MORNING MUST READS: BAILING AND B.S. – UPADATED

While there are interesting things to read on other subjects, this morning it was a tad difficult to focus on anything but the economy and the elections.

So here are FOUR FIVE MUST READS that have to do with one or both:

Okay, yeah, I was trying not to post it, but do also read Maureen Dowd’s imagined meeting between Obama and our favorite former president, Jed Bartlett.

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[UPDATE: PAUL KRUGMAN’S ABSOLUTELY, POSITIVELY MUST READ COLUMN BELATEDLY ADDED BELOW. Scroll down.]

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BECOMING A “SEMI-SOCIALIST WELFARE STATE”—WITH NONE OF THE FUN PARTS

1. On Sunday, Bill Saporito of Time Magazine writes that we have just become the United States of France—and not in a good way. Here’s a clip:

This is the state of our great republic: We’ve nationalized the financial system, taking control from Wall Street bankers we no longer trust. We’re about to quasi-nationalize the Detroit auto companies via massive loans because they’re a source of American pride, and too many jobs — and votes — are at stake. Our Social Security system is going broke as we head for a future where too many retirees will be supported by too few workers. How long before we have national healthcare? Put it all together, and the America that emerges is a cartoonish version of the country most despised by red-meat red-state patriots: France. Only with worse food.

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You just know the Frogs have only increased their disdain for us, if that is indeed possible. And why shouldn’t they? The average American is working two and half jobs, gets two weeks off, and has all the employment security of a one-armed trapeze artist. The Bush Administration has preached the “ownership society” to America: own your house, own your retirement account; you don’t need the government in your way. So Americans mortgaged themselves to the hilt to buy overpriced houses they can no longer afford and signed up for 401k programs that put money where, exactly? In the stock market! Where rich Republicans fleeced them.

2. WALL STREET’S RUINOUS MAGICAL THINKING

In next week’s New Yorker (now online) Nick Paumgarten talks about the dangerously-imaginative and now-collapsing world of “derivatives.” Here’s a clip:

Over the past thirty years, Wall Street has honed the art of creating and selling financial products with an increasingly tenuous connection to reality. It has been an extraordinarily creative period—a modernism of money, with an equivalent trend toward abstraction. Relatively simple derivatives evolved into ever more arcane contrivances. The risk and the leverage piled up, and, in the short term, the billions rolled in. This is over now.

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One problem is that the contrivers mistook their art for a science. A pre-modern money manager explained last week, “They looked at it all as a science experiment.” They tested each new product—each hypothesis—against a bunch of historical precedents, running computer models to see how the product would fare under the conditions of various bygone catastrophes. “The problem was, they didn’t have any historical precedent for when it all melts down. The historical precedents they used are not relevant.”

In fact, it wasn’t science at all. It was more like what anthropologists and psychologists call magical thinking—the tendency to believe that wishing it so makes it so. For years now, people have clung to the conviction that you can have outsized returns with little risk, leverage without recoil. This is what the clever financiers claimed that their inventions could do. Their colleagues and clients wanted to believe them. They all wanted to believe that their credit-default swaps could continue to insure against debt defaults.

3. THE BAILOUT: FLAWS AND SOLUTIONS

Over at Politico the editors asked some conservatives, some liberals and a few people in between, what they thought was the primary flaw in the administration’s bail out plan and what out to be done to to fix it.

The suggestions are not exactly earth shaking. If anything, they reveal that, despite their pronouncements, many don’t have a clue as to what might have a shot at getting us out of this mess.

4. THE ECONOMY, THE ELECTION & THE TRUTHINESS FACTOR

Finally, once again, Frank Rich.

This time Rich makes the point that, because Barack Obama doesn’t have a whole lot of experience in the economic realm, we will have to assess him in more general terms—based on what we think of his leadership and judgment.

McCain, on the other hand, has a descernable record on economic issues, no matter how much his campaign would like to pretend otherwise. Here’s a clip:

For all his fiery calls last week for a Wall Street crackdown, McCain opposed the very regulations that might have helped avert the current catastrophe. In 1999, he supported a law co-authored by Gramm (and ultimately signed by Bill Clinton) that revoked the New Deal reforms intended to prevent commercial banks, insurance companies and investment banks from mingling their businesses. Equally laughable is the McCain-Palin ticket’s born-again outrage over the greed of Wall Street C.E.O.’s. When McCain’s chief financial surrogate, Fiorina, was fired as Hewlett-Packard’s chief executive after a 50 percent drop in shareholders’ value and 20,000 pink slips, she took home a package worth $42 million.

5. CASH FOR TRASH?

Of all the Must Reads, this is the….uh… must readiest: This morning, NY Time and Princeton’s Paul Krugman has been fretting about the administration’s bailout strategy since it was announced. This morning, he lists a bunch of points to help how you and I to think through this whole bailout question for ourselves.

Whether you agree with Krugman’s conclusion or not, it behooves each of us to try to wrestle with the basics of this $700 billion rescue plan…..and then voice an opinion. After all, it ain’t those formulating the plan who will take the hit for decades if it goes south. It’s us and our kids. This is the moment when the saying “democracy is not a spectator sport” needs to have real meaning.

Here’s the heart of what Krugman has to say. Read it and tell me what you think.

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

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But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

If you agree, call your Congress people. NOW! And whatever you decide, please share your conclusions here.

(Also, be sure to try to work the word “deliveraging” into casual conversation as often as possible.)