Morning-Aftering the Meltdown

Congress is pushing through a 9/11-like bipartisan commission to root through the ruins of the economy, discover what happened and figure out how to avoid another meltdown, and the White House has signaled its approval.

With Democrats and Republicans already arguing over how many members each will pick, it promises to be an exercise in finger-pointing unless the lead investigators are imbued with the zeal and bite of the Pecora Commission that unearthed the causes of the 1929 market crash.

Back then, the inquiry started as a Republican whitewash of Wall Street that ran through three tame lead counsels until a bulldog New York assistant DA named Ferdinand Pecora took over and started grilling elite bankers and brokers to lay bare Wall Street abuses, up to and including the fact that J.P. Morgan, Jr. and his partners had not paid any income taxes for two years.

The issues are much more complicated now, and the Meltdown Commission investigators will need not only the subpoena power to root out wrongdoing but the expertise to trace and dissect the complex derivative deals that caused today's mess, and the members will have to have the background to understand what they find.

Congress will undoubtedly round up the usual suspects such as James Baker and Lee Hamilton, but this one could use a couple of Nobel economists who are not uncritical fans of the Obama Recovery campaign. Paul Krugman and Joseph Stiglitz should be at the top of the list.

Banks Want a Bailout Do-Over

Anyone who has ever cashed in a Certificate of Deposit knows banks are adamant about extracting a penalty for early withdrawal but now, in repaying taxpayers, they are whining about the rules.

According to the New York Times, "Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money."

In a perverse way, it's reassuring that the financial crunch has not altered the basic rule of banking--to squeeze every last cent out of using other people's money for their own profit--but it also casts doubt on the government's convoluted plan to save the money lenders from their own greed and error.

“You will be seeing additional actions by the administration,” the President said after a meeting yesterday with his advisers to discuss results of the bank stress tests and the $500 billion to $1 trillion plan for public subsidies to encourage private investors to buy mortgage assets.

That proposal has been characterized by Nobel Prize economist Joseph Stiglitz as "ersatz capitalism, the privatizing of gains and the socializing of losses. It is a 'partnership' in which one partner robs the other."

But even such a giveaway is apparently not enough for some bankers who are resisting this subsidized sale of toxic assets because it would make them book big losses.

In the coming weeks, as government regulators tighten their grip on the system, they will be relearning what every depositor knows--that banks are in the business of having it both ways and even those that are not too big to fail won't go down without taking every last taxpayer dollar with them.

Nobel Economists vs. Geithner

Another winner of the Nobel Prize in economics, and a former Clinton White House adviser, joins Paul Krugman today in turning thumbs down on the Treasury's public-private toxic asset plan and suggests that nationalizing banks would be "preferable."

Joseph Stiglitz concludes: "Some Americans are afraid that the government might temporarily 'nationalize' the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

"What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a 'partnership' in which one partner robs the other. And such partnerships--with the private sector in control--have perverse incentives, worse even than the ones that got us into the mess."

Stiglitz's denunciation of the Public-Private Asset Plan as "a win-win-lose proposal: the banks win, investors win--and taxpayers lose" follows Krugman's observation last week that "it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic."

Not only do we have two Nobel Prize economists trashing the proposal but even the radicals at the Wall Street Journal are unhappy that the trough for investors may be too small:

"So not only is the government going to be anointing a favored few to invest in these assets. It is also giving those favored few the opportunity to collect fees and profit-sharing from anyone else that wants to go in with them. In the wake of the AIG bonfire, Mr. Geithner is tempting another outcry."

Unlike those AIG bonuses, the toxic-asset plan is too complex for "another outcry" by politicians or the public, but in the amounts of taxpayer money involved, it dwarfs that issue.

Even worse, it is a key recovery proposal by a President voters want desperately to succeed. But someone in addition to economists and super-investors like George Soros has to put nationalization of banks in some form on the agenda--and soon.

The Mideast Money Drain

With the economy in a nosedive, the Democratic Congress is beginning to turn its anti-war focus on the dollars that are being drained by Bush's Mideast policies.

"In a shift from last year’s failed legislative efforts to force a reduction of troops," the New York Times reports, "the Democrats’ new approach is...focusing on the financial cost of military operations and on the war’s implications for the nation’s troubled economy."

This coupling comes on the heels of a new book, "The Three Trillion Dollar War: The True Cost of the Iraq Conflict" by Nobel Prize-winning economist Joseph Stiglitz with Linda Bilmes, which estimates that Iraq has already cost almost ten times as much as the first Gulf War, almost a third more than Vietnam and twice as much as the First World War.

Stiglitz told a British think tank this week that war spending was a hidden cause of the current credit crunch after our central bank responded to the financial drain by flooding the American economy with cheap credit.

"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said, leading to a housing bubble and a consumption boom that has driven the economy into recession and saddled the next president with the biggest budget deficit in history.

If this argument is too complicated for politicians to make, Senate committees are beginning to hone in on the billions that have been wasted or stolen during the past five years of presumably protecting us from terrorists--an estimated $3.8 billion misspent by Musharraf in Pakistan along with billions more that have vanished in Iraq.

When voters get their stimulus checks of a few hundred dollars this summer, they may want to think about that.