McCain Proposes $1 Trillion Bailout Bypassing Congress

This is the same John McCain who just a couple of days ago was railing on the $1 trillion price tag of the bailout (when it was actually $700 billion).

But just a few days after railing against the unbridled power of government, McCain now seems to envision the presidency as a dictatorship. He now thinks that Bush should just spend $1 trillion without allowing anyone to ask any questions -- and he supports doing it just one day after the House of Representatives voted down a $700 billion bailout.

This won't suprise anyone on the left. The question I have is this: when are conservatives going to wake up and realize that despite all his bluster about being a conservative, the Republican nominee for president has proposed the single largest expenditure in the history of this nation -- and that he's proposed that it be made without the approval of Congress?

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Will McCain Suspend his Campaign Again?

Who is the problem? It works so well.

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Eye-Opening Thoughts About the Bailout's Defeat

By Joshua Holland, AlterNet.
Experts discuss the politics of the bailout's defeat in the House, the fundamentals of the plan and where we might go from here.

We're watching economic history in the making. There is no consensus on what Congress is going to do next or what's going to happen on Wall Street in the coming weeks. Hundreds of billions of dollars are at stake, and it's clear that the decisions that are being made now are going to have a massive effect on all of us.
To help readers cut through the media overload, we've gathered together a dozen views from smart, alternative thinkers on the bailout, the politics surrounding its defeat and predictions about where the economy, and the government's actions, might go from here.
What Happened
There's been quite a bit of discussion about exactly what happened with the bailout bill ...

Robert Kuttner offers his views, along with some suggestions for the Democratic leadership looking forward ...
In refusing to provide enough votes to enact a bipartisan bailout bill, Republicans may well have done Democrats a favor. The Democratic leadership gave up several provisions that their members wanted, including more relief for homeowners. But the Republican leadership took the position that they had extracted all they could get, and GOP House members were now free to vote their consciences. In practice that meant listening to the uproar of constituent backlash against a bill that did much for Wall Street and little for the common American. So the easy Republican vote was "No."
House Speaker Nancy Pelosi had been promised that 80 or 90 Republicans would vote for the bill. That way, both parties could share responsibility. But in the end, just 66 Republican votes materialized.
According to my sources, once Pelosi learned of the double-cross, she told the Democratic whips to make it a conscience vote on the Democratic side as well. With the likelihood of voter indignation and the strong possibility that this bill would not fix what was broken, Pelosi was not prepared to make this primarily a Democratic bill. Knowing that the Republicans were walking away from the deal, she held the roll call anyway, to make clear just whose failure this was.
When the vote came up short, she held it open a few minutes but made rounding up additional supporters the Republicans' problem. When the votes did not materialize, she banged the gavel, and the bill went down.
What now?
... The moment for this bill may have passed. Pelosi was also facing growing rebellion in Democratic ranks.
... Both parties will now go back to the drawing board -- and it is here that Republican calculations may have backfired, big time. For while many Republican legislators are posturing populist, they really don't have anything up their sleeves that is true to right-wing ideology, that will please angry taxpayers, and that will fix the problem. Vote No is not a program, and as the crisis deepens the vote will look increasingly cynical and opportunist.

Veteran journalist Peggy Simpson writes about the partisan dynamics ...
Pelosi not only had to work for the Paulson plan, she had to immunize her own folks against a potential campaign crusade by GOP ideologues that this was "socialism, socialism, socialism," foisted off on the public by Democrats now in charge of both houses of Congress.
Voters, meanwhile, had been persuaded this was indeed a taxpayer bailout for the rich, not a rescue plan for the very financial structure of the country. Their calls to congressional members ranged from 100-1 against to 300-1 against ...
Pelosi said from the outset that many liberal Democrats would not budge from the opposition. She also continued the tradition of the late House Speaker Thomas "Tip" O'Neill of understanding that "all politics is local" and that if a vote would mean sure defeat back home, the member could get a pass.
Pelosi and her team told Boehner they could get between 125 and 140 Democrats and that Boehner and Blunt would need to find between 80 and 100 Republicans. That seemed feasible Sunday.
On Monday, Pelosi delivered, Boehner fell short ...
Boehner said Pelosi had chased away a dozen wavering Republicans when she gave a speech saying the vote on this unpalatable $700 billion rescue plan had been made necessary by eight years of Bush policies, including lax oversight on Wall Street ...
Pelosi could have skipped the partisan speech on the eve of the vote -- but she was still trying to rally reluctant Democrats to swallow the bitter medicine.
Few Republicans had been on the House floor to hear Pelosi's speech, and none reacted when they heard it. It was later, after the shocking setback of the vote itself, that GOP leaders seized on the Pelosi speech to rationalize their own failure.
Ultimately, however, the blame-Pelosi excuse didn't help against Boehner.
It made him look even weaker. He had gotten only a third of his House Republicans to back the bill, far short of what he had promised. ... It turns out that Boehner knew hours before the vote ... that Republicans would be far shy of their goal, which could spell defeat for the overall bill.
If Pelosi had known that, she might have delayed the vote. That might have alarmed the markets but probably wouldn't have spooked them the way the actual defeat did.

David Brooks says that we're witnessing an epic failure of governance ...
This generation of political leaders is confronting a similar situation, and, so far, they have failed utterly and catastrophically to project any sense of authority, to give the world any reason to believe that this country is being governed. Instead, by rejecting the rescue package on Monday, they have made the psychological climate much worse.
George W. Bush is completely out of juice, having squandered his influence with Republicans as well as Democrats. Treasury Secretary Henry Paulson is a smart moneyman, but an inept legislator. He was told time and time again that House Republicans would not support his bill, and his response was to get down on bended knee before House Speaker Nancy Pelosi.
House leaders of both parties got wrapped up in their own negotiations, but did it occur to any of them that it might be hard to pass a bill fairly described as a bailout to Wall Street? Was the media darling Barney Frank too busy to notice the 95 Democrats who opposed his bill? Pelosi's fiery speech at the crucial moment didn't actually kill this bill, but did she have to act like a Democratic fund-raiser at the most important moment of her career?
And let us recognize above all the 228 who voted no -- the authors of this revolt of the nihilists. They showed the world how much they detest their own leaders and the collected expertise of the Treasury and Fed. They did the momentarily popular thing, and if the country slides into a deep recession, they will have the time and leisure to watch public opinion shift against them.
The Plan
Some of the brightest economic minds have weighed in on why they endorsed or opposed the plan, and some discussed what they'd do differently ...

David Cay Johnston asks some pertinent questions ...
Questions abound:
• Do we believe in markets, which can be volatile -- or only in managed markets biased by government policy to the upside? Or do we believe in corporate socialism?
• Is our economy so fragile that it cannot withstand shocks? Or is it fundamentally sound, as Senator John McCain was declaring until just days ago? And if our economy really is fragile, just how will borrowing $700 billion more to pay for bad loans make things better for anyone but the lenders and some of their customers?
• What assurance do we have that borrowing $700 billion will not make things worse? None.
Keep in mind a paper released last week by two economists at the International Monetary Fund, who studied 42 banking crises over the past 37 years. Their conclusions (not the IMF's) are: Bailouts often do not work, they often result in more bad practices, and they distort economies by transferring wealth from taxpayers to bankers and their customers.
Perhaps the dissolution of this bailout bill means that we will now get a serious look at just where the problem is, how pervasive or concentrated bank problems are, and whether there are less expensive options ...
Maybe we will also get answers to some hard questions. Like:
• Why was the CEO of Goldman Sachs in the room when government officials decided to bail out the insurer AIG, especially since Goldman has about $20 billion, half of its shareholder equity, at risk on AIG? Keep in mind that Treasury Secretary Paulson is the immediate former CEO of Goldman.
• Why was Lehman Brothers, a Goldman competitor, the only Wall Street firm in trouble so far left to collapse on its own? The Wall Street Journal reports today that it was the collapse of Lehman (which because of its structure may not have been an attractive firm for purchase) that "triggered the cash crunch around the globe."
• Has Treasury obtained from every bank the amount of its illiquid assets, which would tell us if the problems are concentrated at a few banks or are pervasive?
• Would a temporary provision in the bankruptcy code, allowing people with toxic mortgages to get their loans rewritten or pursued to foreclosure, be a cheaper and better alternative?
Disclosure, transparency, options -- those should be the issues in the next few days.

Paul Krugman explains that the taxpayers wouldn't really be picking up that whole $700 billion tab, and suggests a different approach to the credit crunch ...
"Where Will the Money Come From?"
In the end, the U.S. government will rescue the financial system -- not today or tomorrow, maybe not Thursday, but soon, and for the rest of our lives, or anyway until the next crisis.
But, people ask me, where will we get the money? Won't we have to borrow it from the Chinese?
Actually, no.
(To understand why), a real-world example: the rescue of Wachovia. The FDIC got Citi to take over Wachovia's assets and liabilities with a deal under which the feds limit the losses -- they will cover any losses on mortgage paper over $42 billion -- in return, basically, for receiving a share of ownership, in the form of warrants and preferred stock. No actual money changed hands, which illustrates a fundamental principle: recapitalization doesn't mean laying out real money, at least initially -- it just means having taxpayers take on some of the risk.
A large-scale recapitalization would probably take the form of a giant swap of debt for equity: The Treasury would issue several hundred billion dollars' worth of bonds, and give them to financial firms in return for preferred stock. The bonds wouldn't have to be sold to outside buyers -- they would simply be credited to firms' balance sheets.
The effect would be that if the financial firms did well, taxpayers would share in their good fortune via those stock holdings; if firms did badly, they could meet their obligations by selling some of those bonds, which would cut into the value of all their stock, including the stuff Uncle Sam owns. So as in the case of Wachovia, what's really happening is that the taxpayers are taking on some of the risk.
So is all this magic?
No, over time Treasury has to pay interest and principal on the bonds it issues; the value of the bonds comes from the fact that people believe the U.S. government can do that ...

James Galbraith thinks the bailout was the least-bad possibility, so he reluctantly endorsed it. But, like Krugman, he thinks there are better ways to skin this cat ...
The question now is, could the purposes of this bill be met with a smaller appropriation. In my view, the best way to answer that question is to ask: What problem does $700 billion solve?
The answer to that is, we do not really know.
On the face of it, the exposure to bad mortgage-backed securities is considerably larger; the purchase plan in the bill would inevitably bail out some inessential as well as essential investors and institutions, thus wasting a fraction of the resources; and we do not know the full extent to which banks need new capitalization in order to remain solvent. The reasonable presumption, therefore, is that TARP (Troubled Asset Relief Program) would buy time; one hears estimates that the authority would be used at a rate of $50 billion a month, though the basis for that estimate is not clear. A smaller appropriation would buy less time.
How much time is needed?
There is in my view very little prospect that economic recovery will restore housing prices and personal incomes within a reasonable time -- that is, before the $700 billion runs out. Therefore, it seems to me unlikely that this issue will finish here; more will be needed at a later date. However, on the assumption that one can trust and monitor the actions of the Treasury to assure that it carries out its mandate in good faith, there is an argument for appropriating the full sum now: It will help ensure that the system will hold into next year. A smaller appropriation increases the risk of a major crisis in the relatively near term. By how much and when?
No one can say.
If one does not trust the Treasury to act in good faith and in compliance with the spirit and letter of the monitoring and enforcement provisions, then of course there is no case for this bill ...
Whatever happens, if my analysis is correct, even if the bill is passed the issues will not go away. The $700 billion will permit parts of the banking system to be reorganized. I doubt it will cure an underlying problem of illiquid securities many times larger than that. I believe that as banking consolidation proceeds, alongside the decline and fall of the "shadow banking system," the fact that deposit insurance, regulation, disposition of bad assets and enforcement are the sensible way forward will become increasingly apparent.
In short, I would do these things now if I could.
But if they are not done now, they will still have to be done later, even if this bill is passed.


John Hussman, of Hussman Funds, weighs in ...
However the final legislation is written, the Troubled Assets Relief Program (TARP) being rushed through Congress will evidently be built around its single worst provision, which is that the Treasury will have authority to purchase distressed mortgage securities from U.S. financials ...
Does this transaction protect the institution against failure? No!
If you buy the bad assets off the balance sheet at their market value, nothing changes on the liability side! You may have improved the "quality" of the balance sheet, but you've provided no additional capital. At best, you've allowed the bank to liquidate its assets more easily to meet continuing customer withdrawals in the vicious cycle described above.
The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them.
A better approach would be for the government to provide capital directly, in the form of a "super-bond," in an amount no greater than the debt to bondholders. The "super-bond" would be subordinate to customer liabilities, so it could be counted as capital for the purpose of capital requirements, and would be seen by customers as a legitimate cushion of protection. However, in the event of bankruptcy, it would have a senior claim in front of both stockholders and even senior bondholders. Do that, and you've actually got a mechanism to protect the financial system while at the same time protecting customers and taxpayers. Ideally, the super-bond accrues a relatively high rate of interest so that financials have an incentive to shift to private financing as soon as possible, but you would also defer the interest until the bank meets a minimal level of profitability to make sure that the financing doesn't strain the institution's liquidity.

Floyd Norris, chief financial correspondent for the New York Times, agrees that huge financial bailouts come with inherent risks ...
The banking industry is in trouble with or without this bailout. Its efforts to change accounting rules to hide its problems are sad and appalling. The defeated bill would have authorized the Securities and Exchange Commission to suspend the market-to-market rule, which forced the banks to admit how badly they had gambled and lost. The S.E.C. has already yielded to political pressure and barred short-selling in financial stocks, so it is possible it would yield to the accounting pressure as well ...
Absent the defeated bailout, the government is picking off weak banks one by one, arranging takeovers (takeunders might be a better term) when they can. In both the Washington Mutual and Wachovia deals, the depositors are doing fine, while shareholders suffer. That discourages bank runs by depositors, which is good, but encourages what we will call "stock market runs" by shareholders of any bank that might be in the same league as those banks. (If your bank ever bragged about its mortgage lending, look out.)
The risk of a big bailout always was that it would make investors think the banks were in even worse trouble than they appeared to be. Henry M. Paulson Jr., the Treasury secretary, tried to structure this bailout as a purchase of assets, so that banks taking the money would not be tarnished by doing so. But the decision to force those banks to turn over equity may have killed that move, and the changes to be made in the bill now could well make it more punitive. That could be good for a sense of justice, but bad for containing the crisis.
Where Do We Go from Here?
Dean Baker asks an important question: Even if one opposes the deal in its current form, at what point does inaction become deeply irresponsible?
The Democrats have made good progress in getting the Bush administration to move from the $700 billion blank check proposal that we saw last weekend. ... However, there is still much that is missing.
(This week's debacle) leaves the question of whether the Democrats can responsibly walk away from the bailout. This involves a tough call. The financial system was really shaken by the events of last week when Lehman Brothers went under and AIG was about to follow suit. However, Ben Bernanke and Henry Paulson were able to duct-tape things together with the cooperation of the other major central banks.
The financial markets remain extremely unsettled and more bad news is a virtual certainty, but Bernanke and Paulson have lots of duct tape at their disposal. The sort of financial breakdown that we all fear remains a possibility, but my bet is that they will be able to deal with whatever crises develop.
There is one other point worth considering in assessing the responsibility of a walk-away strategy. Suppose the Paulson plan goes through. It is virtually certain that the economy will weaken further and the number of foreclosures and people without jobs will continue to rise.
This is the fallout from a collapsing housing bubble. Families that have seen most of their home equity disappear will feel the need to cut back their consumption and increase their savings. We have a huge cohort of baby boomers at the edge of retirement, most of whom have accumulated almost no wealth during their working lifetime. When these families respond to their loss of home equity by cutting back their consumption it will deepen the recession.
In this context it might prove very important to have the resources needed to provide a substantial stimulus. In principle, even a $700 billion bailout package would not be so large as to preclude a further stimulus next year. However, there is no doubt that this bailout will make further stimulus much more difficult to sell politically. In this sense it is hard to view supporting a bad bailout package as the responsible course of action. While the bailout may lesson a presumably small risk of financial breakdown, it could have the effect of making the recession much longer and more painful than necessary. This would not be responsible.

Sarah Anderson, Chuck Collins, Dedrick Muhammad and Sam Pizzigati from the Institute for Policy Studies argue that the tab for the bailout -- whatever its particulars at the end of the day -- should be picked up by Wall Street, and that the rest of the economy needs some relief as well. ...
Lawmakers in Congress appear to have assumed that the federal government will simply borrow more money to foot the bill for the bailout. The national debt ceiling will rise to a whopping $11.3 trillion, up from $8 trillion a year ago.
But this rush to borrowing merely shifts the bailout burden onto the backs of future taxpayers. Congress needs to change course -- and develop a "pay as we go" plan that makes Wall Street pay. The lion's share of bailout funding should come from the high-finance gamblers and the wealthy CEOs who have so profited from our casino economy.

Funding the Bailout: Basic Principles
Wall Street and speculators should pay now for the mess they created.
Instead of borrowing from the super-wealthy beneficiaries of the casino economy, we should tax them.
Any bailout should stimulate the real economy with investments in Main Street, not just Wall Street.
Broadening the Bailout Dollars
The debate over the bailout has so far concentrated on the $700 billion purchase of "troubled assets" proposed by Treasury Secretary Henry Paulson. A real "bailout" would also target the troubled households of working American families. A $200 billion "Main Street Stimulus Package" could bolster the real economy and those left vulnerable by the subprime mortgage meltdown.
This package should include:
A $130 billion annual investment in renewable energy to stimulate good jobs anchored in local economies and reduce our dependency on oil.
A $50 billion outlay to help keep people in foreclosed homes through refinancing and creating new homeownership and housing opportunities. These funds could also help those locked out of the American Dream to purchase homes through non-speculative mortgage programs.
A $20 billion aid package to states to address the squeeze on state and local government services that declining tax revenues are now forcing.

Robert Reich lays out some of the problems facing lawmakers at the height of an election season, and makes a prediction for this week ...
House leaders will schedule another vote as soon as they can convince twelve of the naysayers, from either party, to approve.
Wild card: angry voters who go to the polls in five weeks.
Conservatives don't want government to take over the free market.
Liberals don't want Wall Street fat-cats to get a free ride.
And the more the public focuses on the bill, the angrier they become. (Polls show about a third of Americans in favor, a third opposed, and a third undecided; the percent in favor is growing slightly, but the percent against is growing even faster.)
Wild card on the other side: The Dow is dropping precipitously. Roughly half of all American families have some retirement money in the stock market. And even if they don't own shares of stock, an increasing number are feeling the pinch of an economy gradually grinding to a halt. (This week's employment report will not be very encouraging.)
Don't expect easier sailing in the Senate. Fewer than a third of the Senate is up for re-election on Nov. 4, but they're all hearing from angry constituents.
Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street's bad debts with no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners.

And Brad DeLong predicts that the government will have to limit investors' risk in the future ...
I don't believe that after this the price of risk will ever again become a free-market price, just as after the Great Depression the short-term price of liquidity -- the short-term interest rate -- ever became a free-market price. The federal government, in one form or another, is going to be in the business of insuring debt securities against steep declines in value. Securities that are not so insured will simply not be traded. What Fannie Mae did for "conforming" home loans, the Treasury or some other government agency will do for derivative securities. It will offer insurance, charge for that insurance, and supervise and oversee financiers much more strictly.

The market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency and adverse selection problems crash spectacularly. Is this a situation in which we should move health care -- also rife with moral hazard, agency and adverse selection problems -- toward a free market configuration?
No.
Market regulation needs to be smart. But first market regulation needs to be.

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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.]

War is Hell, But What the Hell Does it Cost?

One Week at War in Iraq and Afghanistan for $3.5 Billion
By William D. Hartung

War is hell -- deadly, dangerous, and expensive. But just how expensive is it?

In a recent interview, Nobel Prize-winning economist Joseph Stiglitz asserted that the costs of the Iraq war -- budgetary, economic, and societal -- could reach $5 trillion.

That's a hard number to comprehend. Figuring out how many times $5 trillion would circle the globe (if we took it all in one dollar bills) doesn't really help matters much, nor does estimating how many times we could paper over every square inch of Rhode Island with it. The fact that total war costs could buy six trillion donuts for volunteers to the Clinton, Obama, McCain, and Huckabee campaigns -- assuming a bulk discount -- is impressive in its own way, but not all that meaningful either. In fact, the Bush administration's war costs have already moved beyond the human scale of comprehension.

But what if we were to try another tack? How about breaking those soaring trillions down into smaller pieces, into mere millions and billions? How much, for instance, does one week of George Bush's wars cost?

Glad you asked. If we consider the wars in Iraq and Afghanistan together -- which we might as well do, since we and our children and grandchildren will be paying for them together into the distant future -- a conservative single-week estimate comes to $3.5 billion. Remember, that's per week!

By contrast, the whole international community spends less than $400 million per year on the International Atomic Energy Agency, the primary institution for monitoring and preventing the spread of nuclear weapons; that's less than one day's worth of war costs. The U.S. government spends just $1 billion per year securing and destroying loose nuclear weapons and bomb-making materials, or less than two days' worth of war costs; and Washington spends a total of just $7 billion per year on combating global warming, or a whopping two weeks' worth of war costs.

So, perhaps you're wondering, what does that $3.5 billion per week actually pay for? And how would we even know? The Bush administration submits a supplemental request -- over and above the more than $500 billion per year the Pentagon is now receiving in its official budget -- to pay for the purported costs of the wars in Iraq, Afghanistan, and for the Global War on Terrorism (GWOT). If you can stay awake long enough to read the whole 159-page document for 2008, it has some fascinating revelations.

For example, to hear the howling of the white-collar warriors in Washington every time anyone suggests knocking a nickel off administration war-spending requests, you would think that the weekly $3.5 billion outlay is all "for the troops." In fact, only 10% of it, or under $350 million per week, goes to pay and benefits for uniformed military personnel. That's less than a quarter of the weekly $1.4 billion that goes to war contractors to pay for everything from bullets to bombers. As a slogan, insisting that we need to keep the current flood of military outlays flowing "for Boeing and Lockheed Martin" just doesn't quite have the same ring to it.

You could argue, of course, that all these contracting dollars represent the most efficient way to get our troops the equipment they need to operate safely and effectively in a war zone -- but you would be wrong. Much of that money is being wasted every week on the wrong kinds of equipment at exorbitant prices. And even when it is the right kind of equipment, there are often startling delays in getting it to the battlefield, as was the case with advanced armored vehicles for the Marine Corps.

But before we get to equipment costs, let's take a look at a week's worth of another kind of support. The Pentagon and the State Department don't make a big point -- or really any kind of point -- out of telling us how much we're spending on gun-toting private-contract employees from companies like Blackwater and Triple Canopy, our "shadow army" in Iraq, but we can make an educated guess. For example, at the high end of the scale, individual employees of private military firms make up to 10 times what many U.S. enlisted personnel make, or as much as $7,500 per week. If even one-tenth of the 5,000 to 6,000 armed contract employees in Iraq make that much, we're talking about at least $40 million per week. If the rest make $1,000 a week -- an extremely conservative estimate -- then we have nearly $100 million per week going just to the armed cohort of private-contract employees operating there.

Now, let's add into that figure the whole private crew of non-government employees operating in Iraq, including all the cooks, weapons technicians, translators, interrogators, and other private-contract support personnel. That combined cost probably comes closer to $300 million per week, or almost as much as is spent on uniformed personnel by the Air Force, Army, Navy, and Marines.

By one reliable estimate, there are more contract employees in Iraq alone -- about 180,000 -- than there are U.S. troops. There are thousands more in Afghanistan. But since many of these non-military employees are poorly paid subcontract workers involved in cooking meals, doing laundry, and cleaning latrines, the total costs for the services of all private-contractor employees in Iraq probably runs somewhat less than the costs of the uniformed military. Hence our estimate.

So, if $650 million or so a week is spent on people, where does the other nearly $3 billion go? It goes for goods and services, from tanks and fighter planes to fuel and food. Most of this money ends up in the hands of private companies like Boeing, Lockheed Martin, and the former Halliburton subsidiary, Kellogg, Brown and Root.

The list of weapons and accessories paid for from our $3.5 billion is long and daunting:

$1.5 million for M-4 carbines (about 900 guns per week);
$2.3 million for machine guns (about 170 per week);
$4.3 million for Hellfire missiles (about 50 missiles per week);
$6.9 million for night vision devices (about 2,100 per week);
$10.8 million for fuel per week;
$5 million to store and transport that fuel per week;
$14.8 million for F-18E/F fighter planes per week (one every four weeks);
$23.4 million for ammunition per week;
$30.7 million for Bradley fighting vehicles (10 per week).

And that's only a very partial list. What about the more mundane items?

"Laundries, showers, and latrines" cost more than $110,000 per week;
"Parachutes and aerial delivery systems" cost $950,000 per week;
"Runway snow removal and cleaning" costs $132,000 per week;
Flares cost $50,000 per week.

Some of these figures, of course, may cover worldwide military operations for the U.S. armed forces. After all, by sticking the acronym GWOT in the title of any supplemental war-spending request, you can cram almost anything into it.
Then there are the sobering figures like: $2.4 million per week for "death gratuities" (payments to families of troops killed in action) and $10.6 million per week in "extra hazard pay."
And don't forget that all the death and destruction lurking behind these weekly numbers makes it that much harder to get people to join the military. But not to worry, $1 million per week is factored into that supplemental funding request for "advertising and recruitment" -- not enough perhaps to fill the ranks, but at least they're trying.
Keep in mind that this only gives us a sense of what we do know from the public Pentagon request; there's plenty more that we don't know. As a start, the Pentagon's breakdown of the money in its "emergency" supplemental budget leaves huge gaps.
Even your own congressman doesn't know for sure what is really in the U.S. war budget. What we do know is that the Pentagon and the military services have been stuffing more and more projects that have nothing to do with the fighting in Iraq and Afghanistan, or even the war on terror, into those war supplementals.
Layered in are requests for new equipment that will take years, or even decades, to build and may never be used in combat -- unless the Iraq war really does go on for another century, as John McCain recently suggested. These "non-war" items include high-tech armored vehicles and communications devices for the Army as well as new combat aircraft for the Air Force.
Even though these systems may never be used on our current battlefields, they are war costs nonetheless. If they weren't inserted into the supplemental requests for Iraq and Afghanistan, they might never have been funded. After all, who wants to vote against a bill that is allegedly all "for the troops," even if it includes weapons those troops will never get?
These add-ons are not small change. They probably cost in the area of $500 million per week.
Given all of this, it may sound like we have a fair amount of detail about the costs of a week of war. No such luck. Until the "supplemental" costs of war are subjected to the same scrutiny as the regular Pentagon budget, there will continue to be hundreds of millions of dollars unaccounted for each and every week that the wars go on. And there will be all sorts of money for pet projects that have nothing to do with fighting current conflicts. So don't just think of that $3.5 billion per week figure as a given. Think of it as $3.5 billion… and counting.

Doesn't that make you feel safer?

William D. Hartung is the director of the Arms and Security Initiative at the New America Foundation. He is the author of And Weapons for All (Harper Collins, 1994) and How Much Are You Making on the War, Daddy? A Quick and Dirty Guide to War Profiteering in the Bush Administration (Nation Books, 2004). His commentaries on military and economic issues have appeared in the Washington Post, the New York Times, the Los Angeles Times, Newsday, and the Nation magazine.

[Source Note: Readers who want to check out the latest Department of Defense supplemental request for war-fighting funds can click here (PDF file) and read, "FY 2008 Global War on Terror Pending Request" from the Office of the Secretary of Defense.]