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A Self-Fulfilling Prophecy:

Congressman John Shadegg on the Paulson bailout:

David Freddeso: Is a bailout necessary to save the economy at this point from complete collapse — from a major failure of multiple institutions at the same time?

Shadegg: I think that's the most difficult question that could be posed under these circumstances, and it's the question that I have struggled all week to find the answer to. I have talked to a lot of smart people who know Wall Street, know banking, know the economy quite well, and you hear different opinions. Some will tell you that it is absolutely essential. Quite frankly, I'm skeptical about that.

But I think that in some ways the question doesn't matter any more. Because Secretary Paulson chose to raise the matter in the way he did — that is, to go public in a very high-profile way, not just with his concern, but with a kind of Chicken-Little, the-sky-is-falling kind of demand — it became a self-fulfilling prophecy.

That is to say, once the secretary of the Treasury announces to the world that there is a pending financial collapse, perhaps as great as the Great Depression, and Congress must act — he has sent a signal that essentially tells world markets that Congress must act. I will tell you that has been one of the most frustrating things about this since the very beginning...

I can't tell you how many members of Congress were stunned at that news, and were stunned that none of their local bankers were calling them. And then they called their local bankers, as I called my local bankers, and my local bankers said, "I think things are just fine." I talked to one banker who said, "Gosh, we've got money, and we're liquid, and we're making a profit. And we're in the market selling loans, and we've got competitors trying to sell loans against us."

So, at that point, there's a disconnect. Secretary Paulson is claiming that this is a catastrophe of generational proportions that could go worldwide. And none of what we were hearing back home matches that. And I'm not speaking just for myself, but also for many of my colleagues who were making similar calls. They weren't being called by their bankers, or by any of the businesses back home saying, "I can't borrow any money".... If, in fact, Paulson had struck a chord with the American banking community, wouldn't you think that after he announced on Friday that there was a crisis of liquidity that threatens the entire nation's financial solvency and Americans' jobs from coast to coast, that my community bankers in Arizona wouldn't have been picking up the phone by Monday morning, if not over the weekend, to say that "I share the Secretary's concerns"?

Dick Morris had predicted that McCain would come out against the Paulson bailout last night at the debate and endorse the principles of the House Republican plan, which Morris had deemed a "brilliant move." Looks like McCain isn't quite a "brilliant" as Morris thought.

A. Zarkov (mail):
"I have talked to a lot of smart people who know Wall Street, know banking, know the economy quite well, and you hear different opinions."

How many of these "smart" people spoke up about the problems with the housing bubble, the lax mortgage loan underwriting standards, excessive leverage, level 3 assets, flawed correlation assumptions used in modeling CDOs, obvious corruption at the ratings agencies (remember Orange County), and many other problems in the finance industry? These problems were already obvious to anyone with half a brain in 2005. Did any of these smarties ever read Shiller on housing, Partnoy on derivatives, or listen to the warnings from Kevin Phillips (Bad Money), Roubini or even Peter Schiff (EuroPacific Capital).
9.27.2008 8:59am
PersonFromPorlock:
It does look like Shadegg's constituents aren't panicked by Paulson's prediction of catastrophe, though, so the idea that the prophecy is self-fulfilling seems questionable. What I see is a new bunch of money and an old bunch of hands stretched out for it.
9.27.2008 9:17am
Daniel San:
It may be self-fulfilling in this sense, people have less confidence in the big banks. There does seem to be a sense of panic on Wall Street.

But the small banks seem to have money and are making loans. The regional banks generally have money and are making loans. I keep hearing that the big banks are not making loans, but I am still getting loan offers from some of them.

Maybe there will be more failures if we don't do something. The biggest problem (for those who view it as a problem) is that it will be harder to get risky loans or loans that you can't afford to re-pay. Congress seems to view this as a bug; some of us see it as a feature.
9.27.2008 10:37am
Roger Schlafly (www):
It is odd that no one seems to be able to give demonstrable evidence of such a crisis. Exactly what companies need to be saved by the Paulson plan? What are the assumptions and analysis to support the plan? Paulson's testimony to Congress was embarrassingly, as he failed to answer any of the pertinent questions.
9.27.2008 11:13am
byomtov (mail):
Those local banks Shadegg talks about are making loans with federally insured deposits. What does he think they would be paying for deposits without the FDIC?
9.27.2008 11:41am
Steve2:
Here's my question: why is "complete collapse - a major failure of multiple institutions at the same time" necessarily a bad thing? If complete collapse is imminent along with the failure of those multiple institutions, doesn't that strongly indicate some sort of shared fundamental unsoundness? So, their failure would seem inevitable, and a "bailout" now would seem only to prolong the failure process, stretching out the pain to last longer - and preventing the total collapse necessary for replacement on a stronger foundation.
9.27.2008 12:16pm
Bruce:
Or, Dick Morris is not quite as brilliant as Dick Morris thinks.
9.27.2008 12:24pm
byomtov (mail):
why is "complete collapse - a major failure of multiple institutions at the same time" necessarily a bad thing?

Well, let's see. No financing for business, leading to lots of failures, unemployment, etc. A stock market crash, and a reduction in the credit quality of bonds, wiping out retirement savings, college funds, and other savings. That enough for you?

If complete collapse is imminent along with the failure of those multiple institutions, doesn't that strongly indicate some sort of shared fundamental unsoundness?

Well, it indicates a bunch of bad decisions. Whether those were due to fundamental flaws in the system or just some misjudgment can be debated, I guess, though I'd go for the former. The idea is that if you can avoid complete collapse - not without cost - you may be better off, and you might be able to understand what happened.
9.27.2008 12:24pm
Daniel San:
Right now, a good deal of capital seems to be fleeing to Certificates of Deposit. Yes, this is, in large part, because they are federally insured, but it means banks have money. It is a losing proposition for the banks to just sit on that money.

If the major banks all fail simultaneously, there will be no loans for large mergers and acquisitions (or it will be difficult to negotiate those loans). But there will still be funds for business to continue operating.

If people start stuffing their money under their mattresses and the money supply seriously contracts, or the government speeds up the printing presses and the money supply seriously expands, then we have reason to panic.
9.27.2008 12:38pm
js5 (mail):
It was strange hearing him talk about how he supports the bailout when the big news of the thurs/fri was the outright rejection of the plan by the republicans.

I remember Ron Paul talking about the Fed being a huge problem in the GOP Debates, and McCain mocking him like he didn't know what he was talking about. That he suspended his presidential campaign to go pass a 700Billion dollar taxpayer-funded ponzi scheme, ...is beyond the pale.
9.27.2008 12:45pm
Doc W (mail):
I'm just so damned tired of all this scaremongering and people falling for it every time. That's how we got the so-called "Patriot" Act and the Iraq war, among other things. Where assets need to be restructured, that's precisely one of the things the market does well. Let it work.

From byomtov--


The idea is that if you can avoid complete collapse - not without cost - you may be better off, and you might be able to understand what happened.

First of all, people with common sense already understand what happened, namely government intervention in the market causing problems that get blamed on the market, leading to more intervention until the whole house of cards collapses. Second, I just can't imagine why we should throw 700 gigabucks of taxpayers' good money after Wall Street's bad, just on the supposed chance that one might be better off.

You know what all this escalating interventionism reminds me of? A bull market. Yes, a bull market in big government, heading for a crash one way or the other. The pun is a bonus.
9.27.2008 1:23pm
PersonFromPorlock:
If the real problem is bank liquidity, how about temporarily increasing FDIC coverage to, say, five hundred thousand? That should tempt investors who are nervous about their current holdings to become depositors, while leaving the more sanguine still in the market. It's an ack-basswards way of improving investor confidence but it might work.
9.27.2008 2:10pm
SenatorX (mail):
The day a Bankster tells you they are insolvent is the day hell freezes over.
9.27.2008 2:41pm
Michael B (mail):
It would have been a self-fulfilling prophecy two or three decades ago, even one decade ago. Not now when media, technology and communications in general is on a very different plane, a very different scale.

There is a pitiable aspect to all this. We should be demanding, in the manner and mode of a velvet revolution, some truly fundamental changes in the way D.C. is operating, yet it does appear a tipping point has been reached in D.C. and Treasury.

Absolute bare minimum, genuinely transparent and full accountability should be a part of the deal and it's not apparent we're even going to get that.
9.27.2008 4:02pm
MartyH (mail):
The reason McCain says that he is going to support the bailout is because he is involved in the process of negotiating the bailout. He will ensure that the bill is acceptable to Congressional Republicans, whose support is required to pass it.

Obama doesn't know if he will vote for it because he is disengaged from the negotiating process. He's too busy running a campaign to worry about "the biggest finacial crisis since the Great Depression," as he called it. He sure knows what his priorities are!
9.27.2008 4:06pm
byomtov (mail):
people with common sense already understand what happened, namely government intervention in the market causing problems that get blamed on the market, leading to more intervention until the whole house of cards collapses.

Well, that's the view of people who think markets can do no wrong, and the govt can do no right. I would characterize that as letting blind ideology get in the way of understanding, rather than common sense.
9.27.2008 4:39pm
SenatorX (mail):
byomtov that is just a strawman argument, though a common one. It is completely false to characterize that statement as only being the view of "people who think markets can do not wrong, and the govt can do no right". Nearest I can tell it's so common because it's a projection of the opposite view; that individuals looking out for themselves can do no right and the government collective can do no wrong.

If you looked at the total of those that believe in "free market ideology" you would find but a small fraction of "Free Market Anarchists". 99.9% of what you think of as free market idealists will acknowledge in minutes that a regulatory structure is necessary for a market and that the state has a role.

So characterizing things in bi-polar way of either govt or no govt misses the mark completely. We would all be better off moving on to discussions of the types of regulation that benefit us all and the best methods of arriving (at), deploying, maintaining, and correcting regulation maintained by the state. You would then be joining most libertarians as you awakened to the fact that regulation that maintains viable markets is a benefit to all. It has to do with price discovery and capital allocation being vastly superior in a market system to all others suggested and attempted in history.
9.27.2008 6:08pm
LM (mail):
Michael B:

Absolute bare minimum, genuinely transparent and full accountability should be a part of the deal and it's not apparent we're even going to get that.

Accountability, yes. Transparency is trickier. Just like in national security, where you have to balance candor with the danger of educating your enemies, in finance you have to balance it with the danger of fueling a self-fulfilling panic.
9.27.2008 6:24pm
Doc W (mail):

people with common sense already understand what happened, namely government intervention in the market causing problems that get blamed on the market, leading to more intervention until the whole house of cards collapses.

Well, that's the view of people who think markets can do no wrong, and the govt can do no right. I would characterize that as letting blind ideology get in the way of understanding, rather than common sense.

Well, that response does nothing more than set up a straw man, doesn't it. Mind-reading as a substitute for rational argument.

The market is simply the opportunity for people to engage in mutually agreeable transactions. Different individuals may make better or worse choices and end up better or worse off as a result. The fanciful notion of government pervasively manipulating markets to any good end is debunked in good theory and falsified in practice. As for ideology--economic collectivism is an ideology, and just a bankrupt as any of those firms on Wall Street right now.
9.27.2008 7:02pm
Michael B (mail):
LM, transparency and judiciousness are not mutually exclusive or, differently put, foolishness does not inhere to transparency. There's also the fact that accountability cannot be complete without transparency.

Likewise, there's not a chance the Barney Franks and Christopher Dodds, et al. are going to be transparent with the part they helped to play in the mess.
9.27.2008 8:01pm
Mac (mail):
Michael B wrote:


Absolute bare minimum, genuinely transparent and full accountability should be a part of the deal and it's not apparent we're even going to get that.


You are such an optimist, Michael. I would be happy if the Republican's can get the billions of dollars in this package that would go to ACORN and LaRazza out of it.

I mean, 20% of all funds repaid for a group, ACORN, who has a lot of it's members in jail for voter fraud?

I don't even know what LaRazza will get or do with the money. Does anyone?
9.27.2008 8:03pm
Mac (mail):
News today is that Wachovia may fail. Oh, boy.
9.27.2008 8:04pm
Mac (mail):
Well, on the bright side, I guess, is that Wachovia may fail even with the bailout. I don't know that this makes me feel better.

I will ask again, why can't they just repeal Sarbannes-Oxley and let these institutions carry their own debt and quit having to account for the loss today?


Any genius who wishes to weigh in on this one would be appreciated.
9.27.2008 8:07pm
SenatorX (mail):
Wachovia failing is news? I remember when they bought Golden West and was thinking WTF. Like Wamu it's just been a matter of time. Of course they will get gobbled up by a stronger player and the deposits there will be safe. Old school retail banks still have a place even in the current crunch. We knew they were marked for failure when the Fed had their first list of "no shorting" banks. There were 19 or so banks on the list and some were foreign but Wachovia was conspicuously absent. Someone wanted some of that Florida banking and had marked them as a juicy takeover.
9.27.2008 9:23pm
1jpb (mail):

I will ask again, why can't they just repeal Sarbannes-Oxley and let these institutions carry their own debt and quit having to account for the loss today?


In theory transparency is good for the market.

Isn't it better for investors in a free market to know if company A has a lot of assets that are holding up, but company B has a lot of assets that are way underwater? What's the harm in this for Company A? Is Company A in a worse position if Company B can hide their terrible assets?

And there are the ugly management implications. Company B would be motivated to not liquidate the junk because this would expose their secret junk. Is that a good thing? Why wouldn't the managers of Company B hoard this junk to keep up appearances so that they can obtain more and less expensive cash infusions and growth through equity, bond, loan, and other channels? This would be the prudent way to keep Company B going and growing, until the unanticipated (from outside the board room) blowup.

These folks have a more sophisticated take on the issue.
9.27.2008 10:49pm
LM (mail):
Michael B:

LM, transparency and judiciousness are not mutually exclusive or, differently put, foolishness does not inhere to transparency.

What I said.

There's also the fact that accountability cannot be complete without transparency.

Among the reasons accountability is scarce.

Likewise, there's not a chance the Barney Franks and Christopher Dodds, et al. are going to be transparent with the part they helped to play in the mess.

Transparency is neither necessary nor sufficient to answer a loaded question.
9.28.2008 3:10am
jukeboxgrad (mail):
mac:

a group, ACORN, who has a lot of it's members in jail for voter fraud


Really? "A lot?" Please tell us exactly how many are now in jail. Or were in jail. Please show your proof. Also, please let us know if you understand the difference between an allegation and a conviction.

The number of convictions (or guilty pleas) obtained against ACORN workers compares very favorably with the number of same obtained against GOP leaders. Even though the former pool is probably much larger. So the GOP should aspire to operating as cleanly as ACORN.
9.28.2008 10:36am
byomtov (mail):
SenatorX ,

I referred spedifically to the idea that it is "common sense" that the whole problem was caused by government regulation.

I agree with you that

characterizing things in bi-polar way of either govt or no govt misses the mark completely. We would all be better off moving on to discussions of the types of regulation that benefit us all and the best methods of arriving (at), deploying, maintaining, and correcting regulation maintained by the state.

But it was Doc W, not I, who put things in what you call a bi-polar way. He's the one who said "it's all government's fault, and anyone with common sense knows it."
9.28.2008 11:36am
ejo:
well, we are hearing dire predictions of anticipated failures of things from people who failed to anticipate the failures that did occur.
9.28.2008 1:37pm
LM (mail):
jukeboxgrad:

The number of convictions (or guilty pleas) obtained against ACORN workers compares very favorably with the number of same obtained against GOP leaders.

And isn't any comparison at all, apples and oranges? Weren't the ACORN abuses frauds against ACORN (to obtain fees for phony registrations), while the Republican abuses were aimed at manipulating actual elections?
9.28.2008 5:26pm
jukeboxgrad (mail):
Yes, good point. And I have yet to see evidence that ACORN's work has ever led to a single fraudulent vote actually being cast.

I hope Mac will show up and tell us a bunch of names, since he said "lots" of people are in jail.
9.28.2008 6:22pm
Michael B (mail):
Likewise, there's not a chance the Barney Franks and Christopher Dodds, et al. are going to be transparent with the part they helped to play in the mess.
"Transparency is neither necessary nor sufficient to answer a loaded question."
It's not a loaded question unless you're intellectually and morally incurious and resolved to remain in that mode.

For a starting point, damning, pivotal commentary, c. 2004, by Barney Frank, Maxine Waters (who refers to "the outstanding leadership of Franklin Raines"), Gregory Meeks (D-New York), L. Clay (D-Missouri), A. Davis (D-Alabama) - and, also damningly, Bill Clinton weighs in at the end of the piece.

Re, ACORN, excerpt:

"[In July 2007] ACORN settled the largest case of voter fraud in the history of Washington State. Seven ACORN workers had submitted nearly 2,000 bogus voter registration forms. According to case records, they flipped through phone books for names to use on the forms, including 'Leon Spinks,' 'Frekkie Magoal' and 'Fruto Boy Crispila.' Three ACORN election hoaxers pleaded guilty in October [2007]. A King County prosecutor called ACORN's criminal sabotage 'an act of vandalism upon the voter rolls.'

"The group's vandalism on electoral integrity is systemic. ACORN has been implicated in similar voter fraud schemes in Missouri, Ohio and at least 12 other states. The Wall Street Journal noted: 'In Ohio in 2004, a worker for one affiliate was given crack cocaine in exchange for fraudulent registrations that included underage voters, dead voters and pillars of the community named Mary Poppins, Dick Tracy and Jive Turkey. During a congressional hearing in Ohio in the aftermath of the 2004 election, officials from several counties in the state explained ACORN's practice of dumping thousands of registration forms in their lap on the submission deadline, even though the forms had been collected months earlier.'"
9.29.2008 5:26pm
jukeboxgrad (mail):
Re, ACORN, excerpt


Really? discoverthenetworks.org, "a guide to the political left," is supposed to be considered a reliable source? When they rely on well-known experts like Michelle Malkin? We're supposed to be impressed by "David Horowitz's Smear Portal?"

Your irony impairment is severe. It was you who very recently said this:

The claims are neither proven nor disproven by resorting to "authorities" from within the Obama campaign and MSM


I know you live in a universe where David Horowitz is assumed to be more credible than "MSM," but not everyone inhabits that same universe.

The claim made earlier was that ACORN "has a lot of it's members in jail for voter fraud." The 1800-word article you cited doesn't even allege that an ACORN member has ever been convicted or jailed (I think this may have happened; I'm just pointing out that it hasn't happened "a lot;" not even close to "a lot"). So let us know when you're in a position to show something remotely resembling proof for the claim that was made.
9.29.2008 8:17pm
Michael B (mail):
jukeboxclown,

Your pick-nose and blowfish m.o., once again.

The first thing you might have noted is that I didn't make any claim concerning the number of ACORN members who are presently in jail.
9.29.2008 10:16pm
jukeboxgrad (mail):
The first thing you might have noted is that I didn't make any claim concerning the number of ACORN members who are presently in jail.


The first thing you might have noted is that I didn't claim that you made any claim concerning the number of ACORN members who are presently in jail. I pointed out that the claim had been made. And ACORN was being discussed in the context of that claim. That's something else you might have noted. So it's a bit puzzling that you spontaneously decided to toss in a bunch of uncorroborated gibberish about ACORN, since what you tossed in did nothing to shed light on the original claim.
9.30.2008 1:02am