October 1, 2008

Bailout v. Workout — The Continuing Crisis

(Note: This is an update from “Economics 101: Crisis of Confidence”, Mark Alexander’s comprehensive analysis on the current financial crisis. Also see “Drive-by Observations on the continuing crisis” for supplemental opinion on this subject.)

“[A] wise and frugal government … shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.” –Thomas Jefferson

If you did not catch our commentary on the current financial crisis, “Economics 101: Free Market v Government”, I encourage you to read this brief but comprehensive analysis of the current confidence deficit plaguing our financial markets.

By way of update, as we anticipated, the so-called “bailout deal for taxpayers” did not pass the House on Monday, 29 September, after it had metastasized from the Bush administration’s three page proposal to 109 pages.

Though the Bill under consideration had substantial support from conservative organizations like our friends at the Heritage Foundation, and other free-market advocates with trade associations, most House Republicans still objected to the bill because it involved the biggest government intervention in the market since the Great Depression, and did not include sufficient market incentives such as significant tax and spending reductions.

But, media reports to the contrary, it was the Democrats who killed this bill. Had House Speaker Nancy Pelosi lined up the 95 liberal Demos who voted against this legislation, including five Democrat committee chairman, half the Congressional Black Caucus and a majority of the Hispanic Caucus, the plan would have passed.

Democrats voted it down because it did not include enough largesse for their constituents, including billions for Leftist organizations, unions, etc. (For example, read “The Meltdown’s Acorn.”)

Responding to the dysfunction on the Hill, there was a significant selloff in the financial markets on Monday. However, indicating that there is still plenty of rational thought in the market, securities rebounded Tuesday as investors went bottom fishing for stocks that were selling well under their earnings potential.

However, there is real danger that the markets will continue to sell off, threatening the livelihood of many Americans.

As President George W. Bush said Tuesday morning, “As much as we might wish the situation were different, our country is not facing a choice between government action and the smooth functioning of the free market. We’re facing a choice between action and the real prospect of economic hardship for millions of Americans.”

Unfortunately, the “deal” that failed on Monday, may have been the best deal possible for House Republicans.

The Senate will convene Wednesday night to consider a similar plan, which also includes a temporary increase in FDIC insurance for large depositors and extensions of expired business tax reductions. Minority Leader Mitch McConnell described the Senate plan as “one of the finer moments in the Senate.”

However, now that House Democrats and their media lemmings have falsely blamed their impasse on Republicans, they are likely to come roaring back Thursday with a proposition “to save America,” including all the largesse they originally wanted. Like pigs at an open trough, nothing attracts big spenders like a crisis requiring emergency spending.

Senate deliberations notwithstanding, Democrats can pass that legislation (as they could have passed the bill Monday) without a single Republican vote, and all their shenanigans have been calculated to ensure the election of Barack Hussein Obama.

Obama and the Democrats have been playing the “economic fear card” for the past four years, using the economy as political fodder for their campaigns. As Demo-gogue Nancy Pelosi framed it: “For too long, this government, in eight years, has followed a right-wing ideology of anything goes, no supervision, no discipline, no regulation.”

On Thursday, 2 October, the Senate took up the bailout, and passed, by a vote of 74-25, the proposal after upgrading the House’s 109 pager to a 451-page behemoth known as the Economic Stabilization Act. Among the items added to the bill that are completely unrelated in any sense to troubled credit markets is $150 billion in tax breaks for families and businesses, including $8 billion in relief for those hit by natural disasters; $12 billion in credits and incentives for all manner of “green” energy projects from solar energy to electric cars and idling reduction for dishwashers; exemptions for children’s wooden practice arrows and for businesses that employ residents of Indian reservations (read: casinos); an extension of the duty suspension on wool products and a wool research fund; and a provision making it easier for film and TV companies to deduct for domestic production. Nothing attracts flies like emergency spending.

Furthermore, one of the key provisions added is a temporary increase in the limit of federal insurance for bank deposits from $100,000 to $250,000. Yet doing this on top of the bailout may create incentive for more of the same from troubled banks, while more than doubling taxpayer losses when banks fail.

According to economist Stephen Moore, after the FDIC limit was increased from $40,000 to $100,000 in the last year of the Carter administration, ostensibly to ease concerns about ailing thrift lending institutions, “It ended up incentivizing brokers to ship ‘hot’ money in $100,000 chunks to whatever desperate thrift was paying the highest rate. When the savings and loan crisis hit in 1989, taxpayers were on the hook for $150 billion in losses.”

How did the Senate, which is prohibited by the Constitution from doing so, get all of these tax provisions into the bill? Simple, they took a previous House bill, the Paul Wellstone Mental Health and Addiction Equity Act of 2007 that mandates that health insurers treat mental health the same as physical health, and tacked the rest of the bailout on as an amendment to it. Our colleague, James Taranto of The Wall Street Journal quipped, “So the bailout ended up attached to a measure that extends benefits to people suffering from depression and is named after a lawmaker who died in a crash. Never let it be said that the U.S. Senate lacks a sense of humor.”

Nancy Pelosi says she will not bring the bill up for a vote in the House unless she has the votes to pass.

If the House does not arrive at an agreement, and if the Republicans have it in them – surely John McCain does – it is time for them to put forward a bold plan of attack and force the Democrats’ hand. We deserve serious debate about the future principles that will guide our economy, and let the people voice their opinion on Election Day, 4 November 2008.

Footnote: As for all the Leftmedia economic fear card play, rest assured, ads like those produced and paid for by MoveOn.org blaming John McCain for the meltdown and now running on Leftwing media outlets like CNN and NBC are nothing more than fabrications wrapped in deceptions embedded in lies.

(Publisher’s Note: This is an update from “Economics 101: Crisis of Confidence”, Mark Alexander’s comprehensive analysis on the current financial crisis. Also see “Drive-by Observations on the continuing crisis” for supplemental opinion on this subject.)

White House: Three page Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets

House of Representatives: 109 page LPTAPMR Discussion Draft

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