Bailout

[Gwizz]

The house just voted down the bailout bill

I've been listening to and reading statements about this new (improved?) bailout.

Now I'm wondering if this banking problem is really a crises. 

It seems the people that are responsible for the banking problem are the ones wanting the bailout the most.

It seems the original bailout is basically still in place for the same amount, only stretched out over time.

Apparently it still gives absolute authority to the Secretary of State.  He can just about do as he pleases.  If he needs more tax dollars he has few hoops to jump through to get it.

This plan could really hurt the people more than the banking problem has.  Since tax money will be used to supplement the bailout with businesses taxed the most, business will pass it on with higher prices and everyone will pay these added taxes (the cost of the bailout). Everything the government does is done with the peoples money.  When they print more dollars it lowers the value of the dollar and the people lose again.

The money for the corrupt Acorn group was cut out of the bailout.

It seems that Acorn was involved in pressing banks to give out risky loans as a part of their community organizing activities.  Obama was a part of the Acorn activity.  He has never been forth coming with his exact duties at Acorn.

A comment was made that this bailout (by the people who caused the problem) was designed to survive at least until after the election.  Our corrupt speaker, said she wants to have at least 50% of the republicans to vote for it.  If the bailout fails I believe she wants some republicans to blame.  What does she know about this bailout that she is not talking about?  It seems to me those in congress, if they voted for this bailout, could lose their own election unless they live in a very very Blue state.

The bailout, while needed, is aimed at the very rich not the common people.

I listened to a statement from a 2004 congress meeting where a charge was made of major problems with Fannie Mae and Freddy max financials.  The congress claimed that there were no problems and the investigator was chastised.  Yet his investigation indicated many problems that have now come true and that a person, the CEO of Fannie Mae, had stolen roughly $50 million and cooked the books for other executives.  He was sued to return the money. he returned less than 10 Million in value of money and paper. They reached a settlement and no charges was brought against this democrat.  He took an early retired from this leadership job.  Obama had plans to make this man a member of his staff, but now denies it.  I forget the man's name; Frank something? ,

But will add it when I find it.

Here is the information: 

http://en.wikipedia.org/wiki/Franklin_Raines

[Gwizz]

One of the congressmen said the reason he didn't vote for the bailout was the power it gave to the Secretary of State to bailout any bank in the world and to create paper, notes, loans etc without getting permission from anyone.

He was only required to notify the congress.

This Democratic congress in going down as the most do nothing congress is resent history.

[thomasjordan]

Everyone talks about G. W. Bush's low approval ratings.

His approval ratings are double those of Mrs. Pelosi's and Mr. Reid's Congress.

Democrates and conservatives don't like Mr. Bush.  The middle and Republicans are neutral on him.

Nobody likes this Congress.

[Gwizz]

I hope the low approvals translates into election turnovers.  But people will often not like a group but still like their Representative that is a member of that group.

I'm listening to the radio and heard that the failed bailout did have Over site.

This over site amounted to 3 people who will keep an eye on the bailout.

I missed the names. There was an plane flying over at the time.

But one is the chairman of the private, Federal reserve Bank, an elitist.   WOW, responsible to whom.

Another is the head of HUD.

I missed who the last one works for.  But I believed it was a Chris something.

[Gwizz]

Read this tonight.

As Congressman Mike Pence (R-Indiana) stated: "The decision to give the federal government the ability to nationalize almost every bad mortgage in America interrupts this basic truth of our free market economy....  [T]his bill ... remains the largest corporate bailout in American history, forever changes the relationship between government and the financial sector, and passes the cost along to the American people. I cannot support it.  Before you vote, ask yourself why you came here and vote with courage and integrity to those principles.  If you came here because you believe in limited government and the freedom of the American marketplace, vote in accordance with those convictions....  We have fought the good fight. Now we need to finish the race and make sure that posterity and the American people know there were conservatives who opposed the leviathan state in this dark hour." Source of Mike Pence quote: http://tinyurl.com/3uhgep 

 

And has Newt Gingrich says: "I don't think the taxpayers should be socked for $700 billion for welfare for Wall Street. I think it's fundamentally wrong, and I think that it is very likely to create a bureaucratic control of our financial system in a way that will cripple us for 20 years....  I think ... they know that if they don't rush it through, it has no hope, because as the American people learn the details, they're just going to scream at their House and Senate members." Source of Newt Gingrich quote: http://tinyurl.com/52295q

[Gwizz]

Some comments made today:

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On the Bailout, congress has received orders today from their constituents to vote no on the wall street bailout.

Congress e-mails for no on the bailout ran from 50 to 1 to as high as 200 to 1 for one congressman, early today.

Now, e-mails are saying what happened, why didn't it pass.  No ratio was given for this.

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The democrats keep passing blame toward the Conservatives. But, the problem is almost totally democratic caused.

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The Fannie Mae and Freddie Max books have been cooked for so long, the real debt will take a while to figure out.

I'm going to stay as liquid as possible for a while and see what the fear mongers in congress try next.

[Gwizz]

Found some interesting comments.

A California congress person receive over 10,000 emails about the bailout.  Only 10 of the e-mails wanted the bailout.

With such a large lack of support by the people many congress persons did not represent their constituents very well.

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My congressman a moderate democrat stated the e-mails were so overwhelming, was the main reason he voted against the Bailout.

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The 6 pages of paperwork for the draft of the bailout changed to 110 pages when congress was asked to vote on it.

Yet some congress people voted for it without fulling reading it.

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About 60 congress members met before the voting to listen to finance experts.  These Experts stated there was better ways to fix the banking problems.  That the government's bailout was being pushed too fast and It was flawed.

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Bankers stated they have money to loan but are waiting to see what government is going to do.

They can fix the problems without the government's help, if government would just get out of the way

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700 trillion is twice the budget of Denmark.  It is about twice the cost last years welfare.

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If 700 billion was divided between every home loan as of the end of last year and given to each home owner the amount would be over $20.000.00 dollars per home loan, not per person.  Government involvement will always cost a lot more than private involvement.  To replace this money the government would have to collect a lot more than 700 Billion in taxes.

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A study was releases for the average temperature world wide for 2007.  We had the greatest change since the 1930s.

The average world temperature dropped 0.6 degrees Centigrade. 

[Hawk]

A study was releases for the average temperature world wide for 2007.  We had the greatest change since the 1930s.

The average world temperature dropped 0.6 degrees Centigrade.

Get ready for the next great money-making scam - Global Cooling, again.  ::)

[Gwizz]

More comments:

The new Senate Bailout bill with 451 pages is a huge expansion of the House bill's 110 pages that was voted down.

http://www.associatedcontent.com/article/1077249/new_senate_bailout_bill_to_be_voted.html?cat=3

Little of the original bill has changed just a lot of additional pork was added to gain more support from congress. 

Pork is like a bribe.  It will give you this at tax payers expense if you will vote for the bailout.

If congress had worked this hard before, they would not be called a do nothing congress today.

I read the new time magazine at the doctors office,  It was full of lies about this banking corruption.

It quoted Obama as saying McCain had done nothing to prevent this crises.  McCain's bill to put back the regulations that Clinton signed into law removing regulations, are both a part of Congressional records.  It was submitted and voted down by the Democrats. 

On another note:

The stock market dumped supposedly because the bailout was voted down in the house.  Well, really is that so.

Very wealthy people are deeply involved in the stock market.  The new bailout will tax then heavily to help pay for it. They can trade for 24 hour each day.  Someplace in the world the stock market is open except on weekends, etc.  These people have the power to unload large amounts of stocks to start a market decreasing in value.  This scares other traders who sell and the market continues to fall.  When market reaches a lower amount set by those who purposely started the downward trend, they buy back stock and make a killing on the gain. They sold high and bought low at the little guys expense. 

What if the huge drop in the market value were purposely caused for profit, to scare people and the politicians that didn't vote for the bailout and to gain money to pay the extra taxes the elite will have to pay.  After all, the bailout will help these very wealthy the most.  They want the bailout to pass.  And milking the stock market, their money machine, will help them pay up front. 

I believe they are pressuring the president to support the bailout and certainly pressuring the congress to pass it.  US citizens overwhelmingly do not want congress to bailout these absurdly rich harbingers of financial corruption.

When Freddie max and Fannie Mae was created the Democrats put the untouchable phrase into the documents that no one can question what they do.  This makes it tougher to prosecute the corrupt democrats involved.  There are corrupt Republicans but this banking mess is totally in the Democrat's corner. 

McCain said he will not throw mud.  But, what happens when you won't call a crook a crook.  He calls you a crook and blames you for what the crook did. Some people will believe it even with piles of democratic mud piled everywhere. 

It is nice to be a peace maker, but when people are hitting you over the head with baseball bats, maybe it would be a good idea to fight back.

[maddog]

This Democratic congress in going down as the most do nothing congress is resent history.

I think that is a beautiful thing! Let them do nothing. Let them do it again, and again, and again..... The less they do the more freedom I get to keep. I can only call this a good thing.  :)

--Ray.

[maddog]

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The democrats keep passing blame toward the Conservatives. But, the problem is almost totally democratic caused.

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No, it's completely justifiable. There were six, yes count them, six years of neo-conservative control in congress with a neo-conservative President in the White House that could have done something but they kept saying the the economy was sound. They kept saying that it's growing. This is good, they said. They were more interested in war, Terry Schiavo and trying to find the "enemy within" rather than fixing the economy so it would stay sound. It just so happened that the house-of-cards economy just decided to collapse inside the last year. Basically to quote Bill Clinton's '92 campaign, "It's the economy, stupid!" Not the Democrats. Put the blame on Wall St. where it belongs. They made the loans. Let them reap what they have sown (to quote myself... see the next post.).

--Ray.

[maddog]

This is what I sent to my congressman after I learned that he voted for the bill....

Congressman Boucher,

I was disappointed to learn that you voted for the Wall St. Bailout bill yesterday (http://i2.cdn.turner.com/cnn/2008/images/09/29/bailout.rollcall.0929.pdf). I ask that you do not vote for any such bailout in the future. It is important to me that we do not bailout institutions that have already failed and that should have known better. I do not want my tax dollars used for this. My wife and I have a mortgage and we are not in default. I should not have to pay this addition $700+ billion burden. It's the fault of these failed institutions (read: poor rich men). Let them go bankrupt and reap what they have sown.

Mr. Ray Allen

Christitansburg, VA

[Gwizz]

Maddog, thank you for being so polite writing your posts.  You do cause me to think deeper than I might have.

Quote by Maddog

Put the blame on Wall St. where it belongs

They have blame; But, I don't blame the Wall street banks as much as you do.  They were being threatened by Acorn.  And, they did have the de-regulation law on their side or what they were told was the law. And, they did take advantage of this law although many were coerced by Acorn to do so. 

I sure don't want to bail them out.  They should have complained publicly and I believe some did to the congress.

The little oversite that was still in place was acted upon by a few auditors who were shot out of the water by the Democrats.  I listened to recordings of the democrats, Waters and Franks saying in 2004 that there was no problems.

 

six years of neo-conservative control in congress with a neo-conservative President in the White House that could have done something

True. But, a few Republicans did try to support the auditors. They were out voted.  McCain had the back bone to write a bill, but he didn't have the support he needed to pass his bill and fix the problem.  Bush tried but not very hard.

Can't you say the same about the Democrats when they were in power. They didn't fix the problem either. 

The fact is I believe a couple of Democrats did try.  The problem during this time was that control was held by only one or two votes.  There were alway radicals on both sides that could stop a challenge.

Lately even Clinton said he tried to warn of a possible problem before he left office.  But, I can find no proof that he really did this.

they kept saying the the economy was sound

Because, by cooking of the books, the economy did look sound.

Chris Dodd and Bonny Franks Democrats, both ran either Fannie Mae or Freddie Max.  I forget which.

Chris Dodd took a huge amount in commissions out of his group.

The person that had the 2nd largest amount was Obama himself working for Acorn at the time.

Not many were allowed to benefit from this cash cow.  I believe Dodd wanted it all for himself. 

He got so deep into the scam that it eventually rolled over him and the problem surfaced.  Then Dodd had to stop buying bad debts from the banks and the Wall Street banks had a big problem.  Not all banks went along with what Dodd was doing.  They were the ones that were able to buy out other banks.  It is suspicious that they were not pressured by Acorn.  who knows what mechanization took place during this time and who controlled whom.

No money disappeared it just changed hands.  The money is still around and just waiting on the bailout gains Congress is about to give them before they will put it back into use.

Dodd was allowed to operate this way by the de-regulation designed by Democrats and signed by Clinton.  This is where I place the majority of the blame. They made it possible for the crooks to operate.

Dodd and Franks are just crooks that took advantage of the debacle.  Do they have some blame?  Sure they do.

There were a few republicans who did vote for the original de-regulation bill.

These two or three republicans caused all republicans to be targeted and blamed by the Democrats for this mess.

Overall, I'm with you, let some banks fail and the people who bought houses, knowing they could not make the payments, lose their homes. Better yet we should make the people who caused the problems buy the bad loans at full price.

I would be surprised if the bailout doesn't pass through Congress in the near future.  Congress as a whole doesn't care about the people who elected them.

[thomasjordan]

"Feel good" social policies created this mess, along with a fair amount of bribery and corruption that benefited primarily Democrates.  But there is blame to go all around.

This is one of the best articles I have found about the causes:

October 01, 2008

The Long Road to Slack Lending Standards

By Steven Malanga

In the early 1990s I attended a conference designed to teach journalists the tools of an emerging field known as computer-assisted investigative reporting. One of the hottest sessions of the conference explained how journalists could replicate stories that other papers had done locally using computer tools, including one especially popular project to determine if banks in your community were discriminating against minority borrowers in making mortgages. One newspaper, the Atlanta Journal-Constitution, had already won a Pulitzer Prize for its computer-assisted series on the subject, and others, including the Washington Post and the Detroit Free Press, had also weighed in with their own analysis based on government loan data. Everyone sounded keen to learn if their local banks were guilty, too.

Although academic researchers leveled substantial criticisms against these newspaper efforts (namely, that they relied on incomplete data and did not take into account lower savings rates, higher debt levels, and higher loan defaults rates for many minority borrowers), bank lending to minority borrowers still became an enormous issue��"mostly because newspaper reporters and editors in this pre-talk radio, pre-blogging era were determined to make it so. Editorialists called for the government to force banks to end the alleged discrimination, and they castigated federal banking regulators who said they saw no proof of wrongdoing in the data.

Eventually, the political climate changed, and Washington became a believer in the story. Crucial to this change was a Federal Reserve Bank of Boston study which concluded that although lender discrimination was not as severe as suggested by the newspapers, it nevertheless existed. This, then, became the dominant government position, even though subsequent efforts by other researchers to verify the Fed

[Hawk]

Great article Thomas, and a perfect example of why were in the situation we're in today, and now we tax payers have to bail them out. That's what pisses me off. I believe this will hurt the economy far more than if we just let them fail. Besides, if they fail maybe it would open some eyes and lead toward a 'proper' correction of the situation.

[Gwizz]

How the Democrats were responsible for the banking fiscal.

__________________________________________________________

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@aei.org

Last Updated: September 22, 2008 00:04 EDT

[thomasjordan]

Senators Vitter ® and Landreux (D) both voted NO last night to this travesty of a bailout.  Landreux probably just reassured her reelection in conservative Louisiana.  I might even vote for her this time, which is suprising, as she is the Republican's #1 target in the Senate to knock-off.  She didn't vote NO because she is in a safe seat and doesn't have to worry about reelection.  She stood up for her constuents.  That took courage.  John Breaux trained her well.

[thomasjordan]

I'm not typically a big fan of the Washington Post, but this article seems to get things right.

Oh, and if you have a decent credit score, loans are still available at decent terms and interest rates.  The squeeze is primarily affecting people who shouldn't have been borrowing in the first place.

October 02, 2008

Other Pathways Out of the Financial Crisis

By David Ignatius

WASHINGTON -- Betting on the sagacity of the U.S. Congress is risky, to say the least. So let's assume the worst, and imagine that the big $700 billion bailout doesn't pass anytime soon. What happens then? Is it true that "this sucker could go down," as President Bush put it last week? Or are there other pathways out of the financial crisis?

Imagining financial life without the $700 billion rescue is a useful exercise because it helps clarify the baseline issues in this crisis.

We are beginning a painful process of deleveraging our debt-addicted economy, but that's in many ways beneficial. Martin Wolf noted in The Financial Times that U.S. household indebtedness jumped from 50 percent of GDP in 1980 to 100 percent in 2007, while financial-sector debt increased from 21 percent of GDP to 116 percent over the same period. We have all been participants in this one, I'm afraid, and the appropriate, if painful, cure is to save a bit more and consume a bit less.

The potentially crippling problem is in the short-term credit markets, where financial institutions are hoarding cash in an effort to ride out the crisis. They don't trust that borrowers will be able to repay loans.

This hoarding is creating a larger credit crisis that could begin to squeeze every business that needs money -- from department stores financing inventory to credit card companies juggling millions of purchases every day. The spike in overnight lending rates is downright scary, with the measure known as LIBOR more than doubling to 6.87 percent Tuesday from 2.57 percent Monday.

So the real question is how to unfreeze the credit markets. And here it's not clear that the $700 billion bailout is the most effective response. A better approach may be to target the specific problems that are squeezing lenders.

One step in the right direction was Tuesday's announcement by the Securities and Exchange Commission to clarify the "mark-to-market" accounting rules that have been forcing financial institutions to take huge writedowns on "illiquid" paper assets for which there's no market today.

"When an active market for a security does not exist," said the SEC clarification, companies can base their valuations on expected future cash flow. Many members of Congress have been urging the SEC to suspend the rule entirely -- and allow easier valuation standards -- thereby easing the pressure on the Treasury to buy up toxic securities. Accountants oppose the suspension, arguing that changing the rules now would further erode trust in corporate balance sheets.

A year ago, I heard warnings about the mark-to-market rules from Joe Robert, who runs a global real estate investment firm called J.E. Robert Companies. He argued that these rules were forcing financiers to sell into a declining market and assign rock-bottom valuations to assets that, if held to maturity, might be far more valuable.

Robert offers a simple example of what the mark-to-market regime has done: Imagine a street where the houses are all worth $1 million, and each has a $500,000 mortgage. But a clause specifies that if a house's value declines to less than double the loan, the mortgage will go into default. Now, suppose one homeowner is forced to sell, and has to accept a lowball offer of $600,000. Using mark-to-market rules, the lender would have to judge all the other homeowners technically in default, forcing them to raise additional cash or perhaps sell their homes. That's what has been happening in the financial world.

Another direct fix for frozen credit markets would be an FDIC program to restore bank capital that has disappeared in the downward market spiral. Former FDIC Chairman William Isaac suggested last Saturday in a Washington Post op-ed that this could take the form of "net worth certificates" issued by the FDIC to troubled banks that need time to work out of their problems. This approach worked well in the savings-and-loan crisis of the late 1980s.

"If Congress doesn't pass any bailout plan soon, that won't be the biggest problem," argues James Harmon, a former head of the Export-Import Bank. "The real issue is protecting the public, not whether markets go up or down."

The big danger now is the migration of the crisis from Wall Street to Main Street, where the pain is only beginning. Washington's focus should be on keeping money flowing in the credit system -- and thereby limiting layoffs, shutdowns and bankruptcies. And there are many ways to do that, which don't require help from feckless members of Congress.

davidignatius@washpost.com

Copyright 2008, Washington Post Writers Group

Page Printed from: http://www.realclearpolitics.com/articles/2008/10/accounting_and_fdic_reform_bet.html at October 02, 2008 - 11:56:57 AM CDT

[thomasjordan]

Another article, this time about economists opposed to this bailout plan:

Economists Raise Concerns About Bailout Plan

Thursday , October 02, 2008

By John R. Lott, Jr.

While some politicians were reconsidering their opposition to the bailout this week, there is one group that still expresses a lot of concerns with the legislation: economists.

Interviews conducted with a dozen prominent academic economists, Obama supporters as well as McCain supporters, found little support for the bailout bill. Indeed, even the one economist who supported the proposal passed by the Senate Wednesday night had serious reservations.

Jonathan Berk, an award-winning finance professor at Stanford University and a strong opponent of the bailout plan, expressed the concerns of many:

[thomasjordan]

Yet another NO on the bailout article:

October 02, 2008

Kill the Bailout

By Robert Tracinski

The House of Representatives deserves praise for taking swift action to avert a growing economic crisis--by not approving the trillion-dollar financial bailout plan.

The bailout bill was blocked Monday by a rebellion among House Republicans, who voted two-to-one against a plan they consider a step down the "slippery slope to socialism," in the words of Texas Representative Jeb Hensarling.

They are absolutely correct, and the 133 Republicans who voted to stop this coup against the financial markets--not to mention some of the 95 Democrats who may have balked for similar reasons--need to find the courage to stand firm. That's especially true since the Senate has voted to approve the bailout.

The Senate is supposed to serve, in James Madison's analogy, as the "cooling saucer" for the hot tea served up by the House--but in this case, it is the House that has remained cool and refused to panic. That's because the hysterical demand for a bailout didn't come up from the people; it came down from the elites in Washington and Manhattan. The House is reflecting the sensible skepticism coming up from the folks on Main Street who don't want to pay the bills for bailing out Hank Paulson's former colleagues on Wall Street.

Some cold, realistic scrutiny of the bailout is desperately needed because this plan is not just an attack on the free market. It is an attack on reality. The financial crisis was caused by more than a decade of using government power to rewrite the facts of reality and override the judgment of the market, and the bailout just offers more of the same fantasy economics.

Congress wanted everyone to be able to get a mortgage to buy a home, regardless of income, credit history, or ability to save for a down payment. The name for this contradiction was "affordable housing," an initiative aimed at providing the benefits of home ownership to those who could not, in fact, afford it. So when the market concluded that low-income borrowers could not meet the credit requirements for mortgages, the Clinton administration invoked trumped-up charges of racism to expand enforcement of the Community Reinvestment Act, bullying banks into dropping as "arbitrary" such old-fashioned credit standards as proof of income. And when the market balked at the increased credit risk created by these loans, Congress backed the expansion of Fannie Mae and Freddie Mac, government-sponsored enterprises that used federally guaranteed money to buy up the increasingly risky mortgages.

At every point, when the market sent the message that reality would not support the higher level of risk being taken on by mortgage lenders, the government used its power to override this message.

The vigorous government-created market for riskier "sub-prime" loans masked the real dangers, creating the illusion that increased profits could be obtained without increased risk--an illusion that encouraged some private lenders to follow Fannie and Freddie's lead. To be sure, some of this private risk-taking was part of the normal process of failure in a capitalist economy. A large part of the current financial upheaval originated with high-risk investment banks and hedge funds that held large amounts of mortgage-backed securities. These securities were carefully balanced against one another according to mathematical formulas that were calculated to cancel out their risks. But the mathematical formulas were new and hadn't been tested in a bear market. When the downturn came, they failed.

This is a normal part of the rough and tumble of capitalism. All of the current talk about the "failure" of the free market ignores the fact that the process of failure is a crucial benefit of the free market. In a capitalist system, high-risk firms are always trying out new and untested ideas, and failure is the messenger that tells the market which strategies work and which strategies don't. It is also an indispensable corrective mechanism that moves capital from enterprises with failing strategies to those with successful strategies.

But the Treasury Department and the Federal Reserve have repeatedly short-circuited this mechanism by trying to outlaw failure. When the market sent the message that too many bad loans had been made and that this needed to be corrected by a contraction in the amount of available credit, the government wanted to avoid the unpleasant consequences of such a contraction. So the Federal Reserve papered over the facts--with a flurry of paper money--by artificially reducing interest rates and loosening up credit just when it needed to be tightened.

But that didn't change the underlying facts, and the bad investments still went bad. Yet as the market has sent the message that some firms have become over-extended and are no longer solvent, the government has still tried to avoid letting the market face the facts. The Treasury and the Fed kept trying to rewrite reality by orchestrating a series of government-backed bailouts.

Over at RealClearMarkets, Joseph Calhoun points out a crucial part of this assault on facts:

There has always been a stigma attached to borrowing directly from the Fed and for good reason. If a bank can't get other banks to lend it money, that tells the market something about the condition of the bank in question. Last August, Bernanke convinced three large banks to borrow at the discount window in an effort to remove that stigma. When that didn't work, he concocted a scheme to allow banks to borrow from the Fed in anonymity via a mechanism he called the Term Auction Facility. When Bear Stearns blew up, he added the Term Securities Lending Facility for investment banks. By removing the stigma of borrowing from the Fed and hiding the identity of the borrowers, Bernanke removed important information from the market.

So the Fed's approach to potential bank failures was to try to help failing banks pretend that they weren't failing.

Or consider the SEC's ban on short sales for a list of about 700 stocks--with more companies lobbying to get themselves put on the list. Again, the whole approach of the SEC is not to prevent companies from failing, but to help them pretend that they are not failing, by outlawing trades that would tend to drive their stock prices down.

In fact, all that this sort of policy has achieved is to expand business failures. When Lehman Brothers went bankrupt, for example, it had been in negotiations with several major financial institutions who were considering investing billions in a private buy-out of the firm. But they balked at making the deal because they were waiting for the Fed to offer incentives and guarantees. Thus, the Fed's yelping about how each bankruptcy of a Wall Street firm poses a risk of "systemic failure" turns out to be a self-fulfilling prophecy, because the prospect of an open-ended series of bailouts is blocking all of the mechanisms by which a free market actually prevents widespread failure.

The bailout package would have the government buy out up to $700 billion worth of bad loans. But this is merely delaying the re-pricing of those loans to their proper value. Left to themselves, the holders of these loans would eventually find it necessary to sell them at pennies on the dollar; Merrill Lynch sold its bad loans at 22 cents on the dollar. Private companies could then recognize the magnitude of the loss and start to rebuild their businesses with the remaining assets they possess. But now no firm has an incentive to sell off its bad loans. Why dump them for 22 cents on the dollar when the government might buy them, a few weeks later, at 50 or 80 cents?

So instead what is going to happen is that the federal government is going to go into the financial markets and dictate which securities are worth how much. It is still unclear exactly which loans the government will buy or how much it will pay for them, so no private investor can say whether an investment will pay off or not. This is how the prospect of a government bailout blocks the private buyouts that would actually clean all of the bad debt out of the system.

Instead, this plan transforms the US Treasury into a trillion-dollar hedge fund, making investments in securities whose proper market value is unknown and promising its shareholders--us--that unlike the best Wall Street investment banks, Treasury bureaucrats really know how to make a profit on sub-prime mortgage loans. That's why probably the best comment on the bailout is an e-mail making the rounds on Capitol Hill presenting Paulson's pitch for the bailout deal--in the style of a Nigerian banking scam. "I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude," it begins. Time to hit the "delete" button.

The bailout represents more of the same problems that got us here because it is backed by all of the same people who created those problems. And I'm not just talking about Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke, who organized the series of ad hoc bailouts that spread uncertainty through the financial industry. Much worse is the fact that a chief negotiator for the bailout is House Financial Services Committee Chairman Barney Frank, the chief sponsor of the "affordable housing" scam. And as for Barack Obama, Stanley Kurtz exposes the role played by ACORN, Obama's former employer as a "community organizer." It turns out that a big part of ACORN's "community organizing" was to use thug tactics and the threat of government regulation to intimidate banks into making high-risk mortgage loans.

Fortunately, the public has the good sense to smell that something is rotten. I just got an e-mail recounting what Virginia Representative Jim Moran told Fox News: that calls from constituents commenting on the bailout were running 50-50--50% "no" and 50% "hell, no."

The House should not simply delay the bailout bill or mitigate its worst features; that will prolong the uncertainty in the financial markets. Instead, they need to make sure that the bailout meets with firm and repeated rejection over the next week, preferably by a growing margin of votes.

It is time for the House to kill the bailout and kill it decisively.

It is time for Congress to stop the government from rewriting reality, so that the market can be free to recognize the facts, pick up the pieces of failing firms, and begin rebuilding.

Robert Tracinski writes daily commentary at TIADaily.com. He is the editor of The Intellectual Activist and TIADaily.com.

Page Printed from: http://www.realclearpolitics.com/articles/2008/10/kill_the_bailout.html at October 02, 2008 - 12:23:33 PM CDT

[Gwizz]

Interesting read.

The people who was doing the manipulating, underscore a basic problem that we have of people who are our so called leaders.  They are control freaks who don't understand how to be good leaders.  Even a bigger problem is many of them are elected by people who don't even try to understand that they have been electing control freaks who destroy more than they build.

[thomasjordan]

Many of the people who caused this problem are the same people attempting to "solve" this problem.  And they are demanding that we solve it now, now, now, with no time to think about the solution.

I'm a practicing Emergency Manager.  There are some things that absolutely, positively have to be done now, or people will die.  This situation isn't one of them.  When people try to rush me into making a decision as important as this one, I automatically get suspicious.  Specially when some of them were the ones who created the situation in the first place, and some of them stand to gain a great deal by the decision they are urging.  No thanks.

[Hawk]

It's going to be interesting to see how the governments 'reality' plays against real 'reality'.

Sadly, I don't think it's going to be good.  >:(

Good articles Thomas. Thanks for posting them.

[Gwizz]

Well what do you know, Bonny Franks was put in charge of finding out the causes of the banking fiasco.

Four years ago he said there was no problem when he was already involved in creating the problem.

[Gwizz]

This morning the news spot stated that our congressmen had a hard time voting yes on the Bailout.

I'm sure they did with 75% to 80 % of the people saying vote no and the elite who paid for most of their election costs, saying vote for the bailout.  The people may not vote for them again for a yes vote or the elites may pull their funding if they voted no.

I guess it depends upon who has the longest memory.  The people or the elite. I believe the elitists have the longer memory and their newspapers and media will be true to form and state that every congressmen really voted no at election time.  The people will believe this and the merry-go-round will go around and around and around.  So maybe congress did vote correctly to benefit their own future.