High-Stakes Chicken

So as I understand it, Treasury has caved on the three things that Congress said it wanted:  increased oversight, equity participation, and compensation limits.  But like a blackjack player who doesn’t know when to pick up his winnings and head to the bar, our Congressional leaders can’t stop themselves. 

My favorite showboat-of-the-moment is Chuck Schumer.  Senator Schumer now wants to tranche the money $150 billion at a time, with Bernanke and Paulson coming hat in hand to–wait for it–Schumer’s committee before they get any more.  And besides, who on the Senator’s staff could deny that the “Big 3” of “Schumer/Paulson/Bernanke” has a nice ring to it?

But, unable to resist the chance to play footsies with Maria Bartiromo, Schumer yesterday left a hearing in progress before he could listen to Bernanke explain why tranching is  a bad idea.  Mind you, this is the same public-spirited senator who precipitated a $1.3 billion run and subsequent closure of IndyMac Bank by leaking to the press a letter from him to the Office of Thrift Supervision.  Sen. Schumer, it might be good for you to listen to Garrison Keillor:  “we are voters, we are not fruit flies.  We can read and write, and did not just fall off the coal truck.”  And we know counter-productive hotdogging when we see it.

Here’s the problem:  before we can get to the ultimate issue of solvency in the U.S. financial system, we must fix the problem of liquidity.  And the problem of liquidity is almost exclusively a problem of confidence.  Confidence of consumers, yes; but primarily, confidence on the part of large financial institutions who provide the grease that lets capital markets run, largely in the form of commercial paper and money market funds.  If those big boys aren’t damn sure that what is a liquid market today will be a liquid market tomorrow, they sit on their hands.  And of course, illiquidity then becomes a self-fulfilling prophecy, making the solvency problem impossible to even address.

Congress needs to look in the mirror.  They have impossibly low approval ratings–even lower than the President’s 19%.  If four out of five  voters in their own country don’t trust them to fix potholes, how do you think the Chinese Central Bank will feel about Chuck Schumer & Co. holding the purse strings for Bernanke and Paulson?  Do you think Goldman CEO Lloyd Blankfein’s new best buddy Warren Buffet will encourage him to count on Congress getting it right?  Please!  The idea is to inject confidence into the market, not to squeeze out every last iota of that most precious commodity.

Paulson wants a blank check precisely because he doesn’t know what he doesn’t know, and he knows it.  Congress wants to futz around because they don’t know anywhere near what Paulson knows, and if they do know it, they won’t admit it.  I never thought I’d say this, but Where is Don Rumsfeld when you need him? 

Where, for that matter, is Ron Paul?

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