The “Bail Out” or the “Pig Out”

$2,000,000,000,000

Somehow we knew it would end this way. It usually does.

What began two weeks ago as as a lean three-page bill intended to rescue the financial markets, has percolated in both houses of Congress and emerged as a 450+ page behemoth laden with unimaginable pork. In the process, the potential cost of the bill rose from $700 billion to nearly $2 trillion. 

Here is a breakdown of the bailout package, according to Reuters:

• Financial bailout package aimed at sopping up residential and commercial mortgages from struggling financial institutions ($700 billion).
• Financing for JPMorgan Chase’s government-brokered buyout of Bear Stearns in March ($29 billion).
• Repayments to JPMorgan Chase for financing of bankrupt investment bank Lehman Brothers ($87 billion).
• Purchase of preferred stock of both Fannie Mae and Freddie Mac to shore up their capital as needed, effectively putting the two housing finance firms under government control ($200 billion).
• Loan for AIG to avoid bankruptcy filing for the insurer, and giving the Federal government a 79.9 percent stake in the company ($85 billion).
• Housing Rescue Bill which will refinance failing mortgages into new, reduced-principal loans with federal guarantees ($300 billion).
• Grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures ($4 billion).
• Loans to banks via Fed’s Term Auction Facility ($200 billion).Loans to provide guarantees of money market mutual funds, similar to federally insured bank deposits $50 billion).
• Purchase of additional mortgage backed securities from Fannie Mae and Freddie Mac ($144 billion). 

Total expected bailout cost = $1.79 TRILLION

In addition to the bailout costs, which far exceed the original $700 billion estimates, Congress added at least another billion dollars of additional expenditures for pet projects in order to get the bill passed. Hesitant Democrats, for example, were lured to vote for the bailout bill by including the ”Energy Improvement and Extension Act of 2008,” which is devoted to “green” initiatives such as renewable energy and energy-efficient appliances. 

Likewise, hesitant Republicans were lured to vote for the bailout by attaching the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008,” which offers relief from the alternative minimum tax and extends through 2009 several tax breaks that were set to expire. These measures provide the needed political cover for Congressment to justify their vote for an overwhelmingly unpopular bill.

Several other special provisions include tax breaks for:

• Manufacturers of kids’ wooden arrows ($6 million).
• Puerto Rican and Virgin Islands rum producers ($192 million).
• Wool research
• Auto-racing tracks ($128 million).
• Corporations operating in American Samoa (Note that this isn’t the first time that we’ve seen unusual tax breaks for American Samoa – it’s no coincidence that Starkist has major canning operations in American Samoa, whose parent company just happens to be headquartered in Nancy Pelosi’s Congressional district) ($33 million).
• Small- to medium-budget film and television productions ($10 million).
• Fishermen and others whose livelihoods suffered as a result of the 1989 Exxon Valdez oil spill ($223 million). 

This shouldn’t surprise me, but it does. I guess the only good thing about this bill is that it passed quickly. Imagine how big it would have become if it were allowed to languish in the halls of Congress for another week.

Kudos to Al Sharpton

You won’t often hear me giving props to the Rev. Al Sharpton, but I was impressed wity his perspective on whether or not race was a factor in this election.  

His comments came during an interview on Hannity and Colmes, when he was asked to respond to a recent AP/Yahoo poll that suggests that racial bias is a factor. Contary to what I expected from him, Rev. Sharpton downplayed the poll, as well as the role of race in the current election.

Some of his remarks:

I’m amazed at how people of all races are coming out, really excited. Of course, I think there’s still bias in the country, but I do not think it’s to the degree that it will be a major factor in this campaign… Would I say there’s no bias in America? Of course not? But I do not think it’s the factor it once was, and I do not think it will determine the winner of this race.

At a time when many leaders are tellinig us that racial bias is the only factor that could explain the closeness of the presidential race — and that if Obama is not elected, it will be because of racial bias — I have to applaud Rev. Sharpton for offering a voice a reason.

Is a $700 billion bailout necessary?

As a staunch capitalist and advocate of a free market economy, I cringe at the thought of the government pumping $700 billion into the nation’s financial system. We are told by the Ben Bernanke, Henry Paulson, and others in the Bush Adminsistration that heroic action is urgently needed (this week) to head off a probable recession, a new wave of mortganges foreclosures, and bank failures. We are told that the risk of doing nothing is greater than the risk of spending $700 billion.

I’m not convinced. The risks of government intervention are pretty clear, while the risks of non-intervention are less obvious. First, consider the inherent risks of government intervention.

Any legistlation coming out of Congress — espcially in an election year — is likely to be packed with all kinds of special interests. One proposal would require 20 percent of any profitable transaction to be deposited into a special fund that pays for low-income housing. Now who do you think is going to administer that program? You guessed it — a newly created government bureaucracy (e.g. The Federal Mortgage Profit Recovery and Redistribution of Your Tax Dollars Administration).  And federal agencies never get smaller over time. We would likely see multiple acencies hatched from this rescue plan. 

When was the last time the government accurately estimated the cost of anything? Does $700 billion sound like a lot? Hold on to your wallets, because it is more than likely just the first installment.

And let’s not forget who got us into this mess to begin with. Lawmakers and the media are quick to blame  Wall Street and a lack of regulation. While Wall Street is certainly complicit, it is in fact government regulation that created and fueled the mess. Edwin Feulner wrote a smart article on this topic that appeared on Real Clear Politics yesterday:     

But as lawmakers debate buying up hundreds of billions in assets, they should realize that the government’s aggressive meddling in financial decision-making is what got our economy into this mess in the first place. The long-term answer isn’t more federal control, it’s a return to free-market principles.

Government interference with the free market rarely solves a problem, but generally creates more problems.

Now consider the risk of the government not acting.

Our economy is undoubtedly struggling as it tries to come to grips with the financial crisis. But are we on the verge of an economic meltdown? In yesterday’s NRO, Donald Luskin writes:

…throughout history we have periodically gone through convulsions worse than today’s and survived them without such interventions. According to the Federal Deposit Insurance Corporation there have been 15 bank failures in the U.S. between 2007 and today. We had thousands over a few years in the late 1980s and early 1990s. Since the stock market hit an all-time high last October, the S&P 500 has fallen 23 percent. It fell more than twice that — 49 percent — during the last bear market, between March 2000 to October 2002.

The U.S. economy has weather worse crises without government intervention. And there is no imperical evidence that the current crisis will result in a prolonged recession — only speculation.

Following the burst of the housing bubble, the market will correct itself. A government intervention will only serve to artificially prop up the housing market, and delaying the inevitable and necessary correction. Will the correction be painful? Yes. But until the market is allowed to correct on it own, we will not see a true economic recovery.

Congress is poised to react to this crisis with some form of a goivernment bailout, and certainly a modest intervention would be understandable to stabalize the economy. But given the current politcal crisis, Congress is more likely to OVERreact and overreach, and in the process potentially create a bigger mess than the one it is trying to solve.

Presidential Debate Schedule

Mark your calendars! The first debate is less than a week away.

All of the debates are sponsored by the Commission on Presidential Debates. Each debates starts at 9pm Eastern and lasts 90 minutes.

Here is the full schedule for debates:

Friday, September 26 – Presidential Candidates

Focus: Foreign Policy and National Security

Moderator: Jim Leher of PBS

Location: University of Mississippi – Tupelo, MS

Thursday, October 2 – Vice-Presidential Candidates

Focus: Any topic (but response time is limited to 90 seconds)

Moderator: Gwen Ifill of PBS

Location: Washington University – St. Louis, MO

Tuesday, October 7  – Presidential Candidates

 Focus: Town Hall Debate (Questions from the audience and/or Internet)

Moderator: Tom Brokaw of NBC

Location: Belmont University - Nashville, TN

Wednesday, October 15 – Presidential Candidates

Focus: Domestic and Economic Policy

Moderator: Bob Schieffer of CBS

Location: Hofstra University – Hempstead (Long Island), NY

  

Analyzing the spin

Political spin is as much a part of Americana as hot dogs, apple pie and baseball.  It has become such an integral part of the political landscape that we hardly even know how to recognize it anymore. How do we know whether a candidate is shooting straight, or trying to put one over on us? Software programs are now being developed that analyze speech patterns, facial expressions, and other factors to help us determine when the truth is being stretched.

David Skillicorn, a mathematics and computer science researcher at Queen’s University in Kingston, Ontario, Canada has developed an algorithm that evaluates word usage and speech patterns that identifies when a speaker “presents themselves or their content in a way that does not necessarily reflect what they know to be true”. More information about that algorithm is available at New Scientist.

Skillicorn used his software to analyze a database of 150 speeches of various politicians involved in the 2008 election, and was able to identify an average rate of spin. Each of thre speeches — and speakers — could then be assigned a spin value. He discovered discernable differences between the speeches of John McCain, Barack Obama and Hillary Clinton. While each of the candidates gave some speeches with very high spin content, and other speeches with very low spin content, Obama’s speeches considerabley more spin than either McCain or Clinton (see graphic).

Obama’s nomination acceptance speech rated a spin value of 6.7 (where 0 is average and positive values represent higher levels of spin), while McCain’s acceptance speech rated a spin value of -7.58. Clinton’s speech at the Democratic National Convention was almost perfectly average, with a value of 0.15.

The results do seem to back up McCain’s “straight talk” claim. I’d be interested to see how Bill “No Spin Zone” O’Reilly rates.

A Chance We Can’t Believe In

Pelosi: Don’t Blame Dems!

Following a weekend of breathtaking turmoil in the financial industry, our leader of the House of Representatives emerged as a beacon of hope and inspiration, offering solace to millions of Americans concerned about their savings and retirements plans, reassuring jittery Wall Street investors, and pledging to put partisanship aside and cooperate with the President to quickly solve the crisis.

Oh, wait… That didn’t happen.

Instead, the reaction from House Speaker Nancy Pelosi (D-CA) was swift and sharp: “Don’t blame ME!!!”

It reminds me of a child who gets caught standing in the midst of a puddle of milk, holding an upside-down cup in one hand, and vehemently protesting “It’s not my fault!” 

From The Hill:

House Speaker Nancy Pelosi, when asked Tuesday whether Democrats bear some of the responsibility regarding the current crisis on Wall Street, had a one-word answer: “No.”

Pelosi (D-Calif.) ripped President Bush’s “mismanagement” of the economy and a lack of regulation that led to the current situation.

“I think the American people have had it with this situation where the middle-income people in our country are not protected from the ramifications of the risk-taking and the greed of these financial institutions,” Pelosi told MSNBC.

When asked whether the Democrats “deserve some responsibility” regarding the economic crisis, Pelosi responded: “No.”

Now that’s true grit. Real leadership.

It’s unconscionable that Pelosi can stand today and declare that Democrats have none – zilch – nada – zero responsibility for the current crises, when five years ago the Democrats blocked Bush Administration proposals designed to prevent what happened this weekend. Perhaps Pelosi could use a little reminder:

From the New York Times (9/11/2003):

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios. 

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. 

Sounds like a reasonable plan. Freddie Mac and Fannie Mae were operating with little oversight, their debt portfolio was ballooning out of control, they were not not adequately managing their risk, and they were cooking the books to mislead investors. The Bush Administration proposed a plan that would provide more oversight and accountability for the agencies. Even Freddie Mac called Bush’s plan a “responsible proposal.”

So what happened to the plan? It was killed by Congressional Democrats. The NYT article continues:

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.

In 2003, Democrats said not to worry. There weren’t any problems with Fannie Mae and Freddie Mac. Everybody was just exaggerating. And those fraudulent books? Let’s not put too much pressure on these agencies.

In 2003, Democrats were committed to providing “low-income and affordable housing” (i.e. sub-prime) loans to people who could not afford them. Never mind the risk. Never mind that the agencies didn’t have adequate capital reserves. Democrats fought against tighter regulation and oversight because it would weaken their commitment to issuing sub-prime mortgages.

So quit playing the blame game, Madame Speaker. Me thinks you doth protest too much.

For Obama, the only good news is bad news

The Obama campaign wanted “horrific headlines out of Wall Street” in the wake of a series of weekend banking failures, according to CNN’s Candy Crowley, speaking on Monday’s edition of ”Anderson Cooper 360.”  This is too unbelievable. 

Here is the actual transcript:

COOPER:  You anticipate, in the days ahead, issue number one, it’s going to be front and center?

CROWLEY: Oh, absolutely. I mean, listen, just as foreclosures were showing up on B-17, or in the real estate section, along comes this horrific headline out of Wall Street…. this is what they wanted. They believe, of course, that the economy is one of their strengths and that they can paint John McCain as George Bush.  

You can view the clip at NewsBusters.