The $700 billion bailout should fail on its own merits

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..not be passed through because of other legislation that the taxpayers deserve to have regardless of whether it’s attached to to bailout.

This $700 billion (probably more like $1 trillion or $2 trillion) bailout that was passed by the Senate last night is really no better than what the House voted against just a couple of days ago. But lawmakers are sure they’ve sweetened the deal enough to get the House to vote in favor of it.

Some of the provisions of the current nonsense the taxpayers will have to pay for:

  • Authorize $700 billion for the government to purchase troubled assets and buy equity in distressed financial firms.
  • Require the Treasury Department to make rules to prevent excessive compensation for executives whose companies benefit from the rescue, and to cap deductibility of executives’ pay packages at $500,000 for firms that get $300 million or more from the program.
  • Establish an oversight board for the program, an investigator general to monitor it and regular government audits.
  • Require that the president establish a plan to recoup the cost from the financial industry if, after five years, there are any losses.
  • Phase in the money for buying troubled assets, with $250 billion available immediately, $100 billion to be released if the president certifies it is needed, and the last $350 billion available with another certification, but subject to a congressional vote.
  • Provide business tax breaks, including for production of, investment in, and use of renewable fuels.
  • Increase personal credits against the alternative minimum tax, shielding more than 20 million taxpayers.
  • Grant tax relief to victims of natural disasters in the Midwest and elsewhere.
  • Extend through 2011 a program that funds rural schools and local governments that have low property-tax bases because they are within or adjacent to federal lands.
  • Extend through 2009 the deduction for state and local general sales taxes.
  • Extend through 2009 individual tax breaks, including deductions for higher-education costs and teachers’ personal expenses.
  • Increase, from $100,000 to $250,000, the limit on federal bank deposit insurance. The limit would revert to $100,000 at the end of 2009 unless Congress extends it.

Where do I begin? It’s too expensive and taxpayers shouldn’t have to fund it. Let the market work. If the assets are worth pennies on the dollar on the open market, the banks will just have to hold them or sell them for that price. The government shouldn’t swoop in an overpay for sketchy assets.

And this provision that supposedly disallows golden parachutes to executives? Someone define excessive, please.

The oversight board is worthless: A part-time board that meets once a month to take a peek at how hundreds of billions of dollars are being spent? I don’t think so.

Recover the cost from the financial industry? Who are we kidding? This will be handout, plain and simple. And more handouts will follow because our government is setting a bad precedent.

And the tax provisions for individuals? In general, those are good provisions that should be given to American taxpayers without tying them to this horrible legislation. The AMT no longer makes sense. Certain costs should be tax deductible. Don’t tie these things to the passage of a bad bill!!!

Don’t believe all the “sky is falling” hype. We taxpayers should not have fund a bailout for the irresponsibility of others. The people who lied on their mortgages and the investment banks who packaged and sold these bad mortgages are to blame. And I simply don’t want to pay for it.

Armageddon is not coming, and taxpayers need to speak out against this. The market needs to work it out by itself. I promise you that it will be much less painful and more swift that way. This bailout only prolongs the pain, is nothing but a bandaid, sets a precedent for future bailouts, doesn’t force those who created the problem to live with their mistakes, and is flat out going to cheat taxpayers out of their hard-earned money.

Here is a sampling of comments from lawmakers who voted against this bill (Thanks to The Daily Conservative for assembling these comments.):

Allard (R-CO) Full Comment.

“In considering proposals to stabilize the economy, taxpayers have always been my top priority,” said Allard. “In creating this $700 billion package, Congress held no hearings, nor did it use a process to provide a reasonable assurance that this proposal would even work. I am unwilling to leave a huge legacy of debt for generations to come without confidence that it would be worth the price.”

Barrasso (R-WY) Full Comment.

“As I have said from the beginning of this debate, providing a $700 billion rescue package to our financial institutions is a significant risk to taxpayers. Any government assistance must protect taxpayers – not reward failure.

This rescue package did not meet my three core principals – accountability, oversight and taxpayer protection.

Brownback (R-KS) Full Comment.

“Congress needs time to get this right. A rushed $700 billion bailout package is unlikely to produce the long-term results we need. Plus, $700 billion is a lot of money. You could buy all the farm land in the top 16 agricultural producing states in America with that amount of money. Or it could buy 4.4 million Americans a home at the median price in Kansas.”

Bunning (R-KY) Full Comment.

“Since Treasury Secretary Hank Paulson first came to Congress with this plan I have opposed it,” said Bunning. “And while some of the language and the length of this bill may have changed in the last week, it is still the same old bailout for Wall Street with a few extra sweeteners intended to buy off votes. In the end, this bill still puts the taxpayers on the hook for Wall Street’s losses and takes America’s free market system down the path towards socialism. I cannot and will not support that.”

Cantwell (D-WA) Full Comment.

“And while I put my full support behind these tax relief measures, I believe that bold action is needed to solve our current financial crisis. I am just not for this action. I am in favor of putting the full faith and credit of the U.S. Government behind solving this financial crisis, but I do not support turning the keys of the U.S. Treasury over to the private sector. I don’t believe it’s the government’s job to pick winners and losers in corporate America.”

Cochran (R-MS)

No official comment has been released as of yet.

Crapo (R-ID) Full Comment.

“I voted no because I am not convinced that the Administration’s proposal in its current form is the right solution, that taxpayers were protected,” Crapo explained following the vote this evening. “This is not to diminish the serious and real threat that faces our financial markets and economy. To be certain, there is a substantial threat that must be dealt with, but this proposal requires the taxpayer to assume the majority of the risk. The taxpayers must be protected if this solution doesn’t work out, and should be the last to take a financial loss. However, after much review and evaluation, I concluded that this proposal fails the fairness test and left the taxpayers with too much risk.”

DeMint (R-SC) Full Comment.

Dole (R-NC) Full Comment.

“Action is clearly needed to return stability to our financial markets, but most importantly, effective, sound action is needed. To fix the markets, we must deliver a market-based solution, not a government bailout.

“Because of unrelated spending additions, this bill now comes at a cost of over $800 billion, and it is still a government takeover of our economy with no protection for taxpayers. It raises the debt ceiling to $11.3 trillion. It bails out foreign investors before American homeowners struggling to pay their mortgages. And it does nothing to address the root cause of this mess, the housing crisis.

Dorgan (D-ND)

No official comment has been released as of yet.

Enzi (R-WY) Full Comment.

“Ultimately, I do not believe this is the best solution for our economy or the taxpayer. Something does need to be done to save our economy, but this package is just a very costly band-aid for big banks that will do very little to help patients who needs major surgery.

Feingold (D-WI)

No official comment has been released as of yet.

Inhofe (R-OK) Full Comment.

“After examining the issue very closely and spending time with constituents, local business leaders, and elected officials, I felt compelled to vote against Secretary Paulson’s proposal,” Senator Inhofe said. “As we work to address the financial situation in a timely way, Congressional leaders must be mindful that such a massive proposal needs to have the support of the American people. It is the American taxpayer, after all, who is being asked foot the bill for this bailout. Constituents and business leaders here in Oklahoma continue to tell me they are hesitant to pay for mistakes made by others. Those concerns are valid, and its Congress’s duty to find a solution that takes them into account.”

Johnson (D-SD) Full Comment.

“However, despite the fact that this proposal has merits, I continue to have concerns that it lacks the necessary protections to fix the abuses that caused this problem, provides little direct assistance to American families, does not go far enough to cut the golden parachutes of irresponsible CEO’s, and does not do enough to address American tax dollars benefiting foreign banks.”

Landrieu (D-LA) Full Comment.

“Unfortunately, it appears that an influx of taxpayer money will ultimately need to be a part of any attempt to stabilize and restore faith in our financial sector. However, if the people of Louisiana have learned anything in the last several years, it is that simply throwing money at a disaster doesn’t fix the problem unless paired with wise reforms to the practices that failed us.”

Nelson (D-FL) Full Comment. (Sorry about the caps. That’s how it was on the site.)

“MADAM PRESIDENT, I CAN SAY A LOT ABOUT THIS, BUT LET ME JUST SAY THAT THE BOTTOM LINE IS THAT ULTIMATELY THIS BILL FORCES TAXPAYERS TO BAILOUT INVESTMENT BANKS THAT CAUSED THE CRISIS IN THE FIRST PLACE AND IT DOES NOTHING TO ADDRESS THE REAL PROBLEM WHICH IS HOME FORECLOSURES AND A RESUSCITATION BACK TO LIFE OF THE HOUSING MARKET. AND UNTIL WE STOP THE RECORD LEVEL OF FORECLOSURES, THIS CRISIS IS GOING TO CONTINUE TO WORSEN WHETHER WE PASS THIS BILL OR NOT.”

Roberts (R-KS) Full Comment.

“However, Kansans – by the thousands – have made clear to me that the financial plan currently before the Congress is not acceptable. I agree. It is not clear this plan will get the job done.

The plan permits taxpayer dollars to be used to buy assets of foreign financial institutions that have a presence in the United States. If U.S. taxpayer dollars are going to be put at risk, those dollars should be used to shore up U.S. based companies.”

Sanders (I-VT) Full Comment.

“This country faces many serious problems in the financial market, in the stock market, in our economy. We must act, but we must act in a way that improves the situation. We can do better than the legislation now before Congress.

This bill does not effectively address the issue of what the taxpayers of our country will actually own after they invest hundreds of billions of dollars in toxic assets. This bill does not effectively address the issue of oversight because the oversight board members have all been hand picked by the Bush administration. This bill does not effectively deal with the issue of foreclosures and addressing that very serious issue, which is impacting millions of low- and moderate-income Americans in the aggressive, effective way that we should be. This bill does not effectively deal with the issue of executive compensation and golden parachutes. Under this bill, the CEOs and the Wall Street insiders will still, with a little bit of imagination, continue to make out like bandits.”

Sessions (R-AL)

No official comment has been released as of yet.

Shelby (R-AL)

No official comment has been released as of yet. I see a trend here in Alabama.

Stabenow (D-MI) Full Comment.

“I opposed the Emergency Economic Stabilization Act of 2008 because it is fundamentally the wrong approach to fixing our economy. We need to start from the root of the problem – helping families stay in their homes and keep their jobs. While I’m glad it included alternative energy provisions that I championed as a member of the Senate Finance Committee, it did not do enough for the people of Michigan, and so I could not, in good conscience, support this bill. I will continue my work in the Senate to ensure that we remain focused on legislation that creates jobs and puts American families first.”

Tester (D-MT) Full Comment.

“Like most Montanans, I’ve got a heck of a lot of concerns about this,” Tester said after the hearing. “I want to know that this legislation fixes the root problems, so we’re not doing this year after year. I want to know that no CEOs are getting big paychecks for running their companies into the ground. And I want to make sure that Main Street not just Wall Street is helped.”

Vitter (R-LA) Full Comment.

“First, it’s an unprecedented government bailout that will almost certainly pave the way for even more – maybe sooner rather than later.”

Wicker (R-MS) Full Comment.

“The proposal being brought to the Senate floor tonight is an improvement from the initial Paulson plan. But at its core, this is still the same plan that calls on taxpayers to go $700 billion further into debt in an attempt to fix this problem, while doing absolutely nothing to prevent it from happening again. I have strong philosophical differences with this approach, and I will not vote to support it.”

Wyden (D-OR) Full Comment.

“Now, in 2008, we have been rushed into voting on a package that would spend $700 billion in a far shorter period of time to address the credit crisis that threatens our markets. In my judgment, the bill we are considering tonight leaves far too many questions unanswered, and misses the mark in addressing both the causes and potential cures for the current crisis.”

“First, the bailout package provides help to large institutional investors who took foolish risks. Rather than extending assistance to get credit flowing at appropriate levels again to shore up confidence in our markets, it is likely that much of this money will go to those who don’t deserve a taxpayer bailout for their miscalculations. Wealthy investors, who ought to know better, shouldn’t be allowed to gamble with taxpayer money.”

7 thoughts on “The $700 billion bailout should fail on its own merits

  1. I have to disagree with you on this one. It’s easy to say if the assets are worth pennies, then the banks should have to hold them or sell them, but this doesn’t reflect reality. Because of the situation that the banks have put themselves in, they don’t have the luxury of not selling the assets, so this raises the question of whether or not these assets should be worth pennies. I would compare the current credit crisis to what’s happening for many homeowners, I think you’ll see some parallels.

    If you bought a home for $500,000 in 07′ and because of the crisis it’s now only worth $250,000, then it will impact your personal balance sheet, but it is only significant for those who are forced to sell. People who bought ARMS that they couldn’t afford are going to have to get rid of their homes at fire sale prices and won’t have the luxury of buying and holding to maturity, but the responsible borrowers shouldn’t have to pay for other people’s irresponsibility.

    On the other hand, if you have a responsible borrower who lives across the street, who still has a job, is making payments and doesn’t plan on moving, then the price of their home is really more of an academic issue then financial one. Sure, they probably wish they would have waited and got it at a better price, but over time they’ll pay off their debt and their equity will go up.

    In the case of the homes, it’s only a small section of the market that is actually being forced to sell because your bank isn’t allowed to call you at 9 am and tell you that they need you to pay down 10% of your loan by 11am.

    Now compare this to what’s going on at the banks. The banking industry has always been built on loaning the money that YOU deposit out at higher rates and certainly over the last ten years, their standards have gotten terribly lax, but because of margin requirements and a run on the bank, they don’t have the luxury of waiting for their good assets to mature. Effectively, the credit freeze is putting them into the position of the ARM borrower who doesn’t have the option of waiting, but it’s their depositors who are being put into the position of risk.

    So if our choices are to have the banks fail because they really don’t have enough collateral to back up the money that the American people have given them or to have the government step in and stop the bank run so that banks have the option of deleveraging in a more orderly fashion (or to hold their loans to maturity like you suggest), then I have no trouble supporting it.

    If there was enough private capital to hold these loans, then we wouldn’t be in the position that we are in today. We can play the blame game, but the reality is that the banks are being forced to unload “houses” at fire sell prices and only the US government has the money to buy and hold these securities. With 92% of the residental mortages still paying on time, the cost of the bailout won’t be the $700 million that you keep pointing out, it will be the $700 million + or – what they end up getting back and because of the prices that the government can buy these loans at, it’s reasonable to expect that they could make money on this deal. If we can restore confidence in the banking system, allow home owners to hold their homes to “maturity” and prevent the banks from having to unload good bonds because of margin calls, then the entire economy will benefit.

    It’s easy to point to the bank failures and to stubbornly refuse to help them, but the cost of forcing these banks to fail will be far more than the potential profit or loss that the US government will make on this deal because they have the luxury of holding these bonds to maturity while the banks do not. I won’t argue that the banks have been irresponsible, but would you really have small business owners, regular working Joes and worried homeowners be the ones who end up paying the price for these excesses? The bailout isn’t ideal, but letting the banks burn to the ground would be far worse for all of us.

  2. Tracy Coenen

    What really is the result of banks “failing”? If it’s a matter of the FDIC ponying up cash to the depositors, I’m fine with that. If the FDIC doesn’t have enough money, and the government wants to supplement that (essentially using tax dollars) to give depositors their money back, I’m fine with that too.

    I just don’t see an individual or a bank needing to have a fire sale as a bad thing. In the case of a home, it will allow people who otherwise couldn’t buy a house to get a great deal. (i.e. We’re rewarding those who were responsible and waited.) In the case of the investments, it allows private investors to get a great deal on an investments that you seem to say will pay off long term. (i.e. We’re rewarding them for taking the risk today.)

    This plan is all wrong, and doesn’t really fix the core problem. If it doesn’t fix it, there’s no sense in wasting the money. It’s like putting a bandaid on a wound that needs 300 stitches. It’s not going to fix the problem.

    (Thanks for your comments!)

  3. Thankfully, we do have FDIC insurance (which comes out of the pockets of the banks BTW) and because of it, the most needy in society are protected, but if you own a business $100,000 isn’t going to go very far and if you run a billion investment fund, it certainly won’t protect the millions of hard working Americans who’ve entrusted their savings to these institutions. If it weren’t for the bailouts that we’ve seen to date, many more depositors would have been hurt by the financial collapse.

    If you consider 20% down, “financially responsible” for home owners, it’s still levered 5:1 for consumers. When Bear Stearns and Lehman failed, we were talking about a leverage ratio closer to 30:1. Supposedly, the banks see their activity restricted once they hit a 12:1 ratio, but assuming that a “responsible bank” is at a 10:1 ratio, it would mean that even if 10% of the public loses confidence and pulls their money out of the bank, then there is nothing left for the remaining 90% that didn’t participate in the bank run (except these devalued loans that the government is talking about buying). In the dog eat dog world that your posts argue for, the 10% who actually understand how serious of a crisis this is are going to be rewarded while those who either don’t know (the public) or those who refuse to participate in making the problem worse (long term investors) will potentially become creditors of a bankrupt organization.

    If there were enough private investors to solve this problem, then we wouldn’t even be talking about a bailout, but when you have major investors putting in $5 billion in WAMU and then a month later they have nothing, how are we supposed to expect the private sector to open up their wallets and recapitalize the banks? The same is true for these loans. If someone helps further the American dream by buying a morgage at par and then sees it drop to .90 cents, they don’t have a lot of confidence to keep throwing money at the bond and then because of the liquidity issues, they see more of these loans hit the market at .80, .70 and .60 cents on the dollar people become increasingly gun shy to continue to support the economy by buying these investments. If the banks can’t sell at a rationale valuation and yet they are forced to sell because of liquidity issues, then even those investors who may have bought paper at 60 cents will keep waiting because they know that there is still a ton of this stuff out there waiting to hit the street and they don’t want to see their .60 cents get cut in half by the deleveraging that still needs to take place. Meanwhile banks are being toppled because they are undercapitalized and are being forced to take huge losses on loans that are still performing.

    So why is it bad for the banks to fail? Well some (and I would argue that this means the US government) are going to get a great deal on these investments, but in the meantime, banks will hoard cash because they fear that panic will overtake their business models, which will make it harder for entrepreneuers to get start up financing, for responsible existing businesses to get loans and maintain existing lines of credit, which will impact private investors who see their savings or investment portfolios wiped out because of these failure, which certainly leads to higher unemployment because there are less wages to pay out and less capital that is willing to fund the system, which will lead to more people defaulting on their homes because they don’t have any income, which will cause spending to slow down, which will lead to more businesses failing, etc. etc. etc. This price is too high to pay just so that people can get a good deal on investments.

    Now maybe the bailout plan won’t work and we’re all toast anyway, but they have to do something to restore confidence to the market because if they do nothing, the bank run continues and hard working people are going to lose everything that they have. If the plan does put an end to the bank run, then these banks will at least have the opportunity to hold their bonds to maturity like you suggest.

    Some may feel that it’s good for “responsible” investors (or even short sellers) to be able to pick up huge bargains or to profit from the value destruction that we are seeing, but when I see “responsible” ordinary hard working people losing their life savings, just so that the few can end up profiting, I can’t help but feel that this laissez faire is the wrong attitude to have (and this is coming from a card carrying member of the Libertarian party.)

    We can disagree on how much of a band aid that this will really be, but I’d rather hear suggestions on how to fix the system then to simply reject this plan over an academic argument. Whether or not anyone wants to believe it, the bailout plan is really about putting YOUR money back into your bank account, by stopping the withdrawals and giving the banks enough time to stabilize the system, it will allow the economy to run smoothly and at least gives us a way to break this vicious downward spiral that our entire economy seems to be in.

  4. Tracy Coenen

    Have you seen all the pork in this round? I’m going to do a post on it later today. It’s shameful what the taxpayers are being roped into.

    I just don’t think that we should agree to something because there’s no alternative on the table. Let’s get a reasonable alternative. You see that Wall Street didn’t get excited about the Senate passage of this bill…

    (Thanks again for your comments. I love reading them!)

  5. Well I can’t disagree with you on the amount of pork in the bill. They had to put in so many sweeteners to get this passed, that it will probably give the country diabetes. It’s crazy that Hank Paulson’s plan was only 3 pages and now it’s turned into something the size of a novel. I can’t say that I’m a big fan of the political process. I think it’s really sad that the markets even have to turn to the government for help. I appreciate your comments on the topic as well, even if we disagree on whether or not this is necessary. Clearly, it’s not a black or white situation and there is plenty of room for different viewpoints.

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