Last Friday, I sat down with Congressman Peter Welch in Burlington for about an hour. We had a conversation that touched upon the current financial mess, Democratic capitulation, Iraq and a few self-reflections. I'll be posting it throughout the next week or so.
JD: The bailout is what's on everybody's mind right now. It's funny, after you voted against the first bailout bill, and I mentioned to some people that I was meeting with you, they told me to tell him “nice job”, and after the second vote, I got a few emails saying “tell him I want to take that back!” It was obviously a difficult vote either way, if you read on GMD, odum kind of took you to task for it.
PW: Yes.
JD: You originally said in the article quoted in the Times Argus, “We're at the point that we have to choose, it's this bill or no bill – no bill is an absolute catastrophe.”, and, well, some of us see this as a false choice. And probably some of this comes from skepticism about the Bush administration, at this point how can you trust anything they say?
PW: Well, first of all, I don't trust anything they say. There was nothing in my final decision that was based on trusting George Bush at all.
JD: Do you trust Hank Paulson?
PW: It's not about trusting him; he's not the ideologue that Bush is, but my vote was not based on the credibility of Paulson. This – whether we like it or not, first of all, it's not surprising that this is happening. Many people who have said that is was reckless for us to allow such deregulation predicted at one point, we'd pay a price for it, because it was a house of cards.
You know, we had an economy that was built on credit, rather than an economy that was built on production, okay? So if you step back, a lot of people who were critical of the bailout, their criticism rightly goes back to the whole house of cards that was constructed and eventually, we didn't know when, it was just a question of when, not whether that house of cards would collapse. And so, I was not surprised.
Some folks raised this WMD question, that was a big deal, with Bush coming in, but there's a fundamental difference.
JD: When you refer to the WMD's, do you refer to the notion that Bush is basically –
PW: … making it up.
JD: Okay.
PW: But the reality of it is that these things were blowing up all around us – at AIG, Lehman Bros., Bear Sterns, Washington Mutual, Countrywide – Citibank losing 20 billion dollars, with these executives in there with these ripoff salaries and golden parachutes. The evidence of this financial meltdown was real, and these huge firms that made billions of dollars, in effect by running this speculative enterprise, were so excessive that they shot themselves in the head. Lehman Bros. Was borrowing at a 35 to 1 ratio, and as long as the housing market wsa going up, they were fine. Once it flattened and came down, they not only brought down a lot of innocent bondholders including an Arizona teacher's fund, a city in Norway, they destroyed their own business.
So, even the people who had a self-interest in having this continue, they were so reckless that they destroyed their own livelihood. So, I didn't need a lot of evidence that there was a problem, because it was hitting us in the face. What I needed, what was tough on this, there was two things. I was adamantly opposed to in the first bill that the president presented that was a three page bill, giving a total blank check, with literally no oversight and no taxpayer protection. Number two, a challenge and question for any of us, even those of us who have been harsh critics of deregulation, was what practical steps could we take to try to protect the taxpayers, Vermonters, Americans who did not participate in this reckless conduct but were going to suffer from the consequences.
The fact is, we're in uncharted territory, because of this credit crisis, and that's unique to this economic downturn that we have now.
JD: As I was doing some research about this, I came across a study pointed out by David Cay Johnston, a Pulitzer prize-winning economist, and he mentioned a study by the IMF and they studied 42 banking crises around the world in the last 37 years, and they concluded that bailouts usually don't work, and they often make things worse.
Do you feel like, in a sense, this is a big wager, a 700 billion dollar wager? I mean, how convinced are you that this is going to work, do you honestly just not know?
PW: We do not know. I mean, here's what I thought. Start with the beginning. I was convinced there was a crisis, and that the nature of this crisis was different than any other cyclical downturn we've had. In normal cyclical downturns, unemployment goes up, wages get depressed, tax revenues decline, and usually, since the Second World War, responded to that with stimulative economic activity. The government increases spending, you try to get the jobs programs going, to get consumer demand back up and unemployment down. We have that now. But what's so threatening, and so unique, in where we don't have the tools in the toolbox, is this credit squeeze. And that credit squeeze has happened because of deregulation, and creation of these exotic, basically casino bets collateralized debt obligations, credit deferred swaps, the mortgage-backed securities.
And, you know, in a way, it's important for me to explain the mortgage-backed security and how complicated it's gotten, because that gives people some perspective of how difficult the situation is that we're in. In the old days, if you were gonna buy a house, you'd go to your local banker, he'd check your credit, knows who you are, and he'd give you a loan, right?
In the new days, I'll give you an example of Lehman. They hire a mortgage origination firm, they go to neighborhoods that are often times low-income people, and persuade them to borrow far more money than they'll ever be able to pay back, and they reassure them it's no big deal, you can refinance, and your house price will be up, you know, 30 percent. So the mortgage originator gets you to sign a loan, so you borrow $300,000. Unlike your banker, he doesn't care whether you pay it back. Literally doesn't care. They make 2%, they make $6000 and walk away. They sell it to Lehman. Lehman then slices that loan up into thirty different pieces. They sell the first three years of repayment to, say, the New York Hedge Fund, the second three years to the Arizona Pension Fund, the next three years to the state employee's association, somewhere else.
JD: A big mess, basically.
PW: Exactly, and each time they slice it and dice it, they make a fee. They sell a huge chunk to the Bank of China. China is enormously invested in these mortgage-backed securities.
JD: They do seem to own a lot of us now –
PW: And, so it creates this incredibly complex problem once the real estate value goes down, because even if you default, you want to work something out, let's say you got laid off from your job or a pay cut,so you want to get a loan extension and work it out.. Well, you have to find the Bank of China, you've got thirty different people that own your loans. It's not like going down to the banker and asking to work something out.
What's also happened is lots of banks have these asset-backed securities on their balance sheet, and the reason the lending is drying up is because every bank is afraid to lend to another bank, fearing that while their money is over at the other bank, the regulators will come in a la Lehman and say “you're going into receivership” and the fear is that they're not going to get paid.
JD: Now that's where the nationalization of the banks come in. Thoughts on that?
PW: I actually prefer it to what we did, and we put in the legislation the authority for the Treasury secretary to do that. In other words, in looking at this, the initial reaction to the bailout is one of outrage, because the anger that Vermonters and Americans have towards the excesses on Wall Street is well-deserved. And my calls came in with people expressing that fury. But they also expressed some fear, because at the end of the day, our outrage is not a policy to get us out of this. And if we could wall this off, and say, “Well, this is Wall Street and those guys are getting what they deserve, let 'em go,” I would say “Absolutely.” But if what's happened there is coming here, and our job is to protect Vermonters as taxpayers and as folks with jobs, folks who are saving for their kids to go to college, then we have to ask the question, “What do we do?”
And, anyone who tells you they know exactly how to get their way out of this, they're kidding you, because this is a unique situation. Once we decided we had to act, my goal was to get the best possible bill, and we were a long way from the best possible bill. When that first one came up, there was a gun to our head, and the one thing I have from Vermont is the leverage of the vote they've given me. So I'm gonna use that to the last minute. And what I had been working to, to try to accomplish, some of it we got, some of it we didn't.
JD: What about the “NO BAILOUT” bill? The progressive caucus had that no bailout bill they were floating around.
PW: I favored that.
JD: You favored that?
PW: Yeah.
JD: Well, what were the realistic chances of something like that? Because I…
PW: They were zero.
JD: Because I noticed that Barbara Lee, Donna Edwards, they eventually all signed on to this one that passed.
PW: A lot of us were in the same boat. I mean, a lot of the most progressive members of the caucus did what I did. We fought to the last moment, for the best we could get, so we had to make a decision, yes or no, on the last legislation. And my judgment was that doing nothing would be even worse than the flawed bill.
And I'll you why. What got us here? What got us here was a hands-off, head-in-the-sand approach by government, acting as thought the government has no role in proper regulation that's necessary to protect consumers and businesses, okay?
JD: Like the Cato Institute was running the government or something.
PW: Exactly. So now we get to the inevitable consequence of deregulation, where Wall Street was allowed to run amok and they did. That says to me that we've got to act. And we have to act even though we don't necessarily get it perfect. We can't put our head in the sand and do nothing.
JD: In terms of the accountability, as I understand it , a chunk of the money is released right away, then there's another chunk that comes out at the discretion of the President?
PW: There's a lot of authority for the President.
Here's where the accountability is. First of all, let's be clear that i as a major decision for congress to authorize this bailout.
JD: But why not just 150 billion, and when they need more, to come back for approval again?
PW: I favored that. I was unsuccessful. Okay, there's a number of things that I thought would be much better,and a lot of my progressive friends fought for that we didn't get. One was bankruptcy protection. We need that because if we're going to unwind some of these loans, and you have 30 different borrowers, you really have to have the judicial process so there's some authority…
JD: So a judge can step in and renegotiate a rate…
PW: That's right. And tell people to go in a room and work it out, and if you don't, I'll settle it. Barney Frank worked hard for bankruptcy. We couldn't get it through the Senate.
JD: Where was the opposition? Republicans?
PW: The Senate. Yeah, Republicans.
JD: Democrats and Republicans, or mostly Republicans?
PW: Mostly Republicans, mostly the Senate. We couldn't get it through the Senate. Obama says he's for the bankruptcy provision. That'll make a big difference.
The second thing that I thought was really important that we didn't get, but I fought for, I mean, I was really a leader on this, was the stabilization fund. And I proposed to have a transaction fee on every stock transaction, .25 cents (note from JD – that's .25 of a cent, not 25 cents), that would raise 150 billion a year,and I was told they couldn't get that thought the Senate.
JD: What did you think of the Sanders amendment?
PW: I was fine with Bernie's bill, but I don't even think he got a recorded vote on it.
JD: No, it was a voice vote.
PW: Frankly, I prefer my approach on this, as I think we're going to have to have a tax increase on the high income folks who've gotten the break, to use that for health care and rebuilding our roads and bridges. What I wanted to do is much like deposit insurance at the local bank. If you have money there, it's insured. But that's paid for by a premium, a small premium on your deposit. Well, I wanted to fo a similar thing on the financial services industry, and have that be available to offset any taxpayer cost.
Now, I'm going to go back and fight for that again. Obama tells me that he's for it.
JD: Okay, it's a flawed bill. Do you think this is some sort of victory? A defeat? Neither?
PW: For me, it was a necessary step to begin the process.
JD: You don't feel good about it?
PW: I feel terrible about what's happening to our economy, and I don't make any claim that there's a magic bullet here. Just think about it. We're ten years into a system of deregulation and laissez-faire. It was wildly abused by Wall Street and the financial services industry, and no one believes that you can pass a single law that would suddenly unwind this mess.
But what we have to do is, number one, reassert the responsibility of government to work on behalf of the consumer and the average person.
JD: Okay, what ideas do you have in terms of going about that?
PW: Number one, we start reregulating again. And there were a lot of Democrats who went along with this, so I'm not here defending the party. Not at all. One thing was the refusal of Alan Greenspan and Robert Rubin to regulate derivatives. No one even knows what the heck they are, even Warren Buffett. Literally. But what they are is this huge web of debt relationships that are so obscure that no one knows who owes what to whom – the total amount of them is at least 62 trillion dollars.
There was a woman who was the head of the Commodity Futures Trading Commission in the 90's that tried to regulate 'em. Ed Markey in '92 tried to start regulating them. And bothe were solidly rebuffed by Alan Greenspan and Robert Rubin. They were wrong. Dead wrong.
Second was the decision by Christopher Cox of the SEC, a former Republican member of Congress, a big friend of the securities industry, and he was appointed by Bush to be the head of the SEC. He allowed these investment companies like Lehman to increase their ability to borrow from a ratio of 12 to 1 to 35-40 to 1. So what you had were these investment houses that were literally betting the house. For every dollar they'd put in a deal, they were borrowing 35. When the market was going up, they were really making a killing, but once it went down, they got clobbered.
JD: Okay, now, let's talk about Bob Rubin for a second. He's part of Obama's economic advisory team right now.
PW: Yeah, and that worries me. He did two things, you know. He opposed regulating derivatives. Wrong. Number two, at Citibank, he was on their investment committee, and Citibank lost billions of dollars in bad investments in these mortgage-backed securities,and it's astonishing to me.
JD: Have you talked to Obama about that at all?
PW: No, but if asked, I'd say that. I just think that somebody who was on the wrong side of this regulatory obligation we have is not somebody I'd give a lot of credibility to in working our way out of it.
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Next up, the future of “free markets” and I ask Peter why the Dems cave in so often.