Barack and Joe in Greensboro, NC

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Financial Shockwaves, But It's Also Good for Democracy?

All of the political leaders blessed the deal, but the House of Representatives spit it out anyway. The Wall Street bailout is so odious to public opinion, the "people's house" rejected it today, 228-205. The fever chart in Wall Street -- better known as the stock market -- swooned instantly, with the Dow falling 700 points. The political bedlam in Washington is as real as it gets.

The party leaders will probably try again. I doubt they have the energy or courage to renegotiate the terms in any serious way. A majority of Democrats voted for the measure, but most Republicans took a walk. They will be scolded -- and pounded by captains of industry and finance -- for being "irresponsible." But I doubt the public will agree.

In all of elected Washington, representatives are closest to the people and they know a vote for this outrageous measure is going to end the careers of some colleagues -- maybe many of them. This time, the dissenters can claim principle and say they are voting with the folks, while also voting to save their own hides.

It adds another deep shock to the system, both in politics and economics, but what an invigorating moment for democracy.

The financial bloodbath will continue, but unless the deal on the table changes significantly, Henry Paulson gets to decide who lives and who dies. The former investment banker from Goldman Sachs would be empowered as treasury secretary to play savior or grim reaper, the liquidator who essentially pulls the plug on some banks and financial firms or the man who rescues them from ruin. Of course, Paulson would consult with other government officials. But you can be sure that, behind closed doors, he will ask former brethren in Wall Street to help decide which club members are worthy of saving. This power to pick winners and losers would remain in Paulson's hands until a new president arrives in January.

This the essence of "the deal" Congress worked out over the weekend and was stymied today. Some bells and whistles were added to make the transaction less obnoxious to public opinion, voters and taxpayers. They are not meaningless, but both parties lacked the nerve to tamper with Paulson's basic proposal. This is still a massive bailout of imploding Wall Street, financed with the public's money. And it is still a massive crap shoot for the American people.

If the billions from Washington somehow restore temporary calm and balance to global financial institutions and markets, then the usual cheerleaders will proclaim the "system" has worked. Most Americans, I predict, will not join the cheering. Too much destruction lies ahead, both in the financial system and in the real economy where people live and work. Too much bitterness and rage will be attached to the White Knight at Treasury when he dooms one pension fund or bank, but rescues others. Too much deceptive sleight-of-hand is already embedded in Paulson's approach for ordinary mortals to even recognize what Paulson intends to accomplish.

The essential political failure, in my view, is that Congress did not step up and assert the full emergency powers of government in this epic crisis, that is, take temporary control of the entire financial and banking system so regulators and policy makers can steer the US economy to safer ground, compelling the private institutions to follow their lead. This rescue plan remains essentially voluntary. Yes, the Treasury Secretary would be awarded gargantuan personal powers, but there is not much in writing to compel the banking behavior of private interests he chooses to rescue them. One assumes Paulson will demand some private deals and use his enormous leverage to squeeze anyone who resists. But there is nothing to guarantee this path is taken. The bailout will belong to the club and the club will manage it.

Democrats are the majority party and insisted on some qualifying terms in behalf of the populace -- better than nothing, but weak half-steps. The government can claim warrants or equity ownership from firms in exchange for the public aid. It can put a lid on bloated executive salaries at the rescued banks or brokerages. It can demand more up-close oversight of how the Treasury Secretary performs. The language for all of these measures suggests to me -- I need to read the text again more carefully -- that these are essentially discretionary suggestions.

Paulson can do them if he chooses. Or, if he likes, he can wiggle around them in the fine print. The Dems do not want to assert real control over Paulson's decisions for fear they will then be blamed if and when everything fails.

Republicans, as usual, are playing their own political game -- trying to evade the blame, now and later. Their proposal for an insurance program that financial firms must pay for is ludicrous. It's like trying to buy hurricane insurance on your house after the storm has already blown it away. But the GOP already is in ruin, so its members are thinking long-term survival and creating a predicate for revival. Blame the government, blame Wall Street, blame the go-along Democrats -- maybe people will start liking Republicans again.

Democrats are still in recovery from twenty-five years of deferring impotently to the wise men of Wall Street and retreating tactically from conservative initiatives. I see this crisis as the Democrats' hesitant first step toward rediscovering their nerve and abandoned convictions. They are not there yet. But this crisis is not over. I predict they will get another opportunity to stand up for something and rather soon.

In the nature of this crisis, the next president will be compelled to clean up Paulson's irregular mess. He will be forced to act, not only because of the rising popular anger and enveloping recession but because the Paulson approach is founded on private deal-making and his deceptive statements of purpose.

By January, whoever wins the White House, it will be clear that Washington cannot cure the disease by relying on one smart guy from Wall Street. A new federal agency will be needed to supervise the bailout and restore defined public purposes and enforce them on the system. The government will have to assert its powers forcefully, because by then it will be obvious the "voluntary" approach helped some losers to become winners, but it neglected to save the country.

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Here Is a Better Bailout Plan

By Joseph Stiglitz, TheNation.com.
There are four fundamental problems with our financial system. The Paulson plan addresses only one.
The champagne bottle corks were popping as Treasury Secretary Henry Paulson announced his trillion-dollar bailout for the banks, buying up their toxic mortgages. To a skeptic, Paulson's proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing and recombining risk. This "cure" is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar.
There is, however, an alternative explanation for Wall Street's celebration: the banks realized that they were about to get a free ride at taxpayers' expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands -- called the American taxpayer.
The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn't learn the lessons of the information asymmetry that played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn't happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street's best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn't be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury's models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains.
And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers' exposure. But not so this time. The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was supposed to assure us?

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one.
* The first is that the financial institutions have all these toxic products -- which they created -- and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer -- and for no return.
* The second problem is that there is a big and increasing hole in bank balance sheets -- banks lent money to people beyond their ability to repay -- and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.
* The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market -- and letting it deteriorate at taxpayers' expense.
* The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February -- one that would have included increased unemployment benefits and aid to states and localities -- and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, to aid the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle-down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.
The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again.

There are alternatives.
Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem -- the government getting stuck with the worst or most overpriced assets.
Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.
If we design the right bailout, it won't lead to an increase in our long-term debt -- we might even make a profit. But if we implement the wrong strategy, there is a serious risk that our national debt -- already overburdened from a failed war and eight years of fiscal profligacy -- will soar, and future living standards will be compromised. The president seemed to think that his new shell game will arrest the decline in house prices, and we won't be faced holding a lot of bad mortgages. I hope he's right, but I wouldn't count on it: it's not what most housing experts say. The president's economic credentials are hardly stellar. Our national debt has already climbed from $5.7 trillion to over $9 trillion in eight years, and the deficits for 2008 and 2009 -- not including the bailouts -- are expected to reach new heights. There is no such thing as a free war -- and no such thing as a free bailout. The bill will be paid, in one way or another.
Perhaps by the time this article is published, the administration and Congress will have reached an agreement. No politician wants to be accused of being responsible for the next Great Depression by blocking key legislation. By all accounts, the compromise will be far better than the bill originally proposed by Paulson but still far short of what I have outlined should be done. No one expects them to address the underlying causes of the problem: the spirit of excessive deregulation that the Bush Administration so promoted. Almost surely, there will be plenty of work to be done by the next president and the next Congress. It would be better if we got it right the first time, but that is expecting too much of this president and his administration.

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11 Racist Lies Conservatives Tell to Avoid Blaming Wall Street for the Financial Crisis

By Sara Robinson, Campaign for America's Future.
Conservatives are twisting the facts beyond the breaking point to support their revisionist history. But don't be fooled.
Conservative pundits and politicians have piled onto the excuse like shipwreck victims clinging to a passing log: The real blame for the current economic crisis, conservatives would have you believe, lies not with anything they did, but rather with the 1977 Community Reinvestment Act -- a successful Carter-era program designed to get banks to stop covert discrimination, and encourage them to invest their money in low-income neighborhoods.
It's always easy to tell when the cons are completely lost at sea. The lies get more absurdly preposterous -- and also more transparently self-serving. But when they go so far as to openly and unapologetically latch onto race and class as an excuse for their woes (which this is, at its heart), you know they're taking on water fast -- and scared of going under entirely.
You can hear the conservative commentators burbling this CRA fable from the Wall Street Journal to the National Review; from Rush to YouTube. Neil Cavuto put the essence of the argument right out there on Fox News: "Loaning to minorities and risky folks is a disaster." See! It's all the liberals' fault for insisting on social justice!
Conservatives are twisting the facts beyond the breaking point to support their revisionist history. But don't be fooled: the financial crisis was caused by conservative financial follies and bankers run amok and nothing more. Here are the basic myths they're trying to push about the CRA -- and the facts that will enable you to fire back.
1. The CRA was a liberal boondoggle designed to con banks into funding housing for undeserving, unqualified minorities.
False. The Community Reinvestment Act of 1977 was the result of decades of disinvestment in poor and working-class neighborhoods. It was designed to put an end to "red-lining" -- a widespread practice in which banks refused to write mortgages for houses in certain neighborhoods, no matter who was applying or how creditworthy they were.
The Fair Housing Act of 1968 had made it illegal for real estate agents and banks to discriminate against homeowners on the basis of race. Red-lining soon emerged as a not-so-subtle way to continue this discrimination, by declaring, ahem, certain neighborhoods as unfit to invest in. By 1977, the results of this practice were becoming all too obvious, so Congress stepped and gave lenders a choice: if you want the FDIC to insure your deposits, you need to knock off the redlining.
The CRA didn't force lenders to make riskier loans than they would have otherwise. It simply required that they take each applicant on his or her own merits, and give people in poorer neighborhoods the same fair chance at a mortgage that everybody else in town was getting. It wasn't about preferential treatment. It was just about basic equality.
2. The CRA forced banks to lower their standards and make loans to all low-income families and people with poor credit -- and find banks that refused to comply.
No. The CRA has encouraged banks to lend fairly and responsibly for over 30 years. It does not impose fines. It does periodically examine FDIC-backed banks, and issues them a CRA compliance rating. A highly-rated bank must meet the financing needs of as many community members as possible, and must not discriminate against racial and ethnic groups or certain neighborhoods. However, a bank will not receive a high rating unless it is also maintains "safe and sound banking practices."
In other words, the CRA requires banks to lend to working-class families and people of color -- but only when those people have been deemed as creditworthy as anyone else.
3. The housing bubble burst when too many people with home loans mandated by the Community Reinvestment Act failed to make their mortgage payments.
False. The CRA only applies to FDIC member banks and thrifts. Back in the 1970s, these institutions were responsible for most of the country's mortgage lending. But starting in the 80s and on up to the present, we saw a huge boom in lending businesses-- such as finance companies like Countrywide -- that weren't banks, and didn't take deposits that required FDIC insurance. Thus, they didn't have any obligation to the CRA. And they were free to set their own lending standards, which were often far less cautious than those required of FDIC-insured banks.
4. The bulk of the "junk" loans that have been packaged into mortgage-based securities are CRA loans.
False. An analysis of Home Mortgage Disclosure Act (HMDA) data in the country's 15 biggest metropolitan areas found that 84.3% of the high-cost loans made in 2006 were originated by non-CRA lenders -- including 83% of high-cost loans to low- and moderate-income individuals. The Federal Reserve notes that, across the country, non-CRA lenders were twice as likely as CRA lenders to issue subprime loans to vulnerable borrowers. Furthermore, the Fed also reports that responsible mortgages made by CRA lenders have about the same low rate of foreclosure as other traditional mortgages.
5. If the government had just set the lenders free to do their thing, the market would have prevented this. It's just another example of how government oversight always leads to market failure.
Wrong again, buckaroo. As explained just above, up to four-fifths of these loans were issued by financial institutions that operated with little or no federal regulatory oversight. In fact, in 2006, only one of the top 25 subprime lenders was a CRA institution. A few others were mortgage/finance company affiliates of CRA-covered lenders; but even these were separate businesses that didn't operate under CRA rules (including Countrywide, CitiMortgage, and Wells Fargo Home Mortgage). Likewise: the vast majority of the top 20 issuers of risky interest-only and option ARM loans were not CRA-affiliated lenders.
If anything, the CRA example proves -- once again -- that government oversight not only works; it's essential to maintain safe and sane capital markets.
6. The CRA is just another failed liberal handout program.
No. The benefits of CRA have been substantial. Robert Rubin recently estimated that the law has channeled upwards of $1 trillion into distressed neighborhoods across the country -- including both inner cities and rural areas without much access to investment funds -- without putting up any taxpayer money beyond what it takes to operate the CRA itself. In these areas, home ownership is up -- and with it, the local tax base, which means more parks, more cops, more street repairs, and so on. There's more decent rental housing, too, because landlords can get loans for upgrades and improvements.
Small business ownership is also up. Low-income communities have become more attractive to outside investors, and more able to support community redevelopment efforts. And in places where people once cashed their paychecks at the convenience store and depended on payday loans, there are now full-service bank branches offering the same affordable financial services people in better neighborhoods take for granted.
The cons like to talk about the "ownership society." There is no ownership without access to capital. For 30 years, the CRA has been making private capital available to qualified people who want to bootstrap themselves into home and business ownership, and a secure place in the middle class.
7. OK -- if it works so well, why do we still need it? Haven't the banks finally figured by now out that redlining was a stupid idea?
If only. The very fact that the conservatives are trying to blame the mess on the CRA is, in itself, ample proof that we still need anti-redlining laws on the books. Fifty years into the civil rights era, and they're still arguing that it should be acceptable to permanently exclude people from the capital markets on the basis of race and class. Different millennium, same ugly story: "See? This is what happens when you give money to minorities and poor people. You end up wrecking the country!"
In other words: no, they haven't learned their lesson; and yes, they still believe in red-lining as much as they ever did. Racism is alive and well, and there are still plenty of Americans who would bring back housing discrimination in a heartbeat if the law allowed them to. Which is precisely why we can't allow them to.
8. If we can't blame the CRA, then who can we blame? How about the federal banking agencies, which outright told banks to go ahead and adopt risky lending practices? In particular, a 1992 Boston Federal Reserve Bank publication, Closing the Credit Gap: A Guide to Equal Opportunity Lending, told the banks that it was OK to adopt unsound lending practices.
Nice try, but still wrong. According to the National Community Reinvestment Association, the document cited above offered three new guidelines to lenders -- none of which are applicable to the current subprime crisis.
The first guideline was that the lack of proper credit history shouldn't be counted as a negative factor for potential homebuyers. Banks could use other evidence to assess the borrower's payment habits, including the timely payment of rent, utility bills, and other scheduled loans. Borrows still need to prove that they're reliable; they're just allowed to use documentation besides a credit report.
The second was to remind bankers that some households with debt ratios above the standard 28/36 criteria might still qualify for home loans. This guideline is very conservative by today's standards. Many problematic subprime loans were granted to borrowers with debt-to-income ratios above 50 percent, which was in no way sanctioned by the 1992 guidance document.
The third was that lenders could count Social Security, second jobs, and other verifiable income streams as valid sources of income when evaluating loan applications. But most subprime loans failures aren't related to alternative income sources. The real problem has been with "liars' loans," in which the reported income streams are never verified at all.
9. Well, then...it must be Bill Clinton's fault, right? In 1995, Clinton changed the Community Reinvestment Act to allow the securitization of CRA and subprime mortgages. That's what started all this.
Talking point regurgitation at its worst. The 1995 revisions to the CRA only changed the way in which a bank's CRA compliance is evaluated. They made no mention of mortgage securitization at all. Under the 1995 rules, banks are rewarded only for making mortgages in their communities, not for re-selling mortgages as securities.
10. OK, then -- it's the Democratic Congress's fault! President Bush and Senator McCain tried to stop the subprime mortgage crisis, but Democrats blocked their efforts.
It's not lying. It's a gift for fiction. This one's actually made it into a TV ad. The claim is that Bush and McCain supported the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have created a new government agency to oversee Fannie Mae and Freddie Mac and other federal housing programs.
However, there's no pony in this manure pile. This bill would have done nothing to stop the rash of subprime lending that preceded the housing bubble. It only provided oversight for Fannie and Freddie -- but it said nothing at all about the companies that issued subprime mortgages.
11. No serious conservative economist would have ever approved of the CRA.
False. In March 2007, Federal Board Chairman Bernanke -- no liberal he -- noted that CRA has helped institutions discover and enter new markets that may have been previously under-served and ignored by insured depositories.
These myths are floating around everywhere this week -- a Big Lie that's being repeated so often that Americans may well start to believe it. The real objective of the "blame the CRA" campaign is to pre-emptively discredit any future progressive proposals that involve using government regulation to make the capital markets behave -- and to get the free-market fundamentalist faithful back in the fold.
Time to fire back, and replace the Big Lie with some real truth.

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How to Win the VP-Debate

KEN DUBERSTEIN
White House chief of staff to Ronald Reagan; chairman of the Duberstein Group
This debate is 90 percent about Sarah Palin and 10 percent about Joe Biden. This is her SAT, not a pop quiz or a "gotcha" exam. Gov. Palin must seize the opportunity to speak compellingly about John McCain's vision on national security and economic policy, not in sound bites but in well-constructed, thoughtful paragraphs. This debate is not a forum for Alaska stories but for a McCain worldview, carefully articulated for the independent voter, not simply for the conservative base. Palin should not be an attack dog but should dissect the consequences of Barack Obama's promises. She should focus on Obama's vision and not on Joe Biden's record. She needs to grow before our eyes, in stature, soundness, judgment and temperament. Does she have the capacity to be next in line for the presidency -- that's the high hurdle she must clear.
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CARTER ESKEW
Chief strategist for Al Gore's 2000 presidential campaign
Too often, vice presidential candidates think that their debate is about them. Really, it's about the guy on top of the bumper sticker or, in this case, at the top of the polls. Obama has opened a meaningful lead, driven by the economic crisis. The election is now on his field of play. The debate should be all about Obama. Palin's job is to do what vice presidential candidates never want to do in a debate: the wet work of gutting the other party's presidential candidate. Repeatedly attacking Obama for being out of the mainstream may do nothing to advance her reputation, but it's the best way she can help stop Obama's rise and protect her own glaring weaknesses. Biden's job is to reassure voters that Obama has a clear sense of where he will take the country that comports with their values. In other words, do more forcefully what Obama did not do in the first debate.

LISA SCHIFFREN
Speechwriter to Vice President Dan Quayle; contributor to National Review: Online's "The Corner" blog
Palin started strong but has become a lightning rod for liberal contempt. She needs to speak directly to viewers and address, obliquely, the criticisms of her qualifications and intelligence. She wins by demonstrating relevant experience, solid gut and inner steel. It should sound like this:
I am a mother of five, like the speaker of the House. And yes, I hunt. But my political qualifications stem from my political experience: I am a sitting governor. I was elected governor because I took on a corrupt political machine and sent fellow Republicans to jail, not because I am "cute." Like the other 49 governors, I am accountable for dozens of state agencies. I manage a workforce of tens of thousands. I run an entity with a budget in the hundreds of millions. What has Joe Biden managed? How many people are on his staff?
I do not have foreign policy experience. As Govs. Bill Clinton and Ronald Reagan did, I will learn the names of foreign leaders and the conventions for discussing foreign policy. Here is what you need to know: My instincts are sound. Like John McCain, I recognize our adversaries for who they are. I can tell who the aggressor is in a conflict. I don't have a lot of patience for dictators, radical Islamic terrorists and leaders who threaten America or our allies. I am a fighter, and I will fight for you.

ROBERT SHRUM
Senior adviser to the Gore and Kerry presidential campaigns; fellow at NYU's Wagner School of Public Service
Palin has her marching orders: Don't answer the question that's asked but shift to attacks on Obama, Biden, the Washington elite and the "Bridge to Nowhere." After debate camp, she probably has 15 or 20 such deflections in the can, an easier task than filling in her chasm of substantive knowledge. And she has always her value-oriented homilies to fall back on.
The format is rigid, at the insistence of the McCain campaign, with no chance for the kind of back and forth in last Friday's debate. Biden won't strain to trip up Palin or take the bait when she assails his record. He has two strategic objectives: defend and advance Obama, and go after McCain. That's the choice in November, and even if Palin survives this encounter better than she did Katie Couric's interview, it won't matter that much if Biden has strategic focus and discipline. Palin may blow herself up, but Biden can't spend his time trying to light the fuse.
Moderator Gwen Ifill may play a decisive role. It was Sander Vanocur, a panelist from NBC News, who asked Nixon in 1960 why President Eisenhower couldn't name a single idea of Nixon's that he had adopted. Ifill can push past Palin's syntax-challenged generalities by pressing her instead of moving on to another issue. The right is attacking Ifill because she has a book coming out in January called "The Age of Obama" -- which is actually about the rise of a new generation of African American politicians. I have no doubt Ifill will be fair; I've watched her discomfort candidates on both sides, including mine. I don't know how tough she'll be -- and that will matter -- because Palin has to do more than meet the low expectations she's set. Voters want to measure whether she's up to the job; if they think she isn't, McCain's judgment will suffer another blow.

ED ROGERS
White House staffer to Ronald Reagan and George H.W. Bush; group chairman of BGR Holding
It's time for the McCain campaign to turn mama's picture to the wall and get rough. Palin needs to attack Obama for being the extreme liberal that he is. Attack, attack, attack. Ignore Biden and put the McCain campaign on offense. Republicans will love it and breathe a sigh of relief. Independents need to hear the truth about what a cliche orthodox leftist Obama is. She needs to attack, with ferocity, real facts and a smile. If this becomes a geography bee or a "name that foreign national anthem" show, we are in trouble.
Biden needs to say nothing -- a great challenge for him. It will be hard for him to show subtle expertise without looking smug, to flaunt his experience without talking too much. It is impossible for him to present himself as a credible agent of change. He should stay quiet and sit back while Obama allies in the media create a misstep and then take Palin apart in the coming days.

JEREMY LOTT
Author of "The Warm Bucket Brigade: The Story of the American Vice Presidency"
Many pundits say Joe Biden and Sarah Palin need to appear "presidential" tonight and therefore less combative. The advice is high-minded but dead wrong. They're not running for president, and voters probably don't want another powerful vice president. The vice president was never supposed to be a chief operating officer but, rather, someone who would preside over the Senate in good times and step into the executive position if something awful happened.
Palin should be vicious. She needs to go after Barack Obama and his gaffetacular running mate with a ferocity that got her that "Barracuda" nickname, tearing into them on energy exploration, social issues, spending and their party's complicity in creating the economic conditions that helped cause our current market turmoil.
Palin needs to attack, full tilt, to help the Republicans get their groove back and to further her own political future. The Alaska governor could one day end up on the top of a Republican ticket, whether or not the GOP holds the White House this November. She won't get there by playing nice.

MARY BETH CAHILL
Manager of John Kerry's presidential campaign; former chief of staff to Sen. Edward Kennedy
Palin has an instinctive ease with television cameras and the ability to deliver a killer shot to her opponent. However, she has the higher bar to clear as a newcomer to international affairs with little experience of sustained discussion of America's diplomatic and economic place in the world. Viewers will judge her a success if she exhibits reasonable knowledge of our allies and the challenges that confront the nation without losing her composure.
Biden will achieve success by defending his running mate from every charge and by attacking McCain, not Palin. If he is concise and polite in this moment of maximum attention, he will vindicate Obama's choice of him as a running mate.

MICHAEL FELDMAN
Former senior adviser to Vice President Al Gore; founding partner of the Glover Park Group
Joe Biden's mission tonight: Don't screw it up. The economy has returned as the dominant issue, voters are paying attention and they like what they've been hearing from the Obama campaign. There is no doubt that Biden is qualified to be president, the single most important quality of a VP candidate, so he doesn't have anything to prove. He should answer the questions and let his knowledge and experience speak for themselves. His opponent still has a lot of work to do. He doesn't have to question her abilities; an increasing number of Americans are already doing that. To the extent that he directly engages her, it should be to remind voters that Palin and McCain are running to offer a third term of the Bush administration.
He should articulate his campaign's vision for change on the economic crisis to the wars in Iraq and Afghanistan -- in other words, don't pass up this opportunity to remind voters what is at stake in this election -- defend his running mate from unwarranted attacks (there will be many) but stick to the substance and don't get drawn into personal attacks. This is not the time for point-scoring. The McCain campaign will be poised to jump on anything that gives it the opportunity to change the subject and distract the American people.

GREG MUELLER
Republican strategist; former senior aide to Steve Forbes's and Pat Buchanan's presidential campaigns; president of CRC Public Relations
If Biden does not achieve clear victory, Palin wins just by talking issues with a veteran Beltway politician. Palin must face down criticism that she does not have a command of the issues while maintaining the genuine, Washington outsider, reform image that makes her popular in the heartland. She can do this by going on offense on energy issues and the economy. She can define the Obama-Biden energy and economic programs as out of touch with working and middle-class Americans, who want drilling, lower taxes and fiscal responsibility. She can showcase her populist conservatism by articulating how the high-spending, high-tax Obama-Biden economic agenda fuels opportunity for corruption.
Joe Biden is simply the other character on the stage. He is a skilled debater and has a deep command of the issues, distinct advantages. His challenge is to showcase his experience -- the sole reason Obama chose him -- and try to trip up Palin without appearing patronizing or condescending.

DOUGLAS E. SCHOEN
Democratic pollster and author of "Declaring Independence: The Beginning of the End of the Two-Party System"
As smart and talented as Biden is, he invariably has to prove that he is the smartest guy in the room. He must hold this aspect of his persona in check and avoid at all costs appearing as though he is beating up on Palin.
His single greatest challenge will be to emphasize that he and Obama have the breadth and depth of vision to lead America out of the economic and foreign policy crises the country faces.
Palin must demonstrate that she is qualified to be president -- both by appearing to understand the country's domestic and international problems and by articulating clear policy prescriptions to address them. If she can connect with ordinary Americans the way that she was able to do in her convention speech -- something Biden has never been particularly successful at -- she can win.

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Skepticism of Palin Growing, Poll Finds

With the vice presidential candidates set to square off today in their only scheduled debate, public assessments of Sarah Palin's readiness have plummeted, and she may now be a drag on the Republican ticket among key voter groups, according to a new Washington Post-ABC News poll.
Tonight's heavily anticipated debate comes just five weeks after the popular Alaska governor entered the national spotlight as Sen. John McCain's surprise pick to be his running mate. Though she initially transformed the race with her energizing presence and a fiery convention speech, Palin is now a much less positive force: Six in 10 voters see her as lacking the experience to be an effective president, and a third are now less likely to vote for McCain because of her.

A month ago, voters rated Palin as highly as they did McCain or his Democratic rival, Sen. Barack Obama, but after weeks of intensive coverage and several perceived missteps, the shine has diminished.
Nearly a third of adults in a new poll from the Pew Research Center said they paid a lot of attention to Palin's interviews with CBS News's Katie Couric, a series that prompted grumbling among some conservative commentators about Palin's competency to be the GOP's vice presidential standard-bearer. The Pew poll showed views of Palin slipping over the past few days alone.
In the new Post-ABC poll, Palin matches the Democratic vice presidential candidate, Sen. Joseph R. Biden Jr., on empathy, one of McCain's clear deficits against Obama, while fewer than half of voters think she understands "complex issues."
But it is the experience question that may prove her highest hurdle, particularly when paired with widespread public concern about McCain's age. About half of all voters said they were uncomfortable with the idea of McCain taking office at age 72, and 85 percent of those voters said Palin does not have the requisite experience to be president.
The 60 percent who now see Palin as insufficiently experienced to step into the presidency is steeply higher than in a Post-ABC poll after her nomination early last month. Democrats and Republicans alike are now more apt to doubt her qualifications, but the biggest shift has come among independents.

In early September, independents offered a divided verdict on Palin's experience; now they take the negative view by about 2 to 1. Nearly two-thirds of both independent men and women in the new poll said Palin has insufficient experience to run the White House.
Obama was able for the first time to crack the 50 percent mark, albeit barely, on whether he has the experience to be president following Friday's presidential debate, and the question is one of Palin's central challenges as she prepares to face Biden in prime time before a national television audience.
More than two-thirds of voters in the Pew poll said they plan to watch the debate, far more than said they were going to turn on the vice presidential debate four years ago. The expectations are that Biden, a six-term senator, will win: Voters by a 19-point margin think he will prove to be the better debater.
In the new Post-ABC poll, majorities of conservatives and Republicans maintain that Palin has the necessary experience to step in as president, though those numbers are also down somewhat from early last month.
But a third of independent voters now indicate they are less likely to support McCain because of Palin, compared with 20 percent who said so in an ABC poll a month ago. Palin now repels more independents than she attracts to McCain. The share of independent women less apt to support McCain because of the Palin pick has more than doubled to 34 percent, while the percentage more inclined to support him is down eight points.

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Fannie Mae's Patron Saint

Taxpayers are now on the hook for as much as $200 billion to rescue Fannie Mae and Freddie Mac, and if you want to know why, look no further than the rapid response to this bailout from House baron Barney Frank. Asked about Treasury's modest bailout condition that the companies reduce the size of their high-risk mortgage-backed securities (MBS) portfolios starting in 2010, Mr. Frank was quoted on Monday as saying, "Good luck on that," and that it would never happen.
There you have the Fannie Mae problem in profile. Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.
At least the Massachusetts Democrat is consistent. His record is close to perfect as a stalwart opponent of reforming the two companies, going back more than a decade. The first concerted push to rein in Fan and Fred in Congress came as far back as 1992, and Mr. Frank was right there, standing athwart. But things really picked up this decade, and Barney was there at every turn. Let's roll the audiotape:

** In 2000, then-Rep. Richard Baker proposed a bill to reform Fannie and Freddie's oversight. Mr. Frank dismissed the idea, saying concerns about the two were "overblown" and that there was "no federal liability there whatsoever."
Two years later, Mr. Frank was at it again. "I do not regard Fannie Mae and Freddie Mac as problems," he said in response to another reform push. And then: "I regard them as great assets." Great or not, we'll give Mr. Frank this: Their assets are now Uncle Sam's assets, even if those come along with $5.4 trillion in debt and other liabilities.

** Again in June 2003, the favorite of the Beltway press corps assured the public that "there is no federal guarantee" of Fan and Fred obligations.
A month later, Freddie Mac's multibillion-dollar accounting scandal broke into the open. But Mr. Frank was sanguine. "I do not think we are facing any kind of a crisis," he said at the time.

** Three months later he repeated the claim that Fannie and Freddie posed no "threat to the Treasury." Even suggesting that heresy, he added, could become "a self-fulfilling prophecy."

** In April 2004, Fannie announced a multibillion-dollar financial "misstatement" of its own. Mr. Frank was back for the defense. Fannie and Freddie posed no risk to taxpayers, he said, adding that "I think Wall Street will get over it" if the two collapsed. Yes, they're certainly "over it" on the Street now that Uncle Sam is guaranteeing their Fannie paper, and even Fannie's subordinated debt.

** By early 2007, Mr. Frank was in charge of the House Financial Services Committee, arguing that he had long favored some kind of reform. "What blocked it [reform] last year," Mr. Frank said then, "was the insistence of some economic conservative fundamentalists in the Bush Administration who, to be honest, don't think there should be a Fannie Mae or a Freddie Mac." What really blocked it was Mr. Frank's insistence that any reform be watered down and not include any reduction in their MBS holdings.

** In January of last year, Mr. Frank also noted one reason he liked Fannie and Freddie so much: They were subject to his political direction. Contrasting Fan and Fred with private-sector mortgage financers, he noted, "I can ask Fannie Mae and Freddie Mac to show forbearance" in a housing crisis. That is to say, because Fannie and Freddie are political creatures, Mr. Frank believed they would do his bidding.
And this is exactly what Mr. Frank attempted to prove when the housing market started to go south. He encouraged the companies to guarantee more "affordable" mortgages, thus abetting their disastrous plunge into subprime and Alt-A loans. He also pushed for, and got, an increase in the conforming-loan limits to allow Fan and Fred to securitize and guarantee larger mortgages. And he pressured regulators to ease up on their capital requirements -- which now means taxpayers will have to make up that capital shortfall.

But the biggest payoff for Mr. Frank is the "affordable housing" trust fund he managed to push through as one political price for the recent Fannie reform bill. This fund siphons off a portion of Fannie and Freddie profits -- as much as $500 million a year each -- to a fund that politicians can then disburse to their favorite special interests.
This is also why Mr. Frank won't tolerate cutting the companies' MBS portfolios. He knows those portfolios (bought with debt borrowed at taxpayer-subsidized rates) were a main source of Fannie's profits before the housing crash, and he figures that once this crisis passes they can do it again. And this time, his fund will get part of the loot.

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Mr. Frank has had many accomplices from both parties in his protection of Fan and Fred. But he was and is among the most vociferous and powerful. In any other area of American life, this track record would get a man run out of town. In Washington, he's hailed as a sage whose history of willful error will be forgotten faster than taxpayers can write a check for $700 billion.

The Real Deal

by Joe Miller and Brooks Jackson
So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault:

* The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.

* Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.

* Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.

* Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.

* The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.

* Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.

* Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.

* Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.

* The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.

* An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.

* Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.

The U.S. economy is enormously complicated. Screwing it up takes a great deal of cooperation. Claiming that a single piece of legislation was responsible for (or could have averted) is just political grandstanding. We have no advice to offer on how best to solve the financial crisis. But these sorts of partisan caricatures can only make the task more difficult.

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Bush can share the blame for financial crisis

By Mark Landler and Sheryl Gay Stolberg, Herald Tribune

WASHINGTON: For his entire presidency, George W. Bush has tried to avoid the fate of his father: brought low by a feeble economy. Now, as the financial crisis radiates far beyond Wall Street, Bush faces an even grimmer prospect: being blamed, at least in part, for an economic breakdown.
"There will be ample opportunity to debate the origins of this problem," Bush said Friday in a televised address from the White House Rose Garden. "Now is the time to solve it."
But in Washington and on Wall Street, the debate has already begun. And while economists and other experts say there are plenty of culprits: Democrats and Republicans in Congress, the Federal Reserve, an overzealous home-lending industry, banks, and also Bush's predecessor, Bill Clinton - they do agree that the Bush administration bears part of the blame.
These experts, from both political parties, say Bush's early personnel choices and overarching antipathy toward regulation created a climate that, if it did not trigger the turmoil, almost certainly aggravated it. The president's first two Treasury secretaries, for instance, lacked the kind of Wall Street expertise that might have helped them raise red flags about the use of complex financial instruments at the heart of the crisis.
To his credit, Bush accurately foresaw the danger posed by Freddie Mac and Fannie Mae, and began calling as early as 2002 for greater regulation of the mortgage giants. But experts say the administration could have done even more to curb excesses in the housing market, and much more to police Wall Street, which transmitted those problems around the world.
In retrospect, "it would have helped for the Bush administration to empower the folks at Treasury and the Federal Reserve and the comptroller of the currency and the FDIC to look at these issues more closely," said Vince Reinhardt, a former Federal Reserve economist now at the American Enterprise Institute, a conservative-leaning research organization here. Reinhardt said it would also have helped "for Congress to have held hearings."
Instead, voices inside the administration who favored tougher policing of Wall Street found themselves with few supporters. William Donaldson, a former Wall Street executive with respected Republican credentials who became chairman of the Securities and Exchange Commission under Bush, quit in 2005 after facing resistance from the White House and Republican members of the panel, who criticized his support for stiffer regulations on mutual funds and hedge funds.
Today, even those sympathetic to Bush say he cannot disentangle himself from a home-lending industry run amok or a banking industry that mortgaged its future on toxic loans.
"The crisis definitely happened on their watch," said Kenneth Rogoff, a professor of economics at Harvard University who advises the Republican presidential candidate John McCain. "This is eight years into the Bush administration. There was a lot of time to deal with it."
To some extent, Bush was simply following a deregulatory pattern set by Clinton. Perhaps the most significant recent deregulation of the banking industry - the landmark act that allowed commercial banks to expand into other financial activities, like investment banking and insurance - was signed into law by Clinton in 1999.
Bush also inherited a culture of borrowing and a frothy housing market that has become "deeply embedded in the American psyche," Rogoff said. And Reinhardt said the markets seemed to be doing so well that few analysts, either in government or the private sector, had a critical eye.
"When everybody is doing better," Rogoff said, "it is difficult to see the underlying weaknesses."
Still, the White House, in the view of critics, fostered a free-market hothouse in which these excesses were able to flower. It avoided regulation of banks and mortgage brokers, leaving much of that work to the Federal Reserve, which, under Alan Greenspan, showed little appetite for regulation. By the time Bush's current Treasury secretary, Henry Paulson Jr., proposed an overhaul of regulations governing the financial sector in April, the storm was already brewing.
The administration did push hard on Capitol Hill to rein in Fannie Mae and Freddie Mac, only to find itself stymied by Congress. But the administration's intense focus on fending off what it foresaw as a looming housing crisis did not extend to the proliferation of fiendishly complex mortgage-backed securities, said Harvey Rosen, an economist who served on Bush's Council of Economic Advisers, briefly as its chairman.
"Maybe there should have been," Rosen said, "but we were focused more on the fact that if these entities just held plain-vanilla mortgage-backed securities, it was still a disaster in the making."
Beyond its deregulatory bent, some economists argue that the administration's fiscal and tax policies made the United States more dependent on foreign capital, which fueled the bubble in housing prices.
"A different Treasury would have taken a different approach," said Lawrence Summers, who served as Treasury secretary in the Clinton administration. "I don't think the economy has been well-managed, and that has certainly been crucial for the problems we're facing."
The White House and Congress wanted to make housing affordable to more Americans, and freeing up the lending markets was a way to do that. As Rogoff said, "It was a market-based way to help poor people. There was an incredible belief in free markets."
For all that faith, Bush's first two Treasury secretaries, Paul O'Neill and John Snow, came from top jobs in industry, not Wall Street. They were viewed in Washington as advocating the interests of business, and being less comfortable with the mysteries of the markets.
Neither was seen as having much influence with the White House, and the Treasury lost some of the primacy in economic policy it had enjoyed under Summers and his predecessor, Robert Rubin. O'Neill and Snow declined to be interviewed for this article.
"The primary agency responsible for keeping an eye on these things is, and should be, the Treasury Department, and I think the president erred in the first place by appointing two secretaries who had no background in finance," said Bruce Bartlett, a Republican economist who was an adviser to President Ronald Reagan and an official in the Treasury Department under President George H.W. Bush.
"If we had had a Treasury that was fully supported by the White House," Bartlett said, "and a Treasury secretary such as Hank Paulson who was really attuned to what was going on in the financial markets, maybe some of these things could have been perceived in advance."
The White House did name people well-versed in the markets to other posts, not least the chairmanship of the Securities and Exchange Commission. But Bush's first SEC chairman - Harvey Pitt, a prominent securities lawyer - was brought down by political missteps. Pitt was replaced by Donaldson, who quit in 2005.
Critics, including McCain, say the SEC has been less active under its current chairman, Christopher Cox, a former Republican congressman from California. It has spent less on enforcement and levied less in fines on wrongdoers, according to the Government Accountability Office.
"You can't overestimate what happens when you encourage regulators to believe that the goal of regulation is not to regulate," said Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University.
In other areas, the Bush administration's failures seem more a case of inaction. The administration, economists said, did little to curb the practices of mortgage brokers, who are regulated by the states. But Democrats in Congress were equally to blame for this, these economists said.
"The Democrats pushed affordable housing goals, even in the face of evidence that people who got the loans shouldn't have gotten them," said Robert Litan, a senior fellow at the Brookings Institution, a research organization in Washington. "The no-money-down loans of 2005 and 2006 were a key part of the problem."
"I blame the Democrats for demanding that Fannie Mae keep buying these loans," said Litan, who was a budget official in the Clinton administration. "I blame the administration for going along with it."
White House officials note that the administration did propose reforms of real estate settlement procedures and the Federal Housing Authority, two areas it had identified as posing the greatest systemic risk to markets. Democrats in Congress, they said, blocked these efforts.
When Bush named Paulson to replace Snow in 2006, the Treasury Department finally got an expert in markets. But early on, his focus was on improving the competitiveness of the U.S. financial sector, which he feared was losing ground to Europe and Asia.

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Clinton rejects blame for financial crisis

By Walter Alarkon, The Hill

Former President Bill Clinton isn’t buying the suggestion that the current economic crisis began under his watch.
Clinton on Thursday responded to a remark President Bush made in his address to the nation Wednesday night. Bush argued that the financial system’s problems began more than a decade ago, during the Clinton administration.
“Most economists agree that the problems we’re witnessing today developed over a long period of time,” Bush said. “For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business.”
Clinton took Bush’s remark as criticism of a 1999 bill he signed that allowed commercial banking firms to offer investment services.
“There are some people who believe that that bill enabled them to somehow participate in some of the riskier housing investments,” Clinton said. “I disagree with that. That bill primarily enabled them to, like the Bank of America, to buy Merrill Lynch here without a hitch. And I think that helped to stabilize the situation.”
Clinton, however, said that Democrats weren’t entirely blameless, stating that they should have highlighted problems with Fannie Mae and Freddie Mac and “tried more aggressively to regulate derivatives.”
He also acknowledged that there was possible danger in his administration’s policy of pressing Fannie Mae, the mortgage company, to lower its credit standards for lower- and middle-income families seeking homes.
“I think, through the lens of this, it looks like that was true,” Clinton said. “But let's go back to where we were at the time. At the time, they had lots of money, were making lots of money, and I thought too much of the money was being given out in value to the shareholders and compensation to the executives. And, at the time, we had a balanced budget and a surplus and a rapidly growing economy in other areas.”
Clinton, however, put some of the blame on Bush’s administration, saying that it was lax in regulating short-selling, a practice criticized for driving down the stock prices of troubled firms.
“This thing really took off when the Securities and Exchange Commission, under this administration, exercised less oversight and they got rid of something called the uptick rule, which enabled betting down … on housing stocks to go crazy,” Clinton said.
When asked about the debate over debates in the presidential campaign, Clinton sounded reluctant to take sides.
NBC's Matt Lauer asked Clinton whether the Republican nominee, Sen. John McCain (Ariz.), was playing politics with the economic crisis by suspending his campaign Wednesday and calling for a delay to Friday's debate. Clinton said that McCain wasn't.
Clinton noted that McCain has actually called for more debates, a reference to the Republican’s request to hold joint town-hall meetings with his Democratic opponent, Sen. Barack Obama (Ill.).
“I think [McCain is] probably looking for some way of, once again, to say to the American people, ‘Hey, I'm not a traditional Republican. And I do take this seriously,’ ” Clinton said. “Because otherwise this makes it much, much more difficult for him to win because this is associated with lax regulation and the absence of economic activity in this period.”