Bailout Bill Dangerous, Inflationary, Unnecessary, and Unconstitutional

by Hans Bader on September 23, 2008 · 1,238 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk

The $700 billion financial bailout bill being pushed by Bush and Congressional leaders is attracting broad opposition.  Not only does it rip off taxpayers and violate constitutional limits on delegation of government power, it also threatens to spread the contagion of the mortgage meltdown, drive up inflation, and ruin the value of the U.S. dollar at home and abroad.

Law Professor Ilya Somin and economist Steven Landsburg question the need for a bailout.  Sebastian Mallaby, a supporter of past bailouts, balks at this one, comparing it to “wandering into a bad-loan bazaar and being ripped off by every merchant.”

As more details of the bailout become available, investors grew alarmed. “Peter Schiff, president of Euro Pacific Capital, said the fear of inflation provoked by the $700 billion plan — without figuring out a way to pay for it — was behind the market’s dramatic movement.  ‘Where’s the tax increase to fund this bailout?  Where is the cut in programs?  The government’s not doing either — they’re just going to print money,’ he said.  And if you think inflation is the answer, take a trip to Zimbabwe and see how it’s working for them.”  (The economy is already at serious risk from the Fed’s inflationary easy-money policy, which helped spawn the mortgage crisis.  The bailout will also increase the risk of future bubbles).

The bailout may yet grow more expensive, since Congressional leaders are demanding lots of additional costly give-aways at taxpayer expense.  Yesterday, we reported that the Administration had agreed with Congressional leaders to expand the bailout “to add more costly give-aways, like ‘systematic‘ limits on foreclosure, that would allow irresponsible borrowers to remain in their homes at taxpayer expense.”  The liberal Congressman who said such an agreement had been reached — House banking committee chairman Barney Frank – ”backtracked” late yesterday, saying that while he was seeking such additional give-aways, he had “overstated the agreement” by saying that the Bush Administration had agreed to them already.   Today, however, the Los Angeles Times quotes Frank as saying that “agreement had been reached in several broad areas, among them . . . a requirement that the department seek to minimize home foreclosures by slicing the interest rate and even the outstanding loan amount of many of the troubled mortgages it buys.”  Such a requirement would be unfair and very costly for taxpayers, and any bill that includes such give-aways should be filibustered.

The versions of the bailout bill that I have seen are so sweeping and standardless that they constitute unconstitutional delegations of power.  They give Treasury Secretary Henry Paulson extraordinarily broad powers to buy bad loans throughout the economy, without any meaningful standards, barring any judicial oversight of even patent misconduct.  But vast grants of authority are only allowed when government officials are subject to judicial review, as the courts made clear in the broadest peacetime delegation of power they ever upheld (the Nixon-era price controls upheld in the Amalgamated Meat Cutters case).

Government officials like Paulson claim that we should trust them to exercise their powers wisely.  But government officials spawned the mortgage meltdown and financial crisis through their incompetence, such as mandating risky loans to promote “affordable housing.”  And Paulson himself failed to see it coming even when the warning signs were obvious.  Not long before taxpayers ended up bailing out mortgage giant Fannie Mae, Paulson claimed it was in good health, and for political reasons, he ignored warnings to the contrary from conservatives.   His arguments for the bailout are internally inconsistent, and disregard the lessons of history.  There is no reason why taxpayers should trust him with $700 billion and no strings attached, especially given his conflicts-of-interest in doling out the money.

Many commentators are now calling for relaxation of federal regulations mandating “mark-to-market” accounting (which requires assets to be valued at current fire-sale prices), in order to stem the financial crisis, including the Republican Study Committee, former FDIC Chairman William Isaac, the Wall Street JournalJohn Berlau, Jeff MillerHolman Jenkins, and Newt Gingrich.  The government insists that private banks use it, but hypocritically refuses to use this method of accounting itself.

Hans Bader September 23, 2008 at 4:18 am

It's unclear exactly how many give-aways at taxpayer expense are being added to the already costly bailout bill to appease liberal lawmakers.On Monday, Barney Frank, who earlier claimed that the "Bush Administration had agreed to additional aid for homeowners facing foreclosure," "backtracked, saying he had overstated the agreement," after "Treasury Department officials later in the day rejected the details of the Democratic additions to the bill." See Susan Ferrechio, "Re-Election Worries May Hinder Fast Passage of Bailout," Washington Examiner, Sept. 23, 2008, at pg. 16.Today, however, as noted above, the Los Angeles Times claims that the Bush Administration has now capitulated to Frank's demands to bailout such homeowners.

Hans Bader September 23, 2008 at 4:37 am

The Republican Study Committee today called on policymakers to reform federal accounting regulations to "Suspend the mark-to-market regulatory rules for long-term assets. These rules require financial firms to mark assets at current levels, even where no market exists and any immediate transactions would result in fire-sale prices. Instead of allowing firms to mark these assets to their true economic value, these rules contribute to a downward spiral as firms have to evaluate their assets not on the basis of their long-term investment but rather on a short-term mania."

Hans Bader September 23, 2008 at 4:49 am

Regulators and government officials contributed to the mortgage crisis in many ways. Recently, John Lott, Jonah Goldberg, and the Wall Street Journal explained how affordable housing mandates, redlining regulations, and the Community Reinvestment Act encouraged lenders to make risky loans to irresponsible people who never saved any money and now are defaulting. Financial expert John Steele Gordon described how the government-backed mortgage giants Fannie Mae and Freddie Mac spawned the mortgage crisis, in the New York Times.

You can find links to the above stories in paragraph 4 of the Sept. 22 blog post "Bailout Threatens Economy, Shreds Constitution, Rips Off Taxpayers." John Lott's piece is also available at http://johnrlott.tripod.com/op-eds/FoxNewsMortgag

Hans Bader September 23, 2008 at 5:15 am

Paulson has a serious conflict of interest when it comes to bailing out Wall Street at taxpayer expense. As news reporters have noted, Paulson himself is a wealthy former Wall Street executive whose firm stands to benefit from taxpayers, rather than Wall Street, picking up the tab for bad loans. Paulson was the CEO of Goldman, Sachs from 1999-2006. See, e.g., Kevin G. Hall, "Paulson and Bailout: Conflicts of Interest?" McClatchy Newspapers, Sept. 22, 2008.

Hans Bader September 23, 2008 at 6:31 am

The bailout rips off people who lived within their means to pay their debts. I can pay my mortgage, because I was frugal, and bought a little two-bedroom house on a fixed rate mortgage. But reckless people in my region can’t pay their mortgage, because they bought big houses on adjustable interest-rate loans with low teaser rates. Now that their introductory low rates have expired, they can’t afford their payments. The government is going to bail them out, at our expense. While many defaulting borrowers have been living it up, buying fancy Lexus cars and eating expensive restaurant meals, I’ve been going through recycling bins on weekends searching for coupons. (For example, I recently found $100 in baby food coupons that way).

richard September 23, 2008 at 10:56 am

the govt got us into this mess and we are just supposed to trust them,b.s

ryan September 23, 2008 at 2:57 pm

Let's see… No WMDs… Umm… I think a week or so ago the administration said.. "the Economy is doing well.." Why in the first place would we even give them a chance now?

Thurman Senn September 23, 2008 at 5:49 pm

I am posting this Comment. I'm also staying up late sending this same message to as many Congressmen and women as I could.First, I’m mad as **** that Congress is even having to consider such legislation. What did my tax dollars pay for when it was paying the salaries of all of the regulators at the Federal Reserve, FDIC, and SEC that allowed the problem to get this bad? Why should my tax dollars bail out all the idiots and/or crooks that have gotten themselves into this mess? I have a mortgage that I pay for every month. My father doesn’t have a mortgage. It's unfair for us to pay for all this.Second, I strongly urge everyone to oppose the proposal until we get some clear answers to some fundamental questions.1. Where did the $700 billion number come from? What data supports this number? How exactly does our economy get destroyed if we don't do this?2. What exactly will the federal government be buying – prime mortgages, second lien mortgages, subprime mortgages, “stated income” (liar loan) mortgages, etc.?3. What price is being paid? How and who is determining the price? Using what criteria?4. Who exactly will be the sellers? Who decides?5. What is the government going to do with whatever it buys? If the government isn’t going to do it (e.g., service the mortgages) who’s going to get hired and at what price? What standards measure performance? If loans are going to be restructured, who decides what the revised mortgage loan terms are going to be? Will everyone get the same deal or will there be "favorites" getting better deals than others?6. What can the selle’s do with the money they receive? Since they’ve already bungled the money they had, what’s to prevent them from making poor investments the second time?None of these questions are being answered to my satisfaction in the news reports.Also, I noted that the proposed bill from Treasury allowed for purchases of commercial mortgages. What??! Why are we (the taxpayer) buying commercial mortgages?$700 billion!!! Legislators fight like a dog over a few million. I expect all voters and citizens to demand answers and hold people accountable. I certainly will be the next time I have to vote.Thurman SennLouisville, Kentucky

CopperheadKid September 23, 2008 at 8:06 pm

Mr. Thurmann Senn,You have listed excellent questions that require answers in your Comment. If we ever get the answers, which I doubt, we then should base our decision on open and fair market principles that most of us try to live by in maintaining ethical business relationships. Next, before rendering a decision we should defer to the Constitution of the the United States to look for a foundational principle to justify this bailout. Oh… wait a second, we have a decision!If any legislator or elected government office holder supports a taxpayer bailout of a private commercial business he/she has just violated his/her oath of office. Period. That was easy; too bad no one is considering that on Capital Hill.Dems and Repubs have acted like our foundational document that gave rise to the free and open market system we have enjoyed can be ignored or dismissed. Adherence to the Constitution would have kept us out of this mess and made many problems the US suffers from concurrently non-issues.NO BAILOUT EVER!The free and open market sytem will adjust to the temporary lack of credit due to the overwhelming "lack of credibility". And we will survive. Hopefully the central bankers, their masters, minions and pawns will not.

Kay Henson September 24, 2008 at 4:19 am

It sounds to me like the people who are stating their comments on this site, are people who have worked their tails off to get where they are today and have not enjoyed any help from anyone, especially the government. My husband and I have had to start over 3 times in our lives because of mismanagement, or thieft, of money by the government or big corp. business. I have sympathy for the people who signed the loans that have ruined their lives, but it is not my responsibility to bail them out. And, it is certainly not by responsibility to bail out greedy corporations that are consumed with how much money they can scam from the people. Our politicians are a joke, but I for one, am not laughing. I am sick of the Socialist Dems, and the Cowardly Reps.

a conservative with September 24, 2008 at 10:01 am

Why is it that you recommend a filibuster for any bill that reduces interest rates or cuts balances on mortgages for homeowners? Writing mortgages for customers who should not have got them and/or for amounts that should not have been granted is the very reason we had these "false markets" in places like Tampa, and other places across the country, which led to the perceived need for such a bailout. Now, while the homeowners who got these pushing-the-envelope mortgages are also responsible, why should they not benefit from the same safety net as the companies who profited off of them? And those companies profited not solely because they made money off one or two bad loans, but because those loans all added up to creating a false market, which raised home prices, which put homeowners in a situation where they owe 500K on a house worth 350K.

Billiesue September 24, 2008 at 6:05 pm

I have heard it said that this will help Wall Street, but will hurt main street. My question is, if this bail out is going to bring the value of the dollar down, then guess what, that means that the price of oil and gas will go up, and people who are staggering to keep those homes with even fixed morages, are going to really struggle. What really flusters me, is people who, in good faith, bought a home doing everything right, will be hurt even more. Monies will go only so far, and then there are people who borrow on their home so they can get buy because the cost of living is rediculously rising. They are borrowing against their home just to live, especially if there is a medical crisis. I have seen people who had a good savings but when an unexpected medical emergancy happens, everything is wiped out., sometimes people resort to borrowing against their home. It's those people who will be hurting.

Sherman Edgar Montgo September 29, 2008 at 4:02 am

Underlying all of this scheme is the fact that no attention is directed toward establishing market value of the mortgaged properties at a level at or above 80% of the amount achieved in 2007. If this is not achieved foreclosures will increase beyond anyone's ability to stop the total collapse of the economy. And I mean NOW! I am unable to search all of the info that might be available. If you know something exists, please email me.

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