Senate Passes Most Fiscally Reckless Bill in History

Tonight the Senate passed the most fiscally reckless bill in history. We fought a tough fight and even won a few battles, but the reality is the war is likely over. A fear mongering campaign by Bush, Paulson, CNBC, CNN, and Bloomberg accompanied by a 777 point plunge on the Dow probably likely sealed the fate.

The media blitz was the financial equivalent of Bush's "Mushroom Cloud" speech that suckered Congress into a needless war in Iraq. The US has wasted a trillion dollars in Iraq for nothing, and now the Bush Administration, with cooperation from Congress, is going to waste $250 billion to $700 billion more, at a bare minimum, fighting an economic slowdown that is coming no matter how much money is wasted. I suspect the total will reach trillions of dollars before all is said and done.

This is what we were up against.

• President Bush
• Treasury Secretary Paulson
• House Speaker Nancy Pelosi
• House Finance Chairman Barney Frank
• CNBC Cheerleaders
• CNN Cheerleaders
• Bloomberg Cheerleaders
• Prime Minister Gordon Brown
• ECB President Jean-Claude Trichet

That is a pretty formidable list. We shocked the world on Monday when the bill failed to pass the house. No one expected that result. We also won a lot of concessions, at least in theory. It will be interesting to see if any of them are worth a damn in actual practice.

For all the fear mongering about financial Armageddon if the bill failed to pass, it is fittingly ironic that that the futures are in the red as I type. Perhaps the stock market rallies on passage in the House, perhaps not.

Regardless, the market will eventually come to the realization that this bill is not going to create any jobs, spur lending, help the stock market, or put sour consumers in a better state of mind. Instead, $250 billion was just wasted with more (up to $700 billion total coming).

There is always a chance the next president (Obama) comes to his senses and does not ask for whatever Bush and Paulson do not waste, but I suspect the entire $700 billion may be long gone before Obama is sworn in.

I personally am going to continue faxing Congress, actually everyone in Congress. If you wish to continue the fight, and I hope most do, concentrating on the Congressional Most Endangered List and your own Representatives is a good place to start.

And although I am carrying on until the bill passes or is killed in the House, I am not going to propose any new campaigns. There are enough examples out there and enough ideas already. You are on your own as to whether to participate or not. I hope many of you do.

I want to thank everyone who took the time to phone, fax, or email Congress. Maybe we made a difference on the amount that is going to be wasted. Maybe not. But we did all we could, and then some. You can all be proud of your efforts.

Comments

[CM in MA:]

I called my rep and thanked him for voting against the bill. I called again today to encourage him to continue opposing it. That said, I expect the House will cave to the pressure. So, since Washington seems incapable of changing itself, we'll have to change those in Washington. I encourage folks to visit the Libertarian Party's webpage (lp.org), then register and vote for the LP candidate, Bob Barr. Below is a press release with Barr's view on the bailout and his sound approach for addressing the root problems.

bobbarr2008.com/pr.../

Press Releases › BARR: No more government guarantees
October 2, 2008 10:39 am EST

Originially published at the Washington Times ...

Just one week ago, Treasury Secretary Henry Paulson was demanding that Congress grant him unprecedented, unreviewable authority to spend $700 billion or more to bail-out Wall Street. But in a major rebuke to the administration and to both the Republican and Democratic congressional leadership, the House voted down the 110-page plan that emerged from last weekend´s frenzied — if not unseemly — effort by Mr. Paulson to salvage a bailout deal.

The Dow dropped some 10 percentage points in reaction to the House vote and, while that was less than a third of the massive percentage drop it suffered in 1987, it shouldn´t surprise anyone that Wall Street was upset at being denied at least $700 billion of taxpayer´s money to practice more of what got it into trouble in the first place — buying up over-valued mortgage-based securities. A majority of members of Congress correctly concluded that the leadership-backed bailout bill was, to put it mildly, bad and that the closed-door sessions that spawned it were deeply flawed as well.

Perhaps at long last, some basic understanding of economics is seeping into the Capitol. Dare we hope that some members now understand the fact that Congress can only redistribute, not eliminate, the pain of an economic downturn? At a minimum now, as a result of the House “no” vote, Congress has time to seriously consider alternative strategies and it needs to press its advantage.

The starting point should be private market adjustment. With the knowledge that an easy government bailout is no longer around the corner, the markets can get serious about working through the mountain of bad debt that imperils homeowners, banks and companies alike.

Unfortunately, artificial booms inevitably lead to painful busts, but these can be productively addressed. Today, this means a mix of bankruptcies, company workouts, and takeovers as we are seeing in the banking sector and outside investors buying large pieces of companies, such as Warren Buffett´s $5 billion investment in Goldman Sachs. This process will reward more responsible firms and encourage them to move early to correct past mistakes.

Many companies also will have to sell mortgage-backed securities. Obviously, companies holding over-valued mortgage-based securities (MBS) prefer to dump bad securities on the government than sell them in a down market. But there is a market even though asset values are uncertain. Merrill Lynch liquidated its MBSs in July.

Bailout advocates simultaneously tell us that these assets are “toxic” and are destroying firms, but which magically at the same time are possessed of value that will ultimately make money for the government if it is allowed to buy them with taxpayer funds. However, good business leaders know that private investors are better able than government officials to dig out that hidden value. Private buyers, too, could participate in reverse auctions and hire asset managers on their dime, not the taxpayer´s. This adjustment process should be carried out in the marketplace — not behind closed doors in Washington.

Both Congress and the administration should focus on cleaning up the mess, not making it potentially far worse. Federal and state authorities need to begin to aggressively prosecute fraud in private markets; fraud that has resulted in trillions of dollars of grossly and deliberately, if not criminally negligently, overvalued mortgage paper. The goal is not to create scapegoats, but to keep markets clean. At the same time, we need a thorough investigation of the misbehavior of public officials in spurring Fannie Mae and Freddie Mac, for instance, to engage in reckless lending. Many of the politicians leading the attack on Wall Street for its failures worked overtime to create the subprime lending debacle.

Congress should rein in the Federal Reserve System. Over the last decade the Fed has followed an easy money policy designed to spur economic growth. But this encouraged irresponsible lending and inflated property values. Increasing the money supply is a bit like mainlining heroin — it´s pleasant while you´re doing it, but it´s extremely painful when you finally stop. Yet as currently configured, the Fed is neither transparent nor accountable.

Congress must say never again with Fannie Mae and Freddie Mac, which lowered mortgage standards and pushed people into new or larger homes than they could afford. These government-sponsored enterprises must be privatized; there must be no more implicit or explicit public guarantees for mortgage lending.

Congress needs to repeal the Community Reinvestment Act. The CRA effectively forces banks to lend to poorer communities irrespective of the creditworthiness of borrowers. Many of the same legislators who demanded increased bank lending in the inner-city now criticize banks for making “predatory loans.” Agencies such as the Securities and Exchange Commission need to suspend the mark-to-market accounting standard and reconsider its application. The rule makes sense for trading assets, especially where values are well established; however, the standard has a perverse impact when applied to long-term income-producing assets in a volatile market. A single major, bad sale can force a major corporate write-down, artificially crippling an otherwise creditworthy firm.

We need better, more streamlined regulation, not more regulation. There are a multitude of government financial regulators, leaving us with expensive controls, but without the transparency most needed by customers and investors.

Finally, we must control federal spending. Where is the $700 billion or more for a bailout supposed to come from, in a government already drowning in deficit spending and a spiraling national debt? Who will bail-out the federal government when investors at home and abroad refuse to buy its paper Instead of attempting to ram through a new version of this bad bill, the president and congressional leaders should announce that a government bailout is off the table. Companies and institutions must focus on systematically working through their problems, in a transparent, focused effort, utilizing the tools in the government´s already-massive quiver of tools.

We must learn from today´s economic disaster lest, to paraphrase George Santayana, we repeat this painful experience in the years ahead.

Bob Barr, a former Republican congressman from Georgia, is the official candidate for president of the Libertarian Party.

2008 Oct 02 12:20 PM

[moonbat1775:]

CM,

The multiplicity of your solutions suggest to me you are fighting the branches and not the root of the problem. The root of the problems is the government backed fractional reserve banking system. All this was predicted by the Austrian economists.

Mish,

I see the 777.7 drop in the Dow as a sign from Heaven. Much better that 666.6, eh? God detests dishonest weights and measures. Fractional reserve bankers, beware! Greenspan, reconsider your atheism. Smarter men than you, believe in the great "I AM".

2008 Oct 02 01:46 PM

[TheAvenger:]

Shedlock,

It is kind of funny how you think your arguments about the rescue package are bullet proof and you cannot be wrong about it… After checking at other insightful analysis from you : “Trying to Defend Mosaic” written on Sept 30: MOS closed that day at $68.02 … Today is at $42.60 (and falling…)

You really need to convince yourself that there is chance you are also dead wrong on this one…

A Doctor trying to save the life of a wounded person doesn’t care if the patient gets infected, first you need to keep the patient alive and then you will deal with the consequences…

2008 Oct 02 02:17 PM

[cantab:]

Michael

Forgive me if I have missed your previous posts that contained an analysis of the "bailout", but I do not see the point of this post. I do not pretend to fully understand the proposed package or the implications it passing or not passing. Your posts' title would imply that you have a firm grasp on the implications of passing the "bailout" and a analysis would have been more helpful than an op-ed.

2008 Oct 02 03:59 PM

[cabear:]

Mr. Shedlock,

I disagree that "the war is over". The war against America's taxpayers is just beginning.

Did it occur to you that Obamanation & his handlers in Congress might be equally clueless about how to solve these financial & economic problems, and therefore just as likely to either a) use whatever is left of the $700 billion or b) request another round of bailout money when the first $700 billion does nothing to lift the economy?

Obamanation is not the 2nd coming of the Messiah, he is just another prototypical tax-and-spend Democrat, and last time I checked there is no shortage of Democrats culpable in this crisis (including his handlers Frank and Pelosi who you've called out by name). If you are partly blaming Democrats for this "fiscally reckless" bill, why would a prototypical Democrat do any better once in office, especially one who will serve at the whim of a Congress controlled by the old guard of the Democrat party?

On that note, many of us regard Obamanation's tax-and-spend bills, namely massive tax increases and yet another government entitlement to provide "free" healthcare, to be equally if not more "reckless".

Unfortunately in this war, America's taxpayers (now evidently less than 50% of the population) are the minority. If we thought the last 8 years were bad, we will soon learn a new meaning of "reckless".

2008 Oct 02 08:26 PM

[Stockguy456:]

We need to send some people to jail!!

2008 Oct 06 01:56 PM