The Bail-out Deal
As an individual with a hefty supply of common sense, I am always wary of anything worked out in Nancy Pelosi’s office, but Ed Morrissey has the breakdown of the $700 billion financial bail-out bill. He concluded:
- This looks like the rare occasion when Congress manages to improve an idea. The original Paulson plan would have imposed immunity from legal action on any moves made by the Treasury, exactly the wrong direction for a crisis already caused by unchecked government manipulation. In the new plan, Treasury officials have accountability for their management of the $700 billion plan.
- The new agreement may have made the plan larger, but the politics of this probably required it. In the original Paulson plan, the bailout focused solely on the institutions choking on the government-mandated Mortgage Backed Securities (MBS) and credit swaps based on them. Congress broadened this to give more direct relief to homeowners facing foreclosure and eviction. While more painful in the short run, it will probably make the economy more stable in the long run, and give the securities the Treasury buys more value, as foreclosures are a severe loss for the lenders. If we can keep people in the homes and help them to pay back the mortgages, we may not lose much money at all over the next 25 years.
Some will complain that this will bail out foreign institutions as well as American banks. That is the result of the government’s creation and sale of MBSs as investment products to people around the world. Fannie Mae and Freddie Mac sold MBSs to anyone who would buy them, and both Americans and foreigners bought them with the implicit backing of the US government. Congress made that grave error in the 1990s and created an entire class of junk bonds worse than anything seen in the 1980s, although with some handholding, we may get to see value out of them yet.
This will still be a painful lesson for us about government manipulation of markets. We will have to tighten belts and cut spending to pay for the initial outlay from this bailout, and we still have another financial crisis coming on entitlements to resolve. However, this agreement — as painful as it is — will probably make the difference between a recession and a global collapse. Those of us with market assets will almost certainly not have to worry about Monday, and the possibility of watching them get wiped them out in a panic.
After this, we need to demand humility from Congress on economic policy. Government-imposed “fairness” led to this catastrophe, and we’ll pay the price for the Community Reinvestment Act and the manipulations of Fannie Mae and Freddie Mac for a generation. Had we allowed the market to work normally, this never would have happened.
The story from The Wall Street Journal is here:
- Bailout Plan Gains Key Support
WASHINGTON — The emerging plan to rescue wounded U.S. financial markets received the tentative support of both presidential candidates and key lawmakers Sunday, as days of haggling over the $700 billion package appeared to be coming to a close.
“I’d like to see the details, but hopefully, yes,” Sen. John McCain, (R., Ariz.) said when asked on ABC’s “This Week” if he would support the plan. “The outlines that I have read of it, this is something that all of us will swallow hard and go forward with. The option of doing nothing is simply not an acceptable option.”
Lawmakers plan to vote on the bailout measure on Monday. Final details haven’t been released yet, but the agreement will include significant oversight of the Treasury Department’s purchases of troubled assets, executive compensation restrictions, the potential for equity stakes in firms that participate in the asset-sale program, and other taxpayer protections.
“I’m not happy with the whole situation, but we have something we can support,” House Speaker Nancy Pelosi (D., Calif.) said Sunday.
Sen. Barack Obama (D. Ill.) in remarks prepared for delivery at an event in Detroit, predicted swift passage of the bailout, which he said will include conditions he advocated.
“Today, thanks to the hard work of Democrats and Republicans, it looks like we have a rescue plan that includes these taxpayer protections,” Sen. Obama said. “And it looks like we will pass that plan very soon.”
More at the link. Mr Morrissey noted some of the things that the House Republicans got removed from the bill:
- The funding of the Housing Trust Fund, the slush fund that feeds ACORN and La Raza, is out. You can thank House Republicans for enough obstructionism to get that result. Other changes made to the final version of the bailout, according to a source on the Hill, were the removal of several provisions:
- Provision to provide unions and other activist groups with proxy access for corporate boards
- Provision to mandate shareholder votes on compensation issues (union priority)
- Diversion of funds into a housing fund to support left-wing activist groups like ACORN
- A provision to allow trial judges to arbitrarily adjust mortgages, creating bonanza for trial lawyers
- A provision to require the government to sell to state and local governments at a discount homes the government acquires as a result of foreclosure
It also suspends mark-to-market rules and requires a study on their effects on the collapse.
I’d like to actually read the damned thing! Here is a summary of its various sections from The Washington Post,. But, of course, a summary doesn’t really tell you all that much; it’s simply a guide to tell you which sections of the 106-page bill deal with what issues.
I’m mostly concerned with:
- Section 109. Foreclosure Mitigation Efforts.
For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.
Now, just what does that mean? Upon my first reading of this, and another statement from Speaker Pelosi’s office, my impression is that the Secretary of the Treasury would have the authority to rework mortgages, to reduce the principle to an amount based on current housing values, rather than on the amount actually spent on the property. As an example, if this provision means what I think it might, someone who has a $500,000 mortgage on a house that is now worth only $300,000, the government could reduce his loan amount to $300,000, even though the person or company from whom he bought the house has already collected $500,000; the government — read: the taxpayers — would be subsidizing such a person’s McMansion to the tune of $200,000!
Now, I hate all types of welfare, but at least with welfare to the poor, you can believe that your tax dollars are actually going to help people who are poor. With this abominable bill, my guess is that our tax dollars are going to be used to benefit people who are fairly well-off, but just bought bigger than they could afford. Those of us who did something radical, and bought houses we can actually afford and pay our mortgages on time — mine comes out of my checking account on the tenth of every month, automatically, so my mortgage is never late — are going to pay more in taxes to bail out those who bought homes they could not afford and who are late in their payments.
Naturally, the bill has provisions designed to prevent corporate executives from bailing out with “golden parachutes,” but let’s be honest with ourselves: the wealthiest corporate leaders might be deprived of a golden parachute, but unless they were total idiots, they already have made millions, and diversified it enough that, while they might lose millions, they still have millions more. The people who will really lose are the people who haven’t made millions, some of whom will lose their jobs, some of whom will lose their retirements, and some of whom will wind up paying more in taxes. If you were a hard-working employee and a responsible home-buyer, you’ll be hurt.
Unfortunately, everyone thinks that this bailout is necessary, to prevent a second Great Depression. Whether it actually is, we’ll never know, because the House and Senate have agreed, and President Bush will sign the thing into law.
One thing is certain: neither Barack Obama or John McCain will be able to deliver on their tax-cut promises, even if they wanted to do so. I never believed that Mr Obama was telling the truth in the first place, but here it is, a ready-made excuse, to renege on those promises — not that he’ll admit it before November 5th. (I don’t expect Mr McCain to admit it, either.)
Dana Pico:
It looks like teh House of Representatives will vote on this thing today, and the Senate on Wednesday.
29 September 2008, 6:17 amDana Pico:
Typical. When I tried to download the .pdf file of the bill from the House website, I got an error message saying that the file was damaged and couldn’t be downloaded.
29 September 2008, 6:49 amYorkshire:
I had to put 25% down on my house, paid my bills on time, did the right thing, so, where’s my bailout freebie? Why do I have to pay for freeloaders and the Dodd/Frank screw-up?
29 September 2008, 7:22 amArt Downs:
How much of the ‘improvement’ was merely cosmetic?
How many members actually read the bill?
Will one penny of the ’skim’ taken by the well-heeled perpetrators ever be paid back?
The whole mess was orchestrated by a cabal of Liberal politicians, Wall Street parasites, and political hacks who often segued between the roles.
The Friends of Obama seem to have played a major role in creating and perpetuating the scam but may imagine that they are immune from any civil or criminal action. There would be pardons aplenty from a President Obama.
“Let them eat any crumbs from the cake” seems to be the message from our new aristocracy. Those pseudo-populist masks may hide the truth from the electorate for one more election but there may be a time when the popular mood may turn to a desire for heads on pikes.
29 September 2008, 9:46 amTom Pearson:
If the republicans were still in the majority in congress rather than the congress having this bailout rammed down their throats, bush would be forcing the congress to enact more, bigger, permanent tax cuts/rebates/breaks, for the already filthy rich.
So let’s just call this pseudo bailout spade is a spade for what it is, “george walker bush’s last gasp act (now that the Democrats have a small majority in both houses) to have a ONE TIME seven hundred billion dollar tax cut/break/rebate for the filthy rich” rammed down ALL OUR THROATS!
Why just screw the congress when you can screw all but the few filthy rich, out of tbe other three hundred million U S Citizens for the same price and effort.
Makes ya proud to be an American doesn’t it folks.
29 September 2008, 11:46 amArt Downs:
What is (almost) amusing is the effort of the perpetrators of the ‘near-meltdown’ to cast blame on the innocent. Democrats created the CRA that mandated an abandonment of traditional lending standards that limited mortgage defaults. Then we saw the creation of Fannie Mae and Freddie Mac, alleged ‘businesses’ that became a key element of the ’slice and dice’, ‘pass the trash’ game.
Yet the management of Fannie Mae and Freddie Mac was stacked with Democrat hacks who seemed to be in a three-way revolving door that opened to Government, pseudo-companies, and Limousine Liberal investment bankers.
Yet there are some angry dullards who buy into the politics of envy lies. The people who took the money and ran and are getting the million dollar a year pensions (for at most three years of sitting at a desk and cooking the books) seem to be on the Obama bandwagon.
Perhaps they feel that he will be as generous for swindlers was was Bill Clinton. Does anyone remember Marc Rich?
29 September 2008, 12:08 pmDana Pico:
The corporate bigwigs might not get their golden parachutes, but unless they were really, really stupid, they’ve already received millions in compensation, and diversified. They won’t get hurt, not badly anyway.
29 September 2008, 12:21 pmTom Pearson:
Art…you are truly pathetic….Innocents?
Name one in Washington D C besides Ron Paul that never has bought into the neoconman deal. Tbe whole damned bunch need to be fired and replaced with people that the citizenry can hold responsible and accountable for their actions and deeds good and bad.
Art, fellow American, you’ve had so much neocon smoke blown up your butt it’s “dulled” your thinking processes.
Both the dummycruds and repukelicans are guilty as hell you tunnel visioned person you and all you have done that I’ve read is echo biased, totally worn out right wing propaganda rhetoric.
That’s what I can stomach about political party members and their point at the other side and blame them bias and defend the guilty inside their own party.
You need to quit sucking on the propaganda tailpipe, because its spewing right back out of you, and take a real look around. Like ole Yogi Berra said, “You can learn a lot just by taking a look around own your own” or words to that effect.
You might also read some of the other posts pal, even if I doubt you’d see past your right wing bias long enough to consider other opinion.
We are all in the same sinking boat and the democrats and republicans are bailing more water INTO the boat. Enjoy it….while it lasts.
29 September 2008, 12:44 pmTom Pearson:
Ron Paul-Texas Straight Talk
A weekly column
Lipstick on a Bailout
This time last week, the biggest bailout in the history of the world seemed to be a fait accompli. Last weekend, the Fed Chairman and the Secretary of the Treasury had harsh words of doom and gloom for Congressional leaders, with the rest of the administration parroting along, and by last Monday it seemed both parties were about to fall in line and vote our Republic away by socializing the banking industry through this bailout.
Foolish business behavior was about to be rewarded, and propped up a little longer, the bubble blown a little bigger, and our coming Depression (Note: Depression full blown not a recession) made that much greater, but then something happened on the way to the House floor.
Citizens made their voices heard.
The real story behind the story in Congress this week was the thousands of calls and emails sent to Representatives, clogging up inboxes and even slowing down the House internet system. Slowly, like the Titanic turning around, sentiments on the Hill shifted, and we heard Congressmen capitulating and changing their tune a little, desperately trying to find ways to salvage the bailout without completely enraging their constituencies.
Now we hear about taxpayer protections, about golden parachutes, and about other nuances that hardly cover up the fact that we would be creating more money out of thin air and further devaluing the dollar! The problem is not HOW the government is spending this money; it’s the fact that the government is spending this money. We don’t have it. We are already nearly $10 trillion in debt, not including unfunded liabilities.
We already spend about $1 trillion a year we don’t have on our overseas empire. Now nearly $1 trillion more is somehow supposed to magically appear and solve all our problems! No – creating more money might delay the inevitable for some well-connected banks on Wall Street, but in a few weeks we will find ourselves right back in this same position, but much poorer.
The unfortunate thing is that we’ve already spent at least $700 billion on other bailouts that did not solve the problem. And while all this negotiation was taking place, the auto industry was quietly bailed out, with no controversy, no discussion, to the tune of $25 billion.
Inevitably, it appears Congress will call their constituents’ bluff and the bailout will pass, because that is the habit Wall Street and Washington have fallen into. People are right to be concerned about our financial future. I’ve been talking for 30 some years about reasons we need to be concerned and change our ways. We find ourselves now in a position of no good options, and no silver bullets. But the worst thing we can do is to compound our problems by intensifying the mistakes of the past. We do have tough economic times ahead, no doubt, no matter what we do, even if we do nothing. The question, is will we have the courage to take our medicine now and get it over with, or will we prolong the misery for many years to come? I’m less and less optimistic about the answer to that question.
http://www.house.gov/htbin/blog_inc?BLOG,tx14_paul,blog,999,All,Item%20not%20found,ID=080929_2441,TEMPLATE=postingdetail.shtml
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Posted by Ron Paul (09-29-2008, 11:38 AM) filed under Monetary Policy
Comments
Comment by Don Richards
September 29, 2008 12:09 PM
Ron - Whatever happens to the $700b bailout bill, it looks like people are listening to you for the first time.
In the last 3 years my bank has changed 3 times - from WorldBank to Wachovia and now Citibank.I’m still using old WorldBank checks.
You’ve been right on the money 30 years! You’re right now…
Don Richards
Libertarian Party of Montgomery County, Texas
Comment by Frank Altomari
September 29, 2008 12:14 PM
Why is NO ONE making the kind of sense you are and speaking the truth like you, sir?
Thanks for fighting for the people.
Comment by Shari Seibel
29 September 2008, 1:10 pmSeptember 29, 2008 12:38 PM
Senator Ron Paul, I wish more men had as much common sense as you do. It is scary that most leaders in politics are more worried about their 5 minutes of fame in the press than they are about the country they are leaving for their children and grandchildren.
Thank you so much for your efforts, YOU are the true maverick!
Ropelight:
House GOP rejects bailout. Read it and rejoice.
29 September 2008, 2:41 pmThe banks were forced at gun-point blah blah blah… | Iowa Liberal:
[...] AP story even though I also don’t doubt that they’ve read it. One thing is for certain;It needs to be nailed to the eyelids of Art “never my fault” Downs. Ugh…the man is like a broken [...]
1 December 2008, 7:19 pm