The bailout bill has been larded up with additional welfare that will increase its cost, but the House will likely approve it today without even reading the bill, which had already expanded to more than 100 pages last night. Worse, some conservative lawmakers may vote for it based on the misleading claim that it contains no welfare for delinquent and defaulting borrowers who are now facing the consequences of years of living beyond their means.
The Associated Press, which didn’t bother to read the bill before reporting on it, claimed today that “not in the bill” is “help for troubled homeowners.” (See Martin Crutsinger, Associated Press, “Rescue Bill Includes More Oversight, Insurance Option,” Washington Examiner, Sept. 29, 2008, at page 14). In reality, the bill includes provisions that allow some irresponsible borrowers to get not only their interest but also their principal reduced, and that expand a government program that helps defaulting borrowers cut their mortgage payments. But the Washington Examiner, which wisely opposed larding up the bailout bill, has today reluctantly come out in favor of the bailout as a necessary evil, after reporting on page 1 that the “$700B bill contains no” welfare for defaulting borrowers. (The Examiner earlier chronicled how government handouts and regulations helped spawn the mortgage crisis).
Michelle Malkin has an excellent post explaining the many ways that the bailout shafts taxpayers, and endangers the long run health of the economy. She notes that Section 109 of the bill includes debt forgiveness, requiring the Treasury Department to consent to “reasonable requests” not only “for mortgage term extensions” and “rate reductions” but also “principal write-downs.” Similarly costly give-aways are authorized in Sections 110 and 124 of the bill. Section 107 of the bill mandates affirmative-action in contracting, through cumbersome requirements we earlier discussed.
Freedom Works lists 10 good reasons to oppose the bailout.
John Berlau explains how the bill may harm the economy. The bill may lead to more inflation and future bubbles. The bailout ignores cheaper alternatives (see here, here, and here) and how repealing regulations might reduce the need for a bailout. It leaves intact regulations and affordable housing mandates that spawned the current crisis.
Andy McCarthy on National Review’s Corner points out,
The scheme “[a]llows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families.”So in addition to rewarding irresponsible lenders and borrowers, we taxpayers are now to be “protected” by buying the toxic debt of states, cities and municipalities. It’s one thing to throw a life-line to the credit industry; local governments, by contrast, have the ability to cut spending drastically or raise taxes if their inhabitants want government services.
Did Andy also notice Section 112 in Sunday’s draft (emphasis mine) ?: “To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending finances to financial institutions that have failed or defaulted on such financing, such assets qualify for purchase under Section 101.”
Just wait until the voters catch these particulars. They’ll take their revenge on whoever signs this saying, “Throw the bums out!”
Here are excerpts from my story in today’s American Spectator Online on how the $700 billion bailout could actually make things worse — in terms of resulting inflation and even a further contraction in credit due to the government purchases’ interaction with the mark-to-market accounting rules. To read the piece in its entirety, click here.
“”The government has to do something to keep markets from falling and the economy from getting worse.” How many times have you heard that mantra this past week from President Bush, Treasury Secretary Hank Paulson, Democrat leaders, the news media, and even some ostensibly conservative periodicals?
But what if the bailout, as originally proposed and in its latest incarnation, would spend $700 billion of taxpayers’ money and actually make the economy worse? Believe it or not, there is good evidence this may happen. The inflationary prospects of the bailout price tag may lead to spikes in oil and crop prices that could hit ordinary Americans in their cars and on their kitchen tables. And government purchases of financial assets could ironically further constrain credit through causing write-downs on even the balance sheets of financial firms not participating in the bailout by worsening the effects of mark-to-market accounting rules.
All last week, the stock market’s plunging downward was pointed to as a sign that Washington must step up to the plate — as quickly as possible. Yet ironically last Friday — the day after the bailout talks broke down at the wild White House meeting with the presidential candidates — the Dow Jones industrial average actually went up by 120 points! This doesn’t mean that the market is opposed to the bailout, but it does show that the market volatility is probably as much due to the potential effects of a bailout as it is to a lack of one.”
Credit default swaps remain a large part of this financial crisis, with some analysts crediting the failures in the $58 trillion market as more important than mortgage-related ones. According to IBD, “Counterparty risk was at the heart of the problems that sent Bear Stearns, Lehman and AIG spinning helplessly down the drain. Investors not only worry about their counterparties, but their counterparties counterparties.”
In several weeks, though, CME, formed from the merger of the Chicago Board of Trade and the Chicago Mercantile Exchange, will launch exchange-based trading for credit default swaps. A clearinghouse is also being planned by Clearing Corp., which is owned by 17 financial players including Goldmans and Citigroup and UBS. According to IBD,
Clearinghouses like those planned by CME Group and the Clearing Corp. address counterparty risks by centralizing the counterparty functions. Instead of a credit protection buyer negotiating individually with the seller, a clearinghouse would act as the counterparty to both buyer and seller. It would guarantee bond payment to the protection buyer. And it would collect payments for the insurance. The clearinghouse also would hold collateral for the contracts and set minimum standards…
Since credit default swaps are now negotiated over-the-counter, standards on such basics as collateral vary widely. “Everyone is different in their requirements,” said Backshall.
And leverage reached outrageous levels. Many counterparties were leveraged 20-30 times, again heightening the risk of default.
The clearinghouses claim they’d tighten collateral rules. In Senate testimony in July, Clearing Corp. pledged to “maintain strict margin collateral requirements.” Donohue said CME’s clearinghouse would require “much higher quality collateral” than what is currently accepted.
But for now the problems keep growing. Standard & Poor’s last week said more than 750 companies risk credit downgrades. Such downgrades would ripple through CDS pricing, increasing turbulence and raising counterparty risk.
Washington Mutual went under this week in the nation’s biggest bank failure ever. But not before putting out a final press release touting its devotion to affirmative action and “diversity,” and the awards it received from Hispanic and gay-rights groups, such as being placed on an “annual Diversity Elite list” for its race-conscious efforts in recruiting, lending, and donations to Hispanic advocacy groups.
Maybe it would still be in business if it had paid as much attention to prudent lending practices as it paid to the race of its employees and customers.
The government is obsessed with race, too. It spent years promoting risky sub-prime mortgages through affordable housing mandates imposed in the name of “racial justice” and “diversity.” And it punished lenders who refused to make risky loans through the Community Reinvestment Act and other laws. Those mandates helped spawn the mortgage crisis. Yet now, Congressional leaders are including affirmative action in the $700 billion bailout of America’s financial system.
At the behest of Congresswoman Maxine Waters, who justified the Los Angeles race-riots (which destroyed countless Korean-American businesses) as an “uprising” by the “oppressed,” Congress is adding affirmative action provisions to the bailout bill. (Waters opposed reform of the fraud-ridden government-sponsored mortgage giant Fannie Mae, which helped trigger the financial crisis, calling its corrupt CEO Franklin Raines “outstanding”).
The proposed $700 billion bailout of the banking system has been set forth only in very broad terms, and vast discretion has been left in the hands of the Treasury Department to buy bad loans at a high or low price, with few checks and balances. Congress could not be bothered to place any meaningful standards on this discretion. But there is one exception: an affirmative action mandate!
Even in the middle of what they claim is a national emergency, liberal Congressional leaders have included in their bailout bill an order to the Treasury Department to promote affirmative action in contracts related to the bailout to the “maximum extent practicable,” even in emergency situations when the Federal Acquisition Regulation must be suspended (see pp. 23 & 58 of the draft bill incorporating their deal with the Bush Administration). If the world were about to end, liberal Congressmen would still be busy drafting affirmative action proposals.
The bailout bill drafted by liberal Congressional leaders contains a massive slush fund that will benefit the fraud-ridden left-wing group ACORN, which must be removed, argues Investors Business Daily. (We earlier discussed the slush fund for ACORN and its history of voter fraud and financial fraud).
Investors Business Daily has a multipart series on how those same liberal politicians spawned the mortgage crisis by blocking reform of the mortgage giants Fannie Mae and Freddie Mac, which used their privileged status as government-sponsored enterprises to buy up “hundreds of billions of dollars in substandard mortgages,” and how “affordable housing” regulations imposed by the Clinton Administration encouraged them to gamble further at taxpayers’ expense. Fannie Mae gave money to ACORN, engaged in massive accounting fraud, political bullying, and heavy-handed attacks on dissenters.
In their bailout proposals, Congress and the Bush Administration have given short shrift to potentially much less costly alternatives (see here, here, here, and here for examples) and reforms of burdensome regulations that would reduce the need for a bailout. They have also done nothing to remedy goernment regulations and affordable housing mandates that helped spawn the mortgage crisis, or to guard against unpleasant side-effects of a bailout such as future bubbles and inflation.
Here are a few treasures I found this morning:
Kathryn Jean Lopez on National Review Online points out that some of the 20% of the profits (a floor) recovered from the bailout would go to voter-fraud-ACORN!!! (See Hans’s post below and here and here and here on ACORN.) (A commenter notes that if most purchases lose money but one makes money, the taxpayers eat the losses while the slush fund gets the profits.)
John Paulson, not to be confused with the former Goldman CEO, suggests in today’s WSJ that the government buy preferred stocks of failing companies, as they did with Chrysler, AIG, and Fannie and Freddie. “Invest the $700 billion of taxpayer money in senior preferred stock of the troubled financial institutions that pose systemic risks. Let’s call this the “Preferred plan.” In fact, it is the Fannie Mae and Freddie Mac model — which the Treasury Department has already endorsed and used in practice. It is also the approach Warren Buffett used for his investment in Goldman Sachs.” Clean and simple, but doesn’t benefit the other Paulson’s friends.
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The $700 billion bailout of the financial system just got worse, thanks to a rewrite by Senate banking committee chairman Chris Dodd. If the government loses money on all the “bad debt” it’s buying, the taxpayers will pick up 100% of the tab. But if markets rebound, or the government makes money on any of its individual purchases, taxpayers won’t keep the money. Instead, at least 20 percent of it will go into a housing slush fund that will benefit the left-wing group ACORN, which pressured lenders to make the risky sub-prime mortgage loans that spawned the mortgage crisis. (Even though housing subsidies and mandates caused the mortgage bubble in the first place).
ACORN practices widespread voter fraud to increase liberal turnout in elections, and is guilty of financial fraud and embezzlement, but it has avoided any punishment due to its links to liberal lawmakers like Senator Chris Dodd, Congressman Barney Frank, and Senator Charles Schumer. ACORN is engaged in massive fraud in battleground states like Florida. (Election rules are being shredded for partisan purposes in other battleground states like Virginia and Ohio).
Other welfare has been added to the bailout to appease liberal lawmakers — the very lawmakers who blocked any reform of the government-sponsored mortgage giants, Fannie Mae and Freddie Mac, which encouraged the risky lending that spawned the financial crisis (Fannie Mae engaged in extensive accounting fraud to benefit its crooked former executives. Yet they remain influential liberal powerbrokers).
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The glee in European capitals at the woes of “Anglo-Saxon” capitalism is tangible. Sarkozy and the German finance minister pile on, with Sarkozy saying, “Self-regulation as a way of solving all problems is finished. Laissez-faire is finished. The all-powerful market that always knows best is finished.” Peer Steinbruck, meanwhile, claims that this would have all been avoided if Washington hadn’t laughed at German proposals for stricter regulation…
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