Immediately following the announcement that the US House of Representatives had narrowly rejected the landmark $700 billion bailout proposal, Senior Editor Paul Jay talked with Conn Carroll and Sam Greenfield to get their reactions. They discussed the causes and significance of the financial crisis as well as their opinions on what an appropriate government reaction to the crisis ought to look like.
PAUL JAY, SENIOR EDITOR: Only minutes ago, the bailout package that was to save Wall Street and, we’re told, save the American economy was voted down in Congress. To dissect and debate the repercussions and consequences of this decision, we’re joined now from Washington, DC, by Conn Carroll. Conn’s assistant director for the Heritage Foundation Center for Media and Public Policy, and he serves as editor of The Foundry, the think tank’s policy blog. And from New York City we’re joined by Sam Greenfield. Sam is the host of the Sam Greenfield show on WVNJ 1160. Welcome, Sam. Welcome Conn.
SAM GREENFIELD, HOST, THE SAM GREENFIELD SHOW: Thank you.
CONN CARROLL, EDITOR, HERITAGE FOUNDATION POLICY BLOG: Great to be here.
JAY: Conn, so I think no one quite expected this to be voted down. What do you think are the consequences of it and what do you think of the decision?
CARROLL: Wow. You know, I don’t think anyone can tell you what the consequences are going to be. That was part of the reason why you saw such a spirited debate on the house floor is that the administration and the leadership in both houses and the Senate just didn’t make their case to other members that if this bill didn’t pass, that there was going to be a market calamity. So it appears now we unfortunately might get to find out.
JAY: Now, Heritage Foundation that you work for as a whole decided to support this bailout. You personally, how did you feel about it? And are we facing Armageddon, which is what we have been told this last week or two?
CARROLL: Well, nobody in the building likes the bailout package at all. It was something where you had intervention in the economy. As a free-market think tank, we were not a big fan of from the beginning. But our economics team, our group of policy advisers on the economic side, really thought it was a pill that we absolutely had to swallow, even though we hated it. But on the Constitution side, a lot of our people, lawyers, thought that it had a lot of separation-of-powers issue that gave way too much of a blank check to Henry Paulson, in that when they tried to add an oversight board to it, that they violated even more separation-of-powers clauses by intermixing the legislative and executive branches too much. And personally, if I had to vote, I thought there’s still more work that could be done on the Constitution aspect of it to make it a better bill. And so, even though Heritage, they support it, they thought it was a good measure, in the end, if I was a member, I probably would have voted against it.
JAY: Sam, where were you on this, and where do you think this leaves us?
GREENFIELD: This situation (excuse me) on a much smaller scale, it reminds me of what happened with Donald Trump a few years ago. Donald Trump borrowed billions of dollars from a couple of banks. He had no line of credit. He did it on his name. They loaned him billions of dollars, just based on Donald Trump. When the stock market went, when the economy tanked in—I think it was ’91, he said, “I can’t pay you back,” and they had to eat a huge part of that loan. The United States government is asking people to do the same thing now, and they’re trying to do it from this angle. They’re trying to say, well, you know, if you don’t do this, the banks can’t extend credit, and the guy who’s got 17 employees is going to have to lay them off. Well, we’re going to find out if they have to be laid off.
JAY: So, Sam, what did you think of this bill yourself? And if you could have written this bill, what would have been the key elements of it?
GREENFIELD: If I had written this bill, someone would be in jail, because the banks were loaning money to people who didn’t have the wherewithal to take out a loan. This is the part of this that amazes me. Billions of dollars in loans to people who couldn’t afford an apartment, let alone to own a house. I mean, it’s like Wall Street went out and got drunk. But by the same token, we’re going to find out over the next week the repercussions of turning the bill down. We’re going to find out. But it’s a sin that this happened. It’s greed so above and beyond anything that people need. I understand some members of Congress’ anger of this guy. It’s like somebody breaks into your house and breaks their leg in the ensuing robbery, and now they sue you.
JAY: Conn, many people are saying that one of the fundamental reasons for this crisis is this is what the free market is when left free. The lack of regulation is one of the critical issues here. Conn, did you agree with that? And also people have been advocating that in this package, if there’s going to be a public bailout, there’d better be real public equity, that if the public treasury’s involved, then the public should wind up owning these companies. What do you make of this whole argument, Conn?
CARROLL: Yeah. Let me break those down into two separate issues, first on the deregulation front. That part is just completely wrong. The foundation of this problem is government intervention in the market. You had Freddie [Mac] and Fannie [Mae], which exist—their very existence—they’re your government-sponsored entities. They exist to put more money into the mortgage market. They were both passed by Democrats; they were both supported by Democrats, conservatives, both in early ’90s. Bliley, a congressman out of Iowa, tried to stop them; in 2005 John McCain tried to stop them, tried to rein them in. But they were just huge organizations that had a monopoly on the mortgage market in the United States. And because they were able to use the government backing, it was Freddie [Mac] and Fannie [Mae] who were buying up all those bad countrywide loans. You know, Sam talks about Wall Street giving all this money to these people who couldn’t afford it, but Wall Street didn’t make all these loans. No one in New York was lending money to somebody out in California. What happened is you had, countrywide, going out to these people making bad loans, Freddie [Mac] and Fannie [Mae], government entities out of Washington would then buy up these securities and then sell them to Wall Street. So you have the government intervening in the market, and that’s why you have this housing bubble.
JAY: So, Sam, what do you think of Conn saying that the problem is too much government, not too little regulation?
GREENFIELD: Well, you know, if there had been some oversight, maybe these guys wouldn’t have gone crazy, if there had been some oversight. There was no oversight. And one of the things that’s happening is, as this ship sinks, everybody’s complicit and no one’s complicit—John McCain calling for the firing of Chris Cox, you know, Freddie Mac and Fannie Mae being, you know, blamed, which is kind of logical. But what I’m saying is it seems to me that it’s deregulation that did this. It seems to me that the rich got richer from this and the poor are going to get poorer. And, you know, the real test of this is going to be what happens in the next five days, ’cause it’s Monday. So if in the next five days the Dow goes down 1,000, some people who voted are going to pay the price for that. If unemployment goes to double digits, somebody who voted against this bill is going to pay for that. Even if in their heart they think they’re right, they’re going to pay for this.
JAY: Conn, if you had to look into the next week or two, President Bush went on television a few days ago and more or less said this is a dark, dire threat, and if this package doesn’t pass, we’re into some apocalyptic financial times. What do you think?
CARROLL: Well, I think what you’re going to see is you’re going to have to see some action on the FDIC level [Federal Deposit Insurance Corporation] and local banks, ’cause this problem isn’t really going to hit Main Street until you have local and small businesses going to the bank, not getting the line of credit they need to meet payroll, when you have small local banks saying to the people who took out home equity in their house, you know, “We said you could pay that,” you know, “$13,000 loan you got off your home equity line over a number of years. No, we need that now.” And you’re already starting to see some of the other banks, you know, have some real bank runs. You know, Wachovia’s in trouble. So if this continued line of bank runs happens, you’re going to see the federal government, through the FDIC channels they already have, start to act more. And, you know, if you do see a further decline, I think you might see this issue revisited. But I think you’re going to see, first, a lot of just normal action by the Fed on [inaudible]
JAY: Now, Conn, you say that you oppose this bill, but fundamentally on constitutional issues about how much power does Paulson have. So if that gets solved, you would favor it. But what do you make of the issue that if the public’s going to do the bailout, the public should wind up with real equity, owning these institutions. Do you support that idea?
CARROLL: I’m not crazy about it. I don’t think the government should be owning companies. And I think that the current version of the bailout did have an adequate solution to that in the warrants they were issued. But warrants weren’t going to be pure equity. It would be a case where the federal government could exercise an option down the road. And it wouldn’t even have to be that the government exercises the option. The warrant can be just an option to buy the stock at a certain price, and then the government could sell that option to a private actor so that the government would never actually have to buy and own any part of the company. They can just sell the option, and a private party could then take ownership of the company. So I do think there is a way for those tax payers to be protected, to give them equity, that wouldn’t involve the government owning companies, which conservatives always want to avoid.
JAY: Sam, what do you make of this question of equity?
GREENFIELD: Well, I understand why people argue it for constitutionality, but I think that the Constitution isn’t going to go up in flames if this bill passed. And I think that if people are denied lines of credit and there are runs on banks, the first line in the Constitution, you know, or not the first line, but the things that are guaranteed are life, liberty, and the pursuit of happiness—not liberty first, not pursuit of happiness first, but life. And if you can’t eat, iif you can’t pay your bills, and if you’re unemployed, it kind of interferes with your life. So I think that that has to be addressed. As far as, you know, the people owning it, you know, ostensibly the people own the airwaves. You hear that all the time: we own the airwaves. We own nothing. Okay? If we own something, then every time we got ticked off, we could walk into a station and say, “We’re taking it over, ’cause we don’t like what you’re saying.” We’ve appointed the FCC to be the guardian of the airwaves. We don’t own it; we won’t own these institutions.
JAY: Mm. Last word from each of you quickly. What do you think we should look for in the next week or two? I mean, there’s going to be a furious renegotiation now. It seems like everybody realizes there’s some kind of bailout. I can’t imagine Congress just letting this thing unravel. So is it just a question of renegotiating the package, Conn?
CARROLL: I think what you’re going to see is an expansion of the issues debated. From the beginning, Paulson tried to make this a very narrow debate about just his package and just his authority and tried to leave the capital gains questions that the Republicans were pushing, other tax questions aside, and from the Democratic side more of a comprehensive regulatory look. I think what you’re going to see from both the House and the Senate is widely divergent paths about where to go forward, but they’re going to be much broader in focus.
JAY: Well, you know a lot of these congressional Republicans that are blocking this. Are they going to dig their heels in here? This is quite a brinksmanship going on. How far are they willing to let this go?
CARROLL: Well, you know, obviously they’re willing to let it go far enough to let this deal [fall] through. So I think that you’re going to have to see what the market does in the next couple of days to see if that changes attitudes.
JAY: Sam, last word?
GREENFIELD: I think at a time when people could be losing their homes, and unemployed, and not having any food come in, arguing about capital gains taxes, it’s silly. It’s not part of the issue. It’s a side issue that they’re trying to squeeze in. I think we should concentrate on this. I think it’ll be passed, but I think there are going to have to be some changes made. But if part of the argument, if part of the big dissension is, well, you know, capital gains taxes aren’t being protected, it’s kind of Marie Antoinette to me.
JAY: Alright. Thank both of you for participating today, and we’ll talk to you again soon.
GREENFIELD: You’re welcome.
CARROLL: Thank you.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.