30 sep 2008

Why Conservatives Led the Fight Against the Bailout Deal


By Joshua Holland
Their revolt was anything but an act of courage to protect American families.

On Monday, the Bush administration's massive Wall Street bailout went down to a narrow defeat in the House. After the 228-205 vote, markets crashed, and the usual partisan finger-pointing followed. According to the Washington Post, Speaker Nancy Pelosi "maintained that Democrats 'delivered on our side of the bargain' by getting 60 percent of House Democrats to support a bill that was built around the Bush administration's proposal, whereas 67 percent of House Republicans voted against it."
At first glance, it may appear that the 133 House Republicans who broke with their party's leadership did so out of principle -- that they bravely stood up against a massive cash transfer to those most responsible for precipitating the financial crisis in the first place. They appeared to be gambling a lot in taking that principled position, despite the fact that the bailout had drawn fire from across the political spectrum. The conventional wisdom, after all, has gelled around the idea that only an unprecedented cash infusion into the ailing banking system will stave off a potential Next Great Depression. The message many rebellious conservatives sent was that it takes courage to roll the dice with the world's economy six weeks before an election, even if the public was deeply skeptical of the measure (the reality is that almost none of the lawmakers who face tight races this fall voted for the bailout, fearing a backlash from voters; Congress is not known for courage or principle on the eve of an election).
And there's no question that the bill they and 95 of their Democratic colleagues killed was an extremely bad one, even if some token nods to "Main Street" had been added to help it go down lawmakers' throats more smoothly. Democrats abandoned a key provision -- one vehemently opposed by lenders -- to allow bankruptcy judges to modify mortgages that are in the process of foreclosure, and they accepted only token limits on executive compensation for companies that would be rescued under the plan (PDF). Worst of all was a vaguely worded provision that might have allowed the Treasury to buy up bad paper at the price at which it was originally booked, rather than at those securities' largely unknowable but deeply diminished current value. That would have essentially given a small investor class an opportunity to recover its losses at the expense of the American taxpayer (and future taxpayers, as the bailout would be financed through debt).
But a deeper look reveals another picture of the legislative fight that has occupied Washington since George W. Bush first proposed the bailout. Unlike most House Democrats, who voted against the bill in an attempt to send the plan back to the drawing board to get a deal that might better protect taxpayers and homeowners, House conservatives torpedoed the measure in order to advance their own alternative "bailout," one that's an ideologically motivated back door to bailing out Wall Street without doing anything for Main Street.
The plan is notably light on detail, even for campaign season, when politicians are loath to discuss the fine points of any proposal. But based on what can be gleaned from media reports, the heart of the "alternative" scheme is for the government to sell insurance for securities based on bad loans, rather than buy up the paper directly. Supposedly, the premiums would be high enough to assure that Joe and Jane taxpayer don't get fleeced.
On its face, that idea seems both fiscally sound and decidedly conservative, in the traditional sense of the word.
But remember what the immediate problem we face is all about. The financial industry is weighed down by an enormous "shit pile" of bad paper -- mortgage-backed securities, complex derivatives and insurance-like instruments that were supposed to make all these "creative" investment vehicles somewhat sound. That shit pile, impossible to value accurately, is threatening the whole economy, as lenders hunker down and hold onto their cash reserves in an attempt to ride out the storm of foreclosures, and that's making it tough for businesses and consumers to get credit they need to expand their operations or buy new gizmos.
That's not a situation that lends itself to a government-backed insurance policy. If the premiums aren't deeply subsidized by the American public, they'll be out of reach of troubled banks by definition -- after all, if they had enough cash to cover their bad debts, which will ultimately be the job of the insurer (that's you, me and the people we know), then they wouldn't find themselves on the brink of collapse to begin with. That means the government would still end up effectively buying up the banks' worthless paper piece by piece as the underlying assets on which that paper is written go belly-up. Think of it as the government selling fire insurance for houses that are already ablaze.
So the point was not to spare the taxpayer the expense of Wall Street's shit pile. By offering an alternative plan, House conservatives abandoned a negotiating process that was, at heart, about trying to modify the disastrous Bush-Paulson plan so that it didn't just bail out the financial sector's movers and shakers without getting some concessions for working America.
The other two tenets of the alternative plan are worse still.
In keeping with the tradition of a party that has one policy solution to all economic ills -- cutting taxes on the wealthy -- the conservatives who bucked their leaders also suggested cutting capital gains taxes, even if only on a temporary basis. It's a triumph of ideology over common sense. We've seen stock markets tanking, as investors flee like rats from a sinking ship, seeking safer ground in commodities, which have gone through the roof (oil prices have been moderated somewhat by expectations of a long slowdown that would cut demand). A tax holiday on capital gains would only encourage those investors with steely nerves (and gains) who are staying in the market to join the herd, getting out while it's tax-free to do so. That can only send the already sky-high prices for food, energy and everything else even higher into the stratosphere. Ordinary working people would end up paying on both sides of the deal -- getting soaked for Wall Street's Reckless Lending Insurance and then paying through the nose to put food on the table.
Adding insult to injury is the third leg of the "alternative" bailout plan: more deregulation of the financial sector.
That's nothing short of breathtaking in its audacity. It was a lax regulatory environment that brought us to the verge of collapse in the first place. Exotic security-backed loans -- loans that didn't conform to the standards in place for banks that held deposits, including subprime loans, mortgages given to people who misstated their income and loans with heavy prepayment penalties and huge balloon payments -- are, as one would expect, faring far worse than the kinds of traditional loans that are regulated by the Federal Housing Authority or backed by Fannie Mae. Regulations passed by Congress only three months ago, as the depth of the meltdown had become clear, made "coercing a real estate appraiser to misstate a home's value" and "making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value" a no-no; if similar commonsense regulations had been in place over the past decade, the run-up of the real estate market wouldn't have been as frenzied, and we wouldn't see the skyrocketing number of foreclosures we're witnessing today.
Again, none of this is to suggest that Americans should shed a tear for the demise of the compromise deal struck between Treasury Secretary Paulson and the Bush administration -- it was a bad deal that deserved to go down in flames. But it's also becoming increasingly evident that some sort of intervention is necessary to prevent the crisis from spreading through the entire global economy. Rather than pugnaciously cling to a failed ideology by heaping lucre on the wealthiest in the hope that it trickles down to the rest of us, Congress should be going back to the drawing board and coming up with a bailout plan rooted in a modicum of economic justice.
The House conservatives who have proven to be such a fly in the ointment are trying to go the other way -- cooking up a plan that will only deepen Main Street's pain in the name of saving it from Wall Street's predations.

Palin Not Always Speechless



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What is the True Cost?


By Robert J. Samuelson and [Pointer]
Thursday, September 25, 2008;
[The loss of Black Monday cost the USA 1.2 trillion dollar in a couple of hours.]
Love it or hate it, the true cost of Treasury Secretary Hank Paulson's proposed rescue of the financial system is not the sticker price of $700 billion. Conceivably, the government could make money; with glum assumptions, the losses would probably be less than $250 billion. No one knows the correct answer -- not Paulson, not Federal Reserve Chairman Ben Bernanke nor anyone else -- but here's how to think about the problem.
Under Paulson's proposal, the Treasury could buy distressed mortgage-backed securities. Consider a batch of hypothetical securities originally worth $100 million and paying an interest rate of 6 percent. They're no longer worth $100 million because half of the homeowners have stopped making their monthly payments. Suppose, then, that the government buys the mortgages for $50 million. It earns 6 percent on its $50 million, and if it borrowed money at 4 percent to buy the securities, it would make a tidy profit. If the government holds the securities until maturity and all the remaining homeowners repay their mortgages, the government would come out ahead.
Would something like this happen?
It could, and Pimco's Bill Gross argued in today's Post that it might, but there are several reasons it might not.
First, we don't know what price the government would pay for the mortgage-backed securities. There are conflicting goals. On the one hand, the government wants to minimize the bailout's costs to taxpayers; that would favor paying the lowest possible price. In my example, the profit would be greater if the government paid only $40 million. On the other hand, the whole idea of the bailout is to help banks and other financial institutions get rid of risky assets and replace them with cash that would encourage a resumption of normal lending and investing. That favors a higher price. If the government paid $80 million instead of $40 million, say, it would lose money.
[Paulson was not willing to accept any oversight and control, without responsibility and accountability in front of Congress nor court, what should make him the most powerful and untouchable man on earth.]
Second, we don't know how a weakening economy will affect future mortgage repayments.
[You surely know, but you don’t want to know.]
The worse the economy gets, the more homeowners will default. At the end of June, about 2.75 percent of home mortgages were in foreclosure, and an additional 6.4 percent were at least 30 days behind in their payments. The unemployment rate was 6.1 percent in August. If it rose to 7 percent or higher, defaults and delinquencies would climb. In my example, if only 25 percent of borrowers repaid their mortgages, the government would lose money.
[And without bailout a rising unemployment to 20%? Do you have an answer on that?]
No wonder members of Congress -- and the public -- are confused. My simple example captures the main unknowns, but in practice there are many more. What bonds and securities would Treasury buy? Would the government hold them to maturity or later try to resell them to private investors?
To all questions, Paulson has said in effect: Trust us.
[Well that’s a big problem. The Bush Administration did never show up to be trustworthy.]
Mark Zandi of Moody's Economy.com has crudely estimated that the ultimate cost of Paulson's plan and all the other rescues (of the mortgage giants Fannie Mae and Freddie Mac, the investment bank Bear Stearns, and the insurer AIG) won't exceed $250 billion. That's a lot, but consider that the annual federal budget runs at about $3 trillion. Compounding the confusion is this: For budget purposes, the Paulson rescue would probably be "scored" under the Federal Credit Reform Act. This law sets budget spending at the proposal's ultimate cost -- not the annual cash flows. For now, the Congressional Budget Office says there are so many unknowns that it can't make an estimate.
[That makes the check in fact a blank check and if it can be more, it shall be more. The reasoning for more will be: If we don’t spent another 700billion the first 700billion is lost for nothing. Such a reasoning can ever be repeated. So, openness, oversight and control is absolutely first necessarily.]
But the biggest unknown lies elsewhere. What happens if Congress doesn't approve the plan, or something like it? Zandi, a supporter, argues that the economy will get much weaker, that many more banks and financial institutions will fail, and that the rise of joblessness will be greater, as will the fall in tax revenue and the increase in unemployment insurance and other government payments. Is this scare talk or a realistic threat?
[You bet. Why is the Party of Fear now at once afraid of “scare talk”? History showed how it works in the 19-twenties with the same politics. Europe has showed in more recent years how to manage such a crisis. Japan has showed how it works when you are late. The Republican Party has in 20 years (Reagan 8, Bush41 4 and Bush43 8 years) Reaganomics prepared and is deliberating arranging a new Great Depression to fight an ideological war against liberalism.]
The true cost of Paulson's plan hangs on the answer, and if the danger is real and imminent, then the cost of doing nothing would be far greater.
[No, there is no Paulson’s plan anymore, thus the true costs depends on speed of the governments answer and the Republican Party anyway will not favor a bailout. They can’t sell there base a principle of the Democratic Party that government’s regulation, control and interference are necessarily and good for the economy.
The free market has to be protected against the exclusive Army of Greed to serve the broader Army of Need.]