The Paulson plan: He gets $700 billion to dispense, you get the tab.

The Paulson plan: He gets $700 billion to dispense, you get the tab.

This week in the Schultz Report, we discuss the only issue that matters at the moment–the financial meltdown on Wall Street and the Paulson plan that’s currently being bum-rushed through Congress, which would give the US Treasury secretary absolutely unprecedented power to buy up bad debt with public dollars, and without any public oversight or future public benefit in the form of equity in the companies we’re bailing out.

David Schultz

David Schultz

“There’s really no precedent in American history for anything like this,” says Schultz. “You don’t say that we’re going to pass the largest bailout in American history, one of the largest financial commitments we’ve ever made, and say you’re going to rush it through in five days without any serious examination. We have too many stories in American history where huge bills have been pushed through and later we find out they’re full of problems for down the line.

“We’re seeing stories emerge already about a lot of Wall Street types, on top of the already huge bonanza here, who are lobbying heavily to get other debt of theirs that is not related to the subprime crisis thrown in here. This is turning into one of the great pieces of pork barrel legislation of all time. It’s going to help out the people who caused the problem, and do absolutely nothing to stem the problems of foreclosure and falling equity for homeowners.

“Compare this bailout to what Sweden did when its banks were in crisis back in the 1980s. They too did a bailout, to the tune of 3-4 percent of their GDP. Ours is about 5 percent. But one of the things Sweden did was to demand equity from the banks. It got assets in return. It also got shares in those banks that it was eventually able to sell off to recoup its investment. We’re getting nothing. The taxpayers are only getting the bill, along with no guarantees and no equity. And no restructuring of the banks.”

Regarding the “muted” response of the presidential campaigns to this epochal turn of events, Schultz notes, “One sort of expects McCain to be dumbfounded about what to do here. The economy is not his strong suit, and he’s admitted that. More importantly, the problems of this economy are in part a result of a massive deregulatory movement that’s been going on since the start of the Reagan era. John McCain has been there voting for all this deregulation. He’s stuck in the sense that he’s got a voting record that’s helped produce this kind of problem. And his response in the last few days–saying, for example, he’d have fired SEC chairman [Christopher] Cox for not acting fast enough–has been very tepid.

“Barack Obama is a little more surprising. He wasn’t there; he wasn’t voting for this stuff for the past 20 years. The economy was supposed to be one of his strengths. And on his webpage, he has some fairly harsh criticisms of the past 20 years. But he also isn’t making any serious proposals in terms of where to go in the future. He says he supports the bailout but would like to see some caps on salaries for executives. That’s kind of nice, but it doesn’t solve anything down the line. He has a golden opportunity to make some serious criticisms of the Republicans and McCain, and to open it up and make some arguments about what to do.

“McCain doesn’t have much of an opportunity here. But Obama does. And it’s surprising that the two candidates have both been so muted. On first blush, this ought to be an issue [the Democrats] are jumping on. But when you step back a little more, you need to understand where the Democrats are getting their money from. Barack Obama, for example, is far outraising John McCain in Wall Street contributions. To a large extent, Wall Street’s driving part of his campaign. I suspect if we were to go through and look at the political contributions coming to the Democrats–I’m speculating on this, but I think you’d see a lot more money coming in from banks and Wall Street. I think they’re being pressured by their constituencies to go in this direction also.

“I also think at this point, Congress–and it’s happened several times under the Bush administration–gets buffaloed. They just don’t exert the backbone, and instead feel like they’ve got to give in to the Bush administration and to the political urgency [of the moment] instead of taking a breath and saying, no, there’s a process here of vetting legislation and looking at counter-proposals. The best thing that could happen in the next few days is for the whole process to slow down, so that you can see more criticisms coming out from economists, both mainstream and non-mainstream, and more introspection about the proposals. That might build up political capital that the Democrats need to be able to criticize.

“But at this point, because they’ve been totally reactive in dealing with this crisis, and because of the political contributions, I think they’re just not in a position to act at this point. They’ve been caught by surprise in not having their own proposals to deal with this problem.”

Listen: David Schultz on the Paulson and Dodd bailout plans and the presidential candidates’ response to the Wall Street crisis (14:22)

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