the blood that flowed through those folks who hosted the Boston Tea Party.

I am no expert on federal law, but I have read a fair number of Supreme Court cases and legislation and studied enough American history to tell you that there has been no instance that I know of in which a government official has not only been allowed but been directed to act “contrary to the public interest.” If the Dictator of the Treasury is not acting in the public interest whose interest is this person acting on behalf of? Nancy Pelosi?

Mortgage Foreclosure Help

The Dictator of the Treasury has all the power here also. But what is notable about this section is how little it offers. It essentially gives the Dictator the power to change interest rates and other terms, but offers no real systemic solution to the issue. If you have a mortgage and read this section (which isn’t that long in keeping with its shallowness) you should be VERY worried.

Executive Compensation

This was supposed to be the centerpiece of the bill, the one that would finally crack the whip on those overpaid CEOs responsible for all this mess. It was the bone the Vichy Democrats tossed the rest of us when they claimed they really had to wrestle with the President to get an agreement on this legislation.

Now I have long been and remain a critic of America’s outrageous executive salaries which are matched nowhere else in the world, except maybe by members of the Saudi Royal Family. Bur frankly right now, CEO salaries are not at the top of my “to do” list for this crisis. Executive salaries did not cause this crisis and curbing them will not resolve it. This is a classic example of Peter Senge’s dictum that the problem is not the people, it’s the system.

But what are we given? The Dictator of the Treasury is again given the power to control this:

the Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance.

That’s it folks. That is what the vaunted section on executive compensation amounts to–it gives the Dictator of the Treasury the power to determine if the compensation is excessive or not.

WIFMs

A friend of mine who is a management consultant says a popular phrase among his kind is “WIFM,” as in “What’s In It For Me.” So what are the WIFMs in this legislation? Several Democrats have stated that it leaves out bankruptcy reform, which given the current financial crisis is urgently needed. What they fail to tell you is some of these same Vichy Democrats voted to tighten the bankruptcy laws. Now they have seen the error of their ways and want to fix their mistake.

This is commendable, but the mistake they really need to fix is the repeal of Glass-Steagall, which is at the heart of this mess. But I have said enough on that elsewhere.

In this bill the WIFM that you look for in vain–and one of the things that kept me up last night–was that given this bill creates a Dictator of the Treasury and gives this person unprecedented power, what about the poor Americans like you and me whose taxes will foot the bill for this? We are entrusting our money to ONE person so we should expect SOMETHING in return.

What you get is nothing. If the corporations get bailed out with your dollars, you would think you would get something for doing that, but in this bill there are no provisions for rebates if these corporations get back on their feet or anything else.

Even more galling, as umpteen commentators have pointed out, we are bailing out the Nancy Pelosi’s of this world who made the bad decision to invest half a million in AIG, but doing nothing for the majority of Americans who have nothing in the stock market. This is a rich person’s bill, intended to shore up the creaky investments of the likes of Nancy Pelosi but it offers little in the form of relief for those of us who are paying outrageous food and fuel prices and wondering if we will be the next to be foreclosed. It’s like solving the Depression by bailing out J.P. Morgan.

It’s All Politics

John McCain has already come out in favor of this bill and Barack Obama has wimped his way through it, but what is not being said is that the Vichy Democrats have put their candidate in a difficult position. There are some long-term, behind the scenes implications at work here. The most serious is that the Vichy Democrats never bothered to consult with Obama when they put this deal together. He was about as much a consideration in this deal as you and I.

It is hard to walk in another person’s shoes, but John McCain has done an excellent job of distancing himself from his party’s Herbert Hoover and even his party itself. Americans are as leery about the Democrats as they are of the Republicans, seeing both as responsible for the Era of Bad Feelings. This bill would have presented Obama with the perfect opportunity to declare he will govern on behalf of the American people who oppose this bill in overwhelming numbers not the Democratic Party.

Even more appalling is that if ever there was an opportunity for the Democrats to demonstrate to the American people that they are the Party of the people while the GOP is the Party of the rich this is it. And what do the Democrats do? Perhaps with leaders like Pelosi, the Democrats no longer do represent the people.

Pick up That Phone

I apologize for not getting this out earlier, but I did not get my hand on a copy of the bill until about eleven last night. As I write this Congress is debating it. But that means you still have some time to call your Representative and tell them what you think. I have purposely included language from the bill so you might be able to cite specific sections you oppose.

But above all, you need to speak out as loud as you can against the creation of the Dictator of the Treasury. In this lies the scary part of this legislation.

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I have usually resisted writing live during a debate, partially because I get caught up in the event and partially because maybe my mind does not work as fast as some of yours, so I need some time to process what is going on.  However, tonight I am going to make an exception, in part because of the importance of the debate.

What is at Stake

There is only a little more than a month left in the election. After I wrote my analysis of current polling data last week I went back and checked the data again this morning. My prediction still appears to be holding up, but an interesting development is that the race is tightening up on both sides. For example, take Wisconsin. I had that fairly solidly in the Obama column because he had over a 5% lead, but that has diminished in just over a week to 3.8. Florida has also tightened up as have a host of other states. With both candidates holding less than 5% leads in many states, the debate tonight could swing those or solidify them.

My assumption is that the economic crisis has tightened the election for both candidates. The American electorate is as volatile as I have seen them in some time in part because this economic mess has about it the feeling of a house of mirrors–everything is distorted so much you no longer no who do believe. It’s not just the bailout issue. Americans are scared–at least this American will admit to being scared.

Let me add my true personal economic crisis story. Washington Mutual just went down the tubes. Six months ago I switched my money out of that investment or I would be standing in line with the other creditors.

The situation reminds me of that scene in It’s a Wonderful Life where there is a run on Jimmy Stewart’s Building and Loan and only by giving a great speech does he prevent his bank from going under. As the line goes, this isn’t Hollywood.

What to Watch For

Obama was accused of being too passive in many of the Democratic Party debates, so look to see if he becomes more aggressive. McCain has never really been tested in a debate the way Obama has, so it will be interesting to see which McCain emerges, the statesman or the feisty GOP partisan.

That leads to the second thing to watch: which candidate will go negative. Hillary Clinton tried to do this in the debates with Obama and the results were mixed. Will McCain try a Hillary Clinton style attack? Obama’s campaign has been surprisingly negative, which I think has hurt rather than helped.

The networks love to work the reaction camera, so pay attention to that. It’s hard to fake a reaction. Most candidates stand there and look wooden-headed or have a plastic smile on their face while their opponent answers. Watch the reaction camera for which replies provoke which reactions, for it will provide a clue to which issues the candidate is most nervous about.

Watch also the questioners. These are not really debates; they are more like press conferences. Like referees in a basketball game watch to see how the moderator “calls” the game. Are the candidates held to a strict time limit? Are they allowed to interrupt each other? How much does the moderator allow for responses?

Finally, of course, are the questions themselves. Keep your own tally of how many are “softball” questions and how many seem to favor one candidate over another.  Do the questions deal with domestic or foreign policy? Do they seem driven more by the headlines than more serious problems? For example, education is a huge issue, but I do not remember a single question about it during the Democratic debates.  Will the questions deal with substantive issues as opposed to tabloid issues such as Sarah Palin’s latest gaffe? Will there be pointed follow-ups to questions where the candidates are clearly dodging the question or will they be allowed to BS their way through?

Be especially focused on the first and last questions for the TV folks know they frame the debate. Where do we start (the obvious choice is the economy) and what kind of question will it be?

The Beginning

Jim Lehrer is already getting frustrated with both candidates’ failures to talk with each other. Sadly, so far each almost seems to be talking off a script so we are seeing the equivalent of two political speeches going on. At the beginning one wonders about which party McCain represents. In his talk about greed and things hurting on Main Street he sounds like a turn-of-the-century progressive.

The First Exchange

McCain hits Obama with the earmarks, government spending argument. He accuses Obama of advocating $800 billion in new spending. McCain is now on the “tax and spend” argument.

Obama jumps in and says he will not have any of this. Obama comes back with the tax policy argument. Lehrer asks McCain to respond. McCain is ready for this one, with an argument about the need to lower the business.

Obama is not going for this. His first good moment, he takes McCain’s figures and shows that in actuality because of loopholes our business tax is the lowest.

The Personalities

In terms of body language, McCain is projecting a picture like that of disgruntled adult looking at an ill-behaved child. It seems clear McCain does not like Obama personally, whereas Obama does not seems to harbor any personal animosity towards McCain. It will be interesting to see how this plays out in the debate. McCain looks about ready to explode.

It also seems clear that McCain is searching for a label to pin on Obama. Unlike the Bush-Kerry debate which from the beginning laid out the flip-flop theme that ultimately “stuck” as an issue, McCain seems to be “trying out” themes. He has tried the “flip-flop attack a couple of times, but it has no stuck. So then he switches to the old “too much spending” argument.

Lehrer pushes each candidate to say what they would do. McCain gets caught by this one by advocating a spending freeze except for defense. Obama totally screws up on this one. McCain has just advocated freezing every domestic program including education and health care. This would have been a perfect time for Obama to say ALL American should share in this crisis and advocated a tax cut freeze. This would have defined the differences between the two parties as well as anything.

A Stuck Record

The debate is only a half hour old and McCain has already mentioned spending at least fifty times. His coaches have obviously told him to mention spending as much as possible and like someone who has taken a bit of advice too strongly. He appears unable to actually engage Obama directly. To me this comes off as insulting, that he is not going to acknowledge his opponent directly. Whether this is the result of coaching or the personality conflict alluded above is hard to say.

Iraq

The number one story a year ago is finally part of the debate. McCain, as expected, highlights his support for Petraeus and the surge. Obama, as expected, highlights his opposition to the war.

“I’m afraid Senator Obama doesn’t understand the difference between a tactic and a strategy,” McCain. This is a prime example of the visible contempt McCain appears to hold for Obama.

The Shotgun

We now have a third tactic on McCain’s part which is to throw out so many charges in one sentence that it is impossible for Obama to answer, Second he clearly is misquoting and quoting out of context. What Obama needs to do now is take a cue from Ronald Reagan and say, “There you go again.”

This shotgun approach is classic Republican politics. Obama is trying very hard to give rational answers, but his approach is like trying to catch a shotgun shell one pellet at a time.  He needs to address the shotgun approach directly.

Obama Goes Personal

In an answer to a question about Pakistan, Obama starts out well talking about taking out Osama bin Laden, but gets personal with McCain talking about McCain taking out North Korea and Iran. These kinds of attacks do not make Obama look very good. It appears yet another McCain strategy is to goad Obama into letting lose one of these exchanges. Obama will need to learn to count to ten before letting lose on one these.

Iran

McCain is beginning to come off as a lose cannon and for the first time tonight I am afraid of this man in the White House. IN answer to a question about Iran he proposes a League of Democracies which he says is purposely designed to freeze out the Soviet Union. This is one of the more provocative and dangerous ideas I have heard for awhile. Even more troubling, McCain does not say much about how this so-called League would work.

Obama does not pick up on this at all other than to say we will need their cooperation. Obama makes a good point when he says, the notion that by not talking to people we punish them is a bad idea.

McCain jumps on this as appeasement. This point will play well with those who remember Neville Chamberlain, but I am not so sure about others.

The McCain Smirk

In the reaction shots, McCain uses a somewhat annoying smirk which seems borrowed from George W. Bush but also reminds me of the way an adult would look at a child who has done something really stupid. There is another McCain tick that is becoming annoying is his continual use of the phrase “What Senator Obama does not understand…”

Getting Feisty

McCain is getting feisty. Obama reaction to this so far is to keep maintaining his rational answers. McCain is behaving like he is in a barroom argument; Obama is answering like he is in a college seminar. Obama is starting to sound more like John Kerry, ticking off facts and rational answers when this debate is not about that.

McCain answers he looked into Putin’s eyes and saw three letters a “K. a B and a G.” Again this man seems a loose cannon. No matter what one thinks of Putin can you now imagine him going into a summit or discussion with Putin after saying this.  Again he accuses Obama of being “naive.”

Obama again tries to correct another McCain misstatement. He needs a better strategy for this, if not Reagan’s “there you go again,” then he might take a cue from John Kennedy who turned Nixon’s charges into humor. In fact, humor is something missing from Obama. Maybe it is not is his character, but he needs to be able to loosen up a bit. As it is he seems too tightly wound.

The Shotgun Keeps Firing

The walls behind Obama are full of buckshot. How many of these have hit Obama and how many in vital spots will await the reaction of the American people. If John McCain were a pheasant hunter, I would accuse him of using an automatic on those birds.

Obama’s Best Answer So Far

In answer to a question about whether the United States is safer since 9/11 McCain of course must say yes.

Here Obama’s specifics and his well-thought out answer is his best one so far.

Back to Iraq

“Senator Obama still doesn’t get it,” says McCain. He says Iraq is the central issue of our times. Obama now seems to be more on a roll and to better understand how to handle McCain. Here again he gives a specific answer that outlines in detail his differences with McCain.

Is McCain Tiring

McCain is sounding again like Hillary Clinton talking about knowledge and experience. However, there are signs that he is visibly tiring. There are more breaks in his voice, his answers seem to wander more, and he seems to be searching through the back rooms of his mind looking for the message. If this debate were to be longer, McCain would not do well.

The Endings

Both endings seemed anti-climatic.  They have no themes, they do not appear to sum up the night.

The Pundits

On to CNN to hear the pundits pronounce. The pundits seem to feel that all Obama needed to do was to show that he could hold his own with McCain. Bill Bennett seems to feel McCain was masterful on foreign policy if being masterful means setting up his Alliance of Democracies then we’ve got big problems.

Final Thoughts

With the McCain campaign trying to portray Obama as an experienced kid who has no business being in the White House, Obama did an excellent job of showing that he thinks about problems where as McCain responds to them viscerally and emotionally. He really presented no example tonight of how he would reason through an issue or solve a problem. This is why at the end of tonight’s debate I am more fearful of McCain than I was before this evening.

One thing Americans will be looking for is whether we will have a stable President or a loose cannon, whether we will have a President who is going to continue the Era of Bad Feelings or take us beyond it. Tonight John McCain did neither. There were moments where he seemed like a loose cannon and his lecturing, know-it-all tone gave little hope that he will be the one to end the Era of Bad feelings.

I had actually hoped McCain might have that in him since he has been a bit of Republican maverick. However, tonight he showed that he is not a person who collaborates well. He gave the impression that his maverick attitude stems from being a know-it-all rather than someone who will help bring America together again. This man is like one of those characters Jack Elam used to play in those old Westerns–a cantankerous, grumpy old man.

Final prediction–I think Obama will get some bounce from this.

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Proposals to fix the financial crisis are popping up like mushrooms in a lawn after a rain and are just as useful. Around here they call them fairy rings, an apt description of some of the ideas I have seen such as those coming from a White House that seems to have fairy dust in its eyes. Several years ago when I said that George W. Bush would go down as the worst President since Herbert Hoover, I did not think that he would do a literal Herbert Hoover and leave us with the worst mess since the Great Depression.

Liberals and Conservatives alike wonder if the fairy dust in the White House has not had an impact on rational thinking. Right now the President who has rung up the largest federal debt in history proposes to add to that burden by bailing out financial institutions with an astounding amount of money. Contrary to reports in the press, which can never seem to do the research necessary to write a decent story, this is NOT the first time the government has proposed to bail out business. Richard Nixon bailed out aircraft manufacturer Lockheed and the Penn Central Railroad. Jimmy Carter bailed out Chrysler. In all three cases the Presidents advanced the rationale that each industry was essential to the American economy.

What makes the Bush bailouts unprecedented is their scope–and their insanity. With each passing day, the White House resembles an ominous specter from the past when Herbert Hoover struggled with the rising crisis of the Depression. Hoover, to his credit, at least had some principles governing his proposals. George W. Bush appears to have ingested too much fairy dust.

Neither Bush nor many of the others advancing their pet schemes have thought to do two things: first, to start with principles and values and second to go back to the original source, the Glass-Steagall Act, whose repeal is one of the main causes for this mess.

Obama’s Principles

The crisis has provided the first glimpse of the kind of Presidencies we might expect from Barack Obama and John McCain. To his credit, Obama yesterday outlined a series of principles that would govern his approach to the crisis. John McCain has yet to do so, at least in the comprehensive fashion of Obama. If you need no other reason to vote for Obama, this is it, for if we don’t have a leader who governs from principle we end up with fairy dust.

As those who regularly read this blog know, I am big on values and principles. Anyone who has studied leadership also knows that true transformational leadership begins with values. A leader must have a well-aligned moral compass to navigate through the perfect storm this crisis threatens to become.

While I might take issue with Obama’s list, quibbling over details is not the important thing. What is IMPORTANT is that we know this President will govern from principle and he will level with the public about those principles. After two decades of Democratic Party triangulation and waiting for a “values Democrat” it looks like we may finally have one. Now we will wait to see if the same reporters who hyped George W. Bush as the “values President” will do the same for Obama.

I am not sure quite how to react to finding many of the principles I advocated in a recent essay showing up on Obama’s list. Here are Obama’s principles straight from his web site:

First, the plan must include protections to ensure that taxpayer dollars are not used to further reward the bad behavior of irresponsible CEOs on Wall Street.

Second, the power to spend $700 billion of taxpayer money cannot be left to the discretion of one man, no matter who he is or which party he is from. I have great respect for Secretary Paulson, but he cannot act alone. We should set up an independent board that includes some of the most respected figures in our country, chosen by Democrats and Republicans, to provide oversight and accountability at every step of the way.

Third, if taxpayers are being asked to underwrite hundreds of billions of dollars to solve this crisis, they must be treated like investors. The American people should share in the upside as Wall Street recovers.

A few of the principles I advocated in a recent essay included:

The first thing is that in exchange for any government bailout, upper level management should be forced to forfeit all stock bonuses and other pay as part of the settlement.

With people calling for a Congressional investigation of the Iraq War, what we really need is a Congressional investigation of the repeal of Glass-Steagall.

The banks have to agree to play by the rules.

Unfortunately, we cannot bring Glass-Steagall back from where Phil Gramm buried it, but we can demand that the PRINCIPLES behind Glass-Steagall become the pro quo for any quid spent on a bailout.

Note both of us place penalties on the executives responsible for this mess at the top of the list. When Friday’s debate takes place I hope Obama will push these principles HARD, because they not only represent a substantial difference with John McCain; they also will resonate with the American people.

The Missing Principles: First, Investigation

Since this site seems to have become where people come for information on Glass-Steagall, a bit of history is in order. People have forgotten that Glass-Steagall was only made possible by a series of Congressional investigations spearheaded by Ferdinand Pecora between 1933 and 1935. Without the evidence gathered in the Pecora hearings it is doubtful Glass-Steagall would have been as far-reaching, for the corruption Pecora uncovered resulted in a huge public outcry against the abuses of the banks.

In testimony last October 2 before the Housed Committee on Financial Services economist Robert Kuttner suggested:

I would urge every member of the committee to spend some time reading the Pecora hearings, and you will be startled by the sense of déjà vu.

Pecora was the former Assistant District Attorney of New York County when he was appointed as special counsel to the subcommittee investigating the financial industry. One o the biggest scandals Pecora uncovered is the famous Insull stock manipulation reminiscent of the Enron scandal in which Insull Utility Investments, Inc., head Samuel Insull Jr. testified how his family manipulated investments so that in one case they made over $25 million on an $11 million scheme.

In a 1933 speech before the New York Elks Club Pecora stated that his investigations had shown:

How men of might–not because of principle but because of economic power and wealth–have by the waving of a hand and the adoption of a resolution have taken millions and millions of the hard-earned pennies of the people and turned them into gold for themselves.

When this nation again comes to days of plenty and prosperity, let us seek to make it impossible for water and hot air to be sold to men and women of America for gold taken from their savings. [New York Times, February 19, 1933]

The headlines of misdeeds uncovered by Pecora poured from the press in 1933. There are pages of them in the New York Times index for the first few months of 1933 alone.  The Pecora hearings were just what Franklin Roosevelt needed to prod Congress into enacting the sweeping banking legislation that he advocated to resolve the crisis and prevent another. In effect, Pecora became the main driver for change in the system.

That we need the equivalent of the Pecora hearings today seems a no-brainer, but both Parties are afraid to do so for fear such hearings will uncover misdeeds on both sides, particularly pertaining to the repeal of Glass-Steagall. Certainly Phil Gramm would not welcome such hearings.

Phil Gramm

With Enron now faded into memory, we forget how much prominent Republicans were involved in that debacle, perhaps none more than Phil Gramm. To begin, Gramm’s wife served on Enron’s Board of Directors, by one estimate bringing between $900,000 and $1.8 million to the Gramm household. Gramm himself was the second largest recipient of Enron campaign contributions in addition to benefiting from over $4.6 million from the financial corporations over the previous decade.

But that was not the end of Gramm’s manipulations for Enron. An article by Paul Kiesel details how far Gramm was willing to go to help his benefactor.  According to Kiesel shortly after the election of George W. Bush:

Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision — lobbied for by Enron, a major campaign contributor to Gramm — that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities.

So let’s place Phil Gramm as witness number one in the investigation.

Glass-Steagall Provisions

A second thing missing from Obama’s proposals are the provisions of Glass-Steagall that might have prevented this crisis. The Gramm-Leach-Bliley Act authored by McCain campaign co-chair Phil Gramm abolished several key provisions of Glass-Steagall that must be reinstated.

Among other provisions, GLB repealed Sections 20 and 32 of the Glass-Steagall Act:

• Section 20 - prohibited any member bank from affiliating in specific ways with an investment bank;
• Section 32 - prohibited investment bank directors, officers, employees, or principals from serving in those capacities at a commercial member bank of the Federal Reserve System.

Interlocking directorates helped to contribute to this mess. To critics of Wall Street they have long represented a source of frustration and corruption. Talk about the fox guarding the hen house. Carter Glass, Franklin Roosevelt and others involved with writing and passing Glass-Steagall knew that if the CEO’s of financial institutions sat on each other’s boards they would have little inclination to curb questionable practices.

Interlocking financial relationships was the second fear held by Carter Glass and FDR. Those interlocking relationships have proved to be one of the prime culprits behind the current crisis.

To Big to Fail

In my last essay I wrote about the insertion of the “too big to fail” provision into Gramm-Leach-Bliley. That needs to be stricken from the books. It is the most dangerous and outrageous piece of economic legislation ever written by the United States Congress. It represents the equivalent of the “separate but equal” segregation legislation of the post-Reconstruction Era.

In the first place, anti-trust legislation either needs to be enforced or rewritten so no corporation becomes too big to fail.  That this country has reached such a point must have the founders of this country wondering what America has become.

Obama’s Clinton Problem

As this crisis deepens it has become clear Barack Obama faces a Clinton problem. Bill Clinton’s role in the repeal of Glass-Steagall is public record. The GOP has already tried to blame the financial crisis on the Democrats, in part because of Clinton’s role. I predict John McCain will bring this up in the debates, if only to deflect criticism from Phil Gramm, who is the real villain.

How Obama handles his Clinton problem could well decide whether he wins in November. A bit of advice: he needs to separate Bill from Hillary. Hillary needs to separate herself from Bill. If Hillary Clinton wants to run or President should Obama lose, her future also depends on how she handles the repeal of Glass-Steagall.

Conclusions

So far Barack Obama has made an admirable start towards dealing with the financial crisis. He has shown that as President he will govern from principle, not triangulation.

The problem is that like much else with Obama, he does not go far enough. The American people do not want halfway measures to resolve this crisis, nor do they want business as usual. Obama needs to have the courage to utter two words: Glass-Steagall. Barack Obama had no part in the Gramm-Leach-Bliley Act. By pointing that out and linking it to his message of change, he could give the American people what they long for–someone whose hands are clean of this mess and who has the principles to clean it up.

The title of this essay purposely has a double meaning. What the American people hope is that the “fix” is not in with regard to this crisis as it was with the repeal of Glass-Steagall. If ever there was a time to revive the principle of Liberal America that government exists to keep the playing ield level, this is it.

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In the past few weeks I have been in essence accused of aiding and abetting the enemy by several so-called Democratic/liberal bloggers because I dared utter the unspeakable truth that elements of the Democratic Party have a responsibility for the current financial crisis just as they also have a responsibility for the Iraq War, the Bush tax cuts, the Patriot Act, Guantanamo and the whole sorry mess of the last few decades.

So let me lay my cards on the table at the beginning. Number one, along with a growing number of economists and financial analysts I believe that the roots of the current crisis lie in the repeal of one of the crown jewels of the New Deal, the Glass-Steagall Act. I wrote the first post on this several years ago and have followed up with several more, the last of which was a series this past spring. These posts have been plagiarized and appropriated by bloggers so fast I cannot keep up with them.  Number two, on the Democratic side at the head of the list of those who shoulder this burden is one William Jefferson Clinton and the so-called Democratic Leadership Council.  Number three, the chief author of the bill repealing Glass-Steagall was none other than one Phil Gramm, who is the co-chair of the campaign of one John McCain. Number four, Barack Obama and the Democratic Party as a Party had nothing to do with the repeal of Glass-Steagall.

The Counterrevolution

So let’s start with the big picture, which begins with the Republican Counterrevolution. As I have written in my book, The Strange Death of Liberal America, the Counterrevolution has been dedicated to rolling back the philosophy and programs of the New Deal.  Chief Republican strategist Karl Rove has spoken of his admiration for the administration of William McKinley and his desire to take America back to those times. The popular mind associates the Counterrevolution with the famous phrase from Ronald Reagan’s First Inaugural:

Government is not the solution to our problem;government is the problem.

But in fact the Counterrevolution has been about more than merely cutting back government or lowering taxes. It has been about returning to a philosophy that was best expressed by McKinley’s contemporary, Yale professor William Graham Sumner, who thought charity of any kind–let alone government aid–was wrong:

The next time that you are tempted to subscribe a dollar to a charity, I do not tell you not to do it, because after you have fairly considered the matter, you may think it right to do it, but I do ask you to stop and remember the Forgotten Man and understand that if you put your dollar in the savings bank it will go to swell the capital of the country which is available for division amongst those who, while they earn it, will reproduce it with increase.

Back in the days of William McKinley there were also some Democrats who thought that government had no business aiding the poor, the down-on-their-luck, the disabled. They were known as Bourbons and their leader was Grover Cleveland.

Perhaps one of Cleveland’s most revealing moments came when he vetoed an 1887 bill that would have provided free seed to drought-stricken farmers. In his message Cleveland wrote:

The lesson should constantly be enforced that though the people support the government, the government should not support the people. ..Federal aid, in such cases, encourages the expectations of paternal care on the part of the government and weakens the sturdiness of our national character. (Quoted in Richard Welch, The Presidencies of Grover Cleveland, p. 14)

The Core Belief of Liberal America and Glass-Steagall

William Jennings Bryan, Woodrow Wilson and Franklin Roosevelt along with several generations of grassroots progressives did not believe in this philosophy. As I stated in The Strange Death of Liberal America they believed that at the heart of the liberal–and American ideal–lay the belief that government exists to keep the playing field level. This philosophy lay behind to the creation of the Federal Reserve System under Wilson and to the various programs of the New Deal under FDR.

One of the crown jewels of those programs was the Glass-Steagall Act. Carter Glass, an old foe of banks entering into the stock market, insured that the Banking Act of 1933 contained four key provisions:

• Section 16 - restricted commercial national banks from engaging in most investment banking;
• Section 20 - prohibited any member bank from affiliating in specific ways with an investment bank;
• Section 21 - restricted investment banks from engaging in any commercial banking; and
• Section 32 - prohibited investment bank directors, officers, employees, or principals from serving in those capacities at a commercial member bank of the Federal Reserve System.

With these four provisions, Glass had the preventative measures he felt would avert another financial crisis. Added to these was Steagall’s contribution: the creation of the Federal Deposit Insurance Corporation.

Attempts to Scuttle Glass-Steagall

In the years after the passage of Glass-Steagall the financial industry and its allies in the Republican Party worked to repeal the Act.

The most notable moment in the attempts to scuttle Glass-Steagall came with the 1971 Supreme Court decision Investment Company Institute v. Camp. In that complex case the Court issued one of the most ringing and unequivocal defenses of Glass-Steagall:

Congress was concerned that commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities.

The legislative history of the Glass-Steagall Act shows that Congress also had in mind and repeatedly focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments.

Many arguments the Supreme Court advanced in support of Glass-Steagall, would prove prophetic three decades later.

The Creation of the Democratic Leadership Council

As the Republican Party continued to work to change Glass-Steagall, the Democratic Party also underwent some internal changes, especially after the stunning defeat of Walter Mondale in 1984. To some Democrats Mondale’s defeat also represented a defeat for the principles of the New Deal and Liberal America that had guided the Party for most of the twentieth century. To these Democrats those policies were obsolete in the face of the Republican rise under Ronald Reagan.

Together these disgruntled Democrats formed the Democratic Leadership Council. At first mainly composed of Southerners who were determined to put a Southerner on the ticket in 1988, they came to embrace a larger national following.

By 1990 Bill Clinton had became chair of the DLC. His first act was to preside over the formulation of the 1990 New Orleans Declaration. This document would become the blueprint for Clinton’s future and that of the Democratic Party. The most telling of these principles are:

We believe the Democratic Party’s fundamental mission is to expand opportunity, not government.

We believe that economic growth is the prerequisite to expanding opportunity for everyone. The free market, regulated in the public interest, is the best engine of general prosperity.

In a speech that would salute Bill Clinton and relate the history of the DLC, DLC CEO Al From described the principles of the DLC:

As the 1960s passed into the 1970s, the liberal agenda — largely because of its success — ran out of steam, and the intellectual coherence of the New Deal began to dissipate. The Democratic coalition split apart over civil rights, Vietnam, economic change, and culture and values, and the great cause of liberal government that had animated the Democratic Party for three decades degenerated into a collection of special pleaders…Democrats had run out of ideas — and liberalism was in great need of resuscitation.

Bill Clinton’s Second Inaugural

In his Second Inaugural, Bill Clinton pulled a Grover Cleveland, essentially adopting the pro-business, free-market philosophy of the GOP. In doing so he gutted the belief that government exists to keep the playing field level, a belief that guided the Democratic Party for most of the American Century.

The tenth paragraph of Clinton’s Second Inaugural makes this clear.

As times change, so government must change. We need a new government for a new century, humble enough not to try to solve all our problems for us, but strong enough to give us the tools to solve our problems for ourselves; a government that is smaller, lives within its means, and does more with less.

Having capitulated to the Republicans, Clinton embraces a concept that, like much with Bill Clinton, sounds good, but lacks any depth.

Each and every one of us, in our own way, must assume personal responsibility, not only for ourselves and our families, but for our neighbors and our nation

That every American should accept responsibility is difficult to argue with, until you realize that from a rhetorical perspective Clinton has just shifted the pea from under one shell to another right before our eyes. Remember that several paragraphs before Clinton had spoken about the role of government and now suddenly we find government has vanished and we have entered that realm of individual responsibility that has served as Republican dogma since the Gilded Age of the nineteenth century.

Leadership and Presidential scholar James MacGregor Burns’ final judgment of Bill Clinton captures the essence of the Clinton Presidency:

The health bill defeat strengthened the hand of those in the administration who wanted the president to follow a political strategy of centrism, moderation, and bipartisanship, operating in the middle of the political and ideological spectrum. Urging transactional rather than transformational leadership, they would have the White House negotiate with friends and foes, left and right, on an ad hoc step-by-step basis.

This was the incrementalism of “policy bites,” such as favoring school uniforms or advising mothers how to put their children in seat belts.

The Repeal of Glass-Steagall

I provide this background on Clinton to show that even before the repeal of Glass-Steagall, the philosophical foundations were already in place to make the repeal possible.  On top of this in the background of the go-go economy of the 1990s, the feeling grew among some economists and the financial community that Glass-Steagall hampered America’s financial competitiveness. Among the many voices favoring this was Alan Greenspan along with former Goldman Sachs partner Robert Rubin, Bill Clinton’s Treasury Secretary. In a 1995 speech and testimony to Congress Rubin signaled the Clinton Administration was ready to repeal Glass-Steagall:

“The banking industry is fundamentally different from what it was two decades ago, let alone in 1933.” He said the industry has been transformed into a global business of facilitating capital formation through diverse new products, services and markets. “U.S. banks generally engage in a broader range of securities activities abroad than is permitted domestically,” said the Treasury secretary. “Even domestically, the separation of investment banking and commercial banking envisioned by Glass-Steagall has eroded significantly.”

A year later Sanford Weill set in motion the forces that would finally end Glass-Steagall. Weill proposed the most audacious financial merger of in American history: he would merge one of the largest insurance companies (Travelers), one of the largest investment banks (Salomon Smith Barney), and the largest commercial banks (Citibank) in America. The problem was the merger was illegal in terms of Glass-Steagall.

Weill convinced Greenspan, Robert Rubin and Clinton to sign off on a merger that was illegal at the time, with the expectation that Congress would repeal Glass-Steagall. Charles Geisst, a professor of finance at Manhattan College adds in a Frontline Interview:

Part of [Weill's] deal with the Federal Reserve was to get rid of all Glass-Steagall violations in the new Citigroup within two years. Otherwise, he would have been faced with a divestiture of a company which had just been put together, because of an old law which is still on the books. So it clearly behooved him, and many other people in the financial services industry who wanted to accomplish essentially the same sort of thing in the future, to push to get Glass-Steagall repealed.

So they pushed hard?

Pushed very hard. … They pushed so hard that the legislation, HR10, House Resolution 10, which became the Financial Services Modernization Act, was referred to as “the Citi-Travelers Act” on Capitol Hill. ..

The ” Citi-Travelers Act” went under the benign-sounding name of the Financial Services Modernization Act of 1999 and, like Glass-Steagall it has become known for the key sponsors of the bill as the Gramm-Leach-Bliley Act, for Republican Senate Banking Committee Chair Phil Gramm, House Banking Committee chair James Leach, and Virginia Representative Thomas Bliley.

The complete story of Bill Clinton’s role in the repeal has previously been told on this site. Suffice it to say, Bill Clinton gave Sanford Weill one of the pens used to sign the repeal of Glass-Steagall.

Aiding and Abetting the Enemy

So is bringing up Bill Clinton’s complicity in the repeal of Glass-Steagall aiding and abetting the enemy? Only if you believe that Bill Clinton and the Democratic Party are one and the same. In fact it is my belief that in their capitulation to the Republicans represented not only by the repeal of Glass-Steagall but support of the Bush tax cuts, the Iraq War and other measures, elements of the Democratic Party have aided and abetted the enemy, abandoning the core belief of Liberal America that guided Bryan, Wilson, FDR, Harry Truman, Lyndon Johnson and John Kennedy.

Harry Truman said it best:

If it’s is a contest between a Republican and a Republican they will vote for the Republican every time.

As for THIS election, one thing is clear, if you vote for John McCain you are probably going to get Phil Gramm as Treasury Secretary or some other high post in a McCain Administration. God help us all then.

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