Much was said a short while ago about the disheartening fact that only 9% of Americans expressed confidence in our Congress. Yesterday's bailout vote showed why even 9% was undeserved.
First, the bill. Michelle Malkin called it a shit sandwich. (Well, okay, she was polite and called it a "crap sandwich." But I'm not going to mince words.) It was authored by Democrats, with Republicans deliberately excluded from authorship. Nice. Let's here it for bipartisanship, guys.
The the primary purpose of the bill was to apportion $700 billion in federal money (that's just a starting point, by the way -- when have you ever seen a government program cost less than its projection?) that was to be used to buy "troubled assets" (i.e. bad debts) from banks, thus relieving the banks of the debt liabilities while providing them with operating cash. The bill would have also mandated the creation of a federal insurance program (like the FDIC) to insure institutions holding large amounts of troubled assets; such an insurance program would act as a mechanism to ensure that bad debts do not sink more financial institutions. But when Republicans finally got their hands on the bill, they found it stuffed full of pork (a bailout of union pension funds) and perks (a plan to skim revenue and give the proceeds to ACORN Housing and other race-based agitators who are tied exclusively to Democrats) and sneaky add-ons that would never otherwise pass (a ban on oil shale production).
After these things were brought to light, Republicans managed to use public outcry as leverage and get many of those things removed, but the full text of the bill still has not been made public. (Correction: the bill was not made public until Sunday afternoon, barely enough time for anyone to discuss it before the Monday morning vote.) After analyzing the bill, the Republican Study Committee issued a summary of the bill that included these concerns:
- Fails to adequately penalize the debtholders and shareholders (including many of the executives themselves), who should bear the risk of any losses, and indirectly infuses capital directly onto the books of these financial institutions.
- Alters fundamentally the nation’s free-market system in that it broadly socializes firm’s money-losing mortgage assets and places the U.S. on a slippery slope whereby profits may also be nationalized.
- Cedes massive authority to Treasury. Given the fact that the Presidential election is a mere six weeks away and a new Secretary will take office in January 2009, lawmakers have absolutely no idea what individual will ultimately be exercising this vast new authority over the long-term.
- Sets up Treasury to pay inflated prices for assets. Since there is nothing in the proposal that forces the financial institutions to sell their assets at a discount rate or event at all, many of these owners may simply wait on the government to increase their bid, leading to more inflated prices than the market would currently bear.
- Creates the potential for an enormous bureaucracy that will be needed to administer the purchase and insurance programs.
- Increases the federal deficit and national debt. The new mandatory spending, will cause a massive increase in the national debt and an immediate (although smaller) increase in the federal deficit. These annual deficits are funded by selling government bonds purchased by a host of large investors, including foreign countries. However, there is a limit to the amount of bonds that a government can float without adverse financial effects.
- Aids financial institutions that may not pose a systemic risk. Some companies, such as AIG, may truly pose a systemic risk to the entire market. However, there is no requirement under the proposal that a company truly be “too big to fail.” Instead, any financial institutions with mortgage-related assets would be eligible.
And about that "massive authority" given to the Treasury -- Secretary of the Treasury Henry Paulson asked for the power to reapportion the money any way he chooses, with congressional and executive oversight strictly forbidden. It's a scary, naked power grab by the Department of the Treasury, and something that we don't need.
In addition, there is also the possibility that the government (specifically Treasury Secretary Henry Paulson, an investment banker by trade) could be using the current credit crisis to leverage the largest trade windfall in history. Here's how -- the Treasury buys $700 billion in loan notes, but these notes are actually bundles of bad and good mortgage loans. Assuming that mortgage failures have peaked, the Treasury may actually be buying mostly good notes at firesale prices. Then as the Treasury slowly increases the money supply to spur economic growth (something that no other "investor" has the power to do) these notes may actually net a staggering profit of over $1 trillion dollars for the US Treasury.
Finally, the bill contained no indications that Congress actually understood what caused the current banking crisis, or was prepared to make some sacrifices in order to help the nation get through it.
The bill utterly failed to address the federally-mandated race and income-based lending quotas that forced banks to get into the subprime/unsecured lending business in the first place. Make no mistake about this -- banks were forced to loan money to high risk borrowers who were members of ethnic minorities, and they were forbidden to use normal risk-assessment tests such as real income and credit scores, on the basis that such tests were "racist." Banks developed sub-prime, 100% financing programs because many low-income borrowers could not afford regular mortgage payments or did not have enough savings for a downpayment -- but banks had to lend money to these borrowers or else face audits, government interference in mergers and other normal business operations, and public castigation and harassment from minority advocacy groups.
Fannie Mae and Freddie Mac sweetened the pot by offering to buy those risky loans and selling them as derivative bonds, backing them with the full faith and credit of the US Government. The whole thing soon spiraled out of control as investors bought up these bonds, expecting them to be fail-safe long term investments. The greed of banks (who were making good money from these bonds, and stupidly expected a windfall when the higher interest rates of subprime mortgages eventually kicked in) and bond traders is certainly to blame for part of the problem, but the record clearly shows that Fannie Mae, Freddic Mac, ACORN Housing, and numerous other organizations funneled millions of dollars in lobbying money and soft-money political contributions to Democrats so they would kill any legislation aimed at regulating or expanding oversight of Fannie and Freddie. And to no one's surprise -- since it was written by Democrats -- the bill did not include any kind of lobbying reform or financial accountability for the CEO's and other corporate officers of Fannie and Freddie.
And how about some good faith offerings that showed Congress was really serious about helping out the taxpayer? Perhaps some cuts in government spending, or a 12 month moratorium on earmarks? Nope. Nowhere to be found in the bill.
So was the defeat of the bill a good thing? Yes and no. Remember, two weeks ago Harry Reid said "No one knows what to do." But in just a few days, House Democrats were able to miraculously put this bill together. Haste usually means poorly-conceived ideas and ill-informed decisions. There is an old maxim: "Unusual cases make bad law." Steve Schippert notes, "Is it not troublesome that the "Bush Tax Cuts" have a defined shelf life and the largest government program in our history does not?"
On the other hand, many people are still worried about an impending credit crunch that could force banks to end or severely restrict commercial lines of credit -- the money that businesses (generally large ones, or those that have irregular or seasonal cash flow) regularly borrow in order to keep operating. The funding in this bill would have kept banks solvent and forestalled a bigger credit crunch. No one was expecting a miracle cure; the best we could have hoped for was a crash landing instead of terminal velocity impact.
Now on to the Democrats, and their party's feckless leadership.
A mere party line vote would have ensured the bill's passage. The House did not need a 2/3 supermajority, because the President promised to sign the bill as soon as it landed on his desk. Yet, 95 Democrats voted "NO" on the bill. What does this say about Nancy Pelosi's leadership? Just before the vote, Pelosi (who declared last week that Democrats bore absolutely no responsibility for the current credit crunch) delivered a shrill kick in the balls to Republican House members, blaming them and the Bush White House for everything currently wrong with our financial system. Her statement was one of the most ugly, deceitful partisan attacks I have ever heard. Here is an excerpt:
$700 billion. A staggering number, but only a part of the cost of the failed Bush economic policies to our country. Policies that were built on budget recklessness when Pres. Bush took office, he inherited Pres. Clinton’s surpluses - four years in a row budget surpluses on a trajectory of $5.6 trillion in surplus. And with his reckless economic policies, within two years, he had turned it around. And now 8 years later, the foundation of that fiscal irresponsibility, combined with an “anything goes” economic policy, has taken us to where we are today.
Critics claim that Republicans who switched their vote after Pelosi's vitriolic rant were spineless. But I ask, if someone keeps kicking you in the balls, how many times are you going to get back up and be kicked again? The truth is that the Republican vote did not matter one bit. The entire Republican delegation could have voted "NO" and the bill would have still passed. That's what being the minority party means.
Democrats, you can't have it both ways. You can't blame the Republican minority for derailing this bill, while claiming that the Democrat minority was essentially powerless in 2003 and 2005, when they defeated two major Republican GSE reform bills.
Did Nancy Pelosi deliberately sink this bill, on the assumption that its defeat will hurt John McCain? Considering the fact that this bill has been nothing but an exercise in divisive partisan politics and finger pointing, that accusation comes as no surprise. Way to go Nancy. You've certainly earned that single-digit confidence rating.
Fabius Maximus has a good post on the bill: "A Quick Guide To The Emergency Economic Stabilization Act of 2008." And you should read his archives, which are linked at the bottom of his post. He claims to not be an economist or a banker, yet his grasp of the problem is amazing, and his writing is easy to understand.
Fox News put together a good 2-part report explaining how Fannie Mae and Freddie Mac enabled banks to comply with federal mandates and make risky loans to unqualified minority borrowers:
And here is another video featuring excerpts from a 2004 House hearing on Fannie Mae and Freddie Mac's violation of regulatory rules. This is when the Fannie Mae accounting scandal was just beginning to unravel. Watch Congressional Democrats defend Fannie Mae and attack the regulators! Rush Limbaugh has a transcript and commentary.