Buying Congress - Bullied on the Bail Out

One must wonder why Congress is hell bent on passing a plan when so many economists are questioning it even working at all and while other more proven approaches are available.

Congressman Peter DeFazio issued a press release showing the the bitterness of these so called sweeteners being dangled before our representatives on Capital Hill:

the Senate has simply added a number of popular tax provisions, and a 4-year extension of the county payments program, to increase support for a fundamentally flawed bailout bill. They added some tax cuts so Republicans would vote for it, and added mental health parity so that progressives and liberals would pay for it. But, it’s the same flawed plan that the House defeated earlier this week. I have fought long and hard to restore the county payments program and every county in my district depends on funding from the program. But, I cannot vote for the Bush/Paulson bailout which will jeopardize our nation’s financial future by borrowing $700 billion -- $2,300 for every man, woman and child and transfer it to Wall Street financiers.

This particular program is critical to Oregon and was recently cut, sending much of the Oregon rural economy into a tail spin. Nice huh? Either vote our way or toast your district?

The Hill has a staffer noting:

House members who care about fiscal discipline are being backed into a corner here

Economy in Crisis details some of the pork:

Section 325 provides tax breaks for the “wool research fund.” Section 503 contains a provision repealing a 39-cent excise tax on wooden arrows designed for children. Section 309, a tax credit for economic development in America … well, actually that’s America Samoa, not the United States of America. Other beneficiaries of the “rescue legislation” include Hollywood producers, Nascar track builders and Puerto Rico and Virgin Island rum-makers.

The CBO has just released some cost analysis figures and says the tax cuts will add to the deficit $112.3 Billion for the next 5 years and also implies a great unknown on the $700 billion bail out actual cost, much due to the purchasing mechanisms and pricing of these toxic assets.

So while all of this arm twisting and holding vital funds hostage is going on in Congress, more and more experts are questioning if this bail out will have any effect, even a temporary one.

“It’s our view that this package, in a fundamental sense, will not solve the problem,” said Simon Johnson, a former chief economist at the International Monetary Fund. Mr. Johnson said that he had been hoping that the bailout plan would simply stabilize the markets through the presidential elections in November, but that he was now pessimistic about even that

Michael Darda, chief economist at MKM Partners, an investment firm in Greenwich, Conn., said the Treasury’s bailout plan might have even unnerved many investors.

“I don’t see how it can help banks unless it’s clear that the government is going to buy these assets for substantially more than they are worth right now,” Mr. Darda said. “It’s such a big step in terms of government influencing the private sector, and it’s hard for investors to take a leap like that overnight, especially when they don’t know what’s going on.”

One of the pure financial blogs most highly critical of the bail out comments:

The biggest problem with the bailout (aside from my usual gripes) is that the plan's proponents are setting improper expectations around the plan's benefits, by assigning benefits to it that the plan simply isn't capable of delivering. The problem with this is twofold: It suggests that the framers of the plan haven't a bloody clue as to the true dynamics of the economic malaise affecting the country, and it could potentially set the nation up for an even greater confidence crisis when the plan fails to deliver

Economist Joseph Stiglitz now sings the bail out blues:

The rescue plan that was just defeated was far better than what the Bush administration originally proposed. But its basic approach remained critically flawed. First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners. Trickle-down economics almost never works, and it is no more likely to work this time.

Moreover, the plan assumed that the fundamental problem was one of confidence. That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans. There was a housing bubble, and loans were made on the basis of inflated prices.

So, why is a plan that isn't even expected to work being shoved through Congress by the carrot and stick?

Economist Roubini wonders if the increasing credit crunch is occurring because of the now $850 Billion dollar bail out:

It's plain that the current financial crisis is worsening in spite of--or perhaps because of--the Treasury rescue plan.

The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package: Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety; credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package

Naked Capitalism has a fairly astounding analysis on the credit crisis with Paulson's plan:

When Paulson dumps out his 700 billion in treasuries it's going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson's billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson's billions divert credit from working capital to long-term mortgages - from where it's most needed to where it's most wasted.

Just a side note, Goldman Sachs is projected to the big winner in this bail out.

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Comments

Oh....Nooooes....

....not the same Goldman Sachs who is the largest contributor to 'The One's' campaign. Cannot be. Obama has repeatedly lied said that....

'I am the one you've been waiting for!'

I thought he was talking to me...not Lloyd C. Blankfein. Ah well...

A.Citizen

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'When you see a rattlesnake poised to strike, you do not wait until he has struck to crush him.'

Thought Mr. Bill was commenting for a sec.

Goldman Sachs is playing both sides of the field. Paulson is an ex-CEO, Rubin is an ex-CEO, Furman I believe was involved ....they are clearly running the country. Look at Paulson, isn't all of his behavior, not that of a government Treasury Secretary and that of a CEO who is now becoming a hedge fund manager?

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Here Comes Blame the Victim

An "opinion" piece is now blaming the victim as if people just recklessly went into debt. People went into debt to survive in most cases. The got home equity loans to pay bills, they used their credit cards for medical bills and groceries, they got into bad mortgages because housing, generally is way more expensive than incomes can handle.

So, they want their bail out so here it comes...oh, the people are just irresponsible.

Predictable strategy.

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Common justification

A common justification I am hearing from proponents of the bailout is that people need to borrow money "to hire employees"

Somehow this just doesn't compute with me - if you have to borrow money to hire someone, maybe you should not be hiring at this point?? just sayin'

Can someone please explain how borrowing money helps hire people?

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it doesn't make sense

But small business does do short term loans all of the time to deal with cash flow. I don't see what the SBA can't open up something to help in these cases. But anyone hiring a lot of employees, unless they are a start up, long term isn't borrowing money to do it. One of those half truths.

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it doesn't make sense

Yes, that part does make sense about short term loans and cash flow. However, It still seems to me that if you are borrowing money to hire or make payroll your company is living a little too close to the edge? Perhaps should be considering headcount reduction or hiring freezes?

I keep hearing this "borrowing to hire" meme as a reason given to support the bailout on TV and even NPR and going unchallenged

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Is the "rescue" (i.e. bailout) bill all pork barrel spending?

From what I have heard: the "Rescue" bill started at 3 pages long. It is now up to 451 pages. It includes tax breaks for Alaska fishermen ($200,000,000+) impacted by the Exxon Valdez oil spill. It includes funds for wool research. It includes funds for (some offshore country) rum producers, etc. etc. etc. Both Obama and McCain strongly favor this bill.

Is that accurate? Is this bill really about pork barrel spending?

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Lots of "hold over your head stuff plus pork"

I wrote about this last night. They put some things in which are sorely needed and I think tried to target Oregon specifically with a veiled threat because a lot of Oregon House members plus 1 Senator voted against the Bill...

See the bullying Congress post...this is critical money that rural Oregon needs to even run...it's massive federal lands and they save timber...so instead of bringing in other industries in these areas they are dependent upon these payments to run the local city and county governments...

(I'm not saying the lack of new developments is Oregon's fault either because as you know....the focus has been offshore outsourcing jobs, investment everything external too the US while leaving entire states, huge areas of the country with no jobs and no investments to grow new jobs).

Last tally I read was about $150B is tacked on. One of these is AMT modifications, which is a tax which hits upper middle class incomes severely and needed reforms...

but then there is additional pork. The real nightmare still is the $700B credit card Paulson gets to go shopping and buy and how he does it is critical and he still can do pretty much what he wants....to go buy up worthless assets (like distressed properties).

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