John Heilemann and Robert Reich on Who’s Winning the High-Stakes Game of Bailout Chicken

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Every day until November 4, a series of writers and thinkers will discuss the election over instant messenger for nymag.com. Today, New York's John Heilemann and Robert Reich, former United States secretary of Labor and University of California, Berkley professor, discuss Paulson's "extortion" and the end of the era of laissez-faire economics.

J.H: So let's start with the topic du jour. We're either on the brink of a bailout bill or not. What's your view?

R.R.: The Dems seem on the verge of caving in. Apparently they've decided that any bailout bill, even a profoundly flawed one, is better than no bill, out of fear that financial markets will melt down otherwise.

J.H: What's wrong with the current bill specifically?

R.R.: There's no bill yet. But as I understand it from several people who are working on it, of the three big things the Dems wanted — limits on executive pay, some equity stake for the public in the companies that are dumping their bad debt on taxpayers, and an explicit provision to allow distressed homeowners to renegotiate their mortgages within bankruptcy reorganization — they're getting just enough to be able to claim they've actually achieved something, when in fact they got nothing. The limits on executive pay are almost a joke. Equity is hardly available. And there's no bankruptcy provision at all. Now, all this may change between now and whenever a vote is taken, but basically the Dems have caved.

J.H: Do you think they're wrong to believe Paulson's Armageddon scenario? Or that they've simply not been tough enough in negotiating?

R.R.: The problem is, even a relatively small chance of economic Armageddon is enough to merit some major action. And if you're a member of Congress, and the chair of the Fed and the secretary of the Treasury tell you the whole financial system will melt down if you don't do what they tell you is necessary — and, by the way, it's about five weeks before Election Day — you're not going to take any chances. But I do think the Dems can hold tougher.

J.H: We're about to hear from Obama on all this, but what do you think he should do, given the options in front of him?

R.R.: I'm an informal economic adviser to Obama, so I don't think it's altogether proper for me to tell you what I'm advising him to do. But what I've suggested to several members of Congress today and yesterday is to demand a better deal. The public is furious about all this. In fact, John, I don't remember a time when the public was as angry about a pending public policy. And the more they find out about it, the angrier they become. Dems don't have to cave in. The idea that any bailout bill is better than a deeply flawed one is simply wrong.

J.H: I couldn't agree more — and yet Obama seems much more onboard with this than McCain is. Arianna Huffington just posted a column saying that the problem may be that he's too close to Wall Street. Do you see any merit in that argument?

R.R.: Obama set out some tough principles on this a few days ago. McCain agreed with him. What worries me is that Wall Streeters are everywhere right now, lobbying everyone, giving every member of Congress advice. Most of them are well meaning, and I don't for a moment question their integrity. It's just that they have a very limited view of the world. And many of them have participated directly or indirectly in the creation of this mess.

But where else are policy makers going to turn? This is complicated financial stuff. Paulson is from the Street, obviously. His plan was cooked up by present and former Streeters. And if and when it's passed, who do you suppose will implement it? Who is Paulson already planning to ask to figure out how to utilize the taxpayers' money? People from the Street, of course.

J.H: This just in, hot outta my e-mail box: "TREASURY SECRETARY HENRY PAULSON FEARS BAILOUT DEAL MAY COLLAPSE; PLEADS WITH DEMS, 'PLEASE DON'T BLOW THIS UP,' ABC NEWS HAS LEARNED." So you may get your wish.

R.R.: What Paulson is really saying is: "Accept my terms or the deal will blow up. And if the deal blows up, so will the entire financial system. And if the financial system blows up, so will the economy, and so will the jobs and wages and pensions of all your constituents." This used to be called extortion.

J.H: For the sake of argument, let's contemplate the following scenario: Monday morning comes and the markets open with no deal in place. What happens then, economically and politically?

R.R.: Paulson is threatening that if there's no deal by Sunday evening, when the Tokyo exchange opens, we see the start of a financial tsunami that spreads around the world. What are the real chances of this? No one knows. But even if it's a 5 percent chance, no responsible policy maker would want to take it. Yet that doesn't mean Congress has to agree to a blank check for Paulson and Wall Street.

J.H: So you think a deal of some kind within the next 48 hours is inevitable? The only questions are its contours and who wins and loses politically?

R.R.: Just about inevitable. It's a huge game of high-stakes chicken. On one side, Paulson and Bernanke and Wall Street. On the other side, the Dems in Congress, some Republicans, and a public growing increasingly angry about what Paulson et al are demanding. Who caves first? I fear the Dems. I hope I'm wrong.

J.H: But don't the politics of this kinda demand that Obama and McCain end up on the same side (as suggested by their joint statement yesterday)? Obama can't afford to let McCain oppose an unpopular bill that he supports, and vice versa.

R.R.: Yes, I think they will wind up on the same page. But they're not the major movers here. This is less about Democrats versus Republicans than it is Main Street versus Wall Street, Congress versus Paulson and Bernanke, populists versus moneyed interests. Paulson knows that the longer it goes on, the less likely it is he'll get what he wants. Why? Because the public is waking up and is pissed as hell — and they're letting their representatives in Congress know it, whether Democrat or Republican.

J.H: Let's assume a deal does get done. $700 billion is a lot of money. How is that going to affect President Obama's domestic agenda if he wins? Back in 1993, a lot of your domestic-spending/human-capital/infrastructure plans got scuttled by an unexpectedly big deficit and the demands of the Fed and bond market. So is this 1993 all over again — same culprits, different circumstances/pretext?

R.R.: By the way, the $700 billion figure is just a guess. Treasury plucked it out of the air. This thing could be much bigger. It's unlikely to be much smaller. So what happens to President Obama's agenda? We may indeed be back to January of 1993 again — a president with an ambitious agenda, but burdened with a giant national deficit and debt along with a Fed that threatens to raise rates unless he cuts spending. But one big difference: In January of 1993, we were coming out of a recession. In January of 2009, we're likely to be in the middle of a much larger one. President Obama may have to spend in order to get the economy moving again. It's called fiscal policy. It may be the only policy instrument available.

J.H: Fiscal policy? Huh. I think I read something about that in Econ 101. Haven't heard much about it since, oh, 1994…

R.R.: It's coming back.

J.H: Okay, let's wrap this up with a bit of bigthink. Seems to me that we are now officially ending the era of laissez-faire which began with Reagan and Thatcher in roughly 1980. Since then our politics have been an argument about how little the government should be involved in the economy, not how much. Now the government is going to be heavily involved in at least one seminal sector — finance — and maybe more (autos? Airlines? Who knows what's next?). And the philosophy of hell-bent deregulation has been pretty fully discredited. So what are the political implications of that? For Dems? For the GOP?

R.R.: A trauma of this magnitude will force the public to reconsider the Reagan-Thatcher bromide, because this is so much larger than the Savings and Loan debacle of the late eighties, larger even than Enron and the other corporate lootings that came to light earlier this decade. Historically, America tends to move back and forth between periods when government is the villain and periods when big business is the villain. When government is the villain, we place great trust in business and understand the value of the free market. And then, inevitably, business greed and stupidity generate excesses of the sort we've seen, and the pendulum moves back.

That John McCain, one of America's foremost deregulators, is now trying to position himself as a big-time regulator, shows how far the pendulum has swung, and how quickly. Historically, Democrats are more trusted to protect the public from big business, while Republicans are more trusted to protect the public from big government. So all of this should work to the Democrats' advantage — in this election cycle and perhaps for a decade or more.

J.H: Democrats resurgent — who'da thunk it? And all it took was a near-meltdown of the financial system!

R.R.: Don't count your chickens yet. If the Dems approve the plan and the meltdown still happens, they might be blamed. If they approve the plan and a meltdown is avoided but the public gets stuck with a giant tab just as we're heading into a severe recession, the Dems might be blamed. If the Dems stick to their buns and don't give Paulson what he wants and then there's a financial meltdown, the Dems might be blamed. In other words, if the Dems blow this big time, you can forget about a Democratic resurgence. But if they blow it big time, you might as well forget about an American economy, too.

J.H: Always the optimist, Pastor Reich.

Earlier: Robert Reich and Ben Smith on McCain ‘Suspending’ the Campaign and the Exact Chances of Worldwide Financial Meltdown [NYM]

For a complete and regularly updated guide to presidential candidates Barack Obama and John McCain — from First Love to Most Embarrassing Gaffe — read the 2008 Electopedia.