The Bailout: For or Against

shokk - the "Pelosi was mean" excuse is a non-starter.

I think the excerpt from http://thinkprogress.org/2008/09/29/frank-republican-feelings/ sums it up quite nicely"

Pelosi's speech mentions the word "Republican" once - in the context of praising them for bipartisanship: "Over the past several days, we have worked with our Republican colleagues to fashion an alternative to the original plan of the Bush Administration." After looking at Pelosi's speech, CNN's Ed Henry said he couldn't "find the partisan thing that they say sort of inflamed Republican members." (View her full speech here.)

A GOP staffer wrote into National Review's Rich Lowry and acknowledged that Frank was right: "Rich - I'm afraid Rep. Frank has a point on this one. Some feelings on the GOP side were hurt, so they voted against the economic well-being of the country?"

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McCain couln't lead the Republicans to vote with him on this bill.  Period.

There are 232 Democrats in the House of Representatives and 40 percent (94) Democrats voted against the bill regardless of the 200 Republicans........if all or most of the Democrats had voted for the bill there would have been no problem..........if Pelosi was doing her job why would they even need to consult with the Republicans.........she has the majority of the house.........they don't even need one Republican vote.............Shokk

shokk you can talk about how its the dems fault all you want.  This is a BIPARTISAN issue, and for 133 repubs to vote no, and then blame pelosi... that's just rubbish.

http://news.aol.com/article/how-house-lawmakers-voted-on-bailout/194032?icid=200100397x1210647251x1200626639

See who voted which way....

I think some kind of "rescue" will be necessary.

It does not bother me for this to drag on because I think that Wall Street has been rubbing their brilliance in our little faces for a long time and they've ask for a Cadillac of bailouts.

I think a Polosi forgets that Robert Reuben, Clinton's "A" team economic guy was right there when they started letting Wall Street deregulate. The Democrats also pushed for financing for low-income folks. A laudable goal, but one open to abuse by the sharks.  

I also think the Dems think they can benefit in the upcoming election by annoying the Republicans and letting a deal fall through. 

Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.

Economist Jeffrey Miron says the bailout plan presented to Congress was the wrong solution to the crisis

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

Don't Miss Bailout plan rejected Financial rescue 101: the bill Commentary: Financial crisis a disaster In Depth: Commentaries The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients. Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.I think that congressmen for once actually listened to their constituents. There are a lot of people out there who are not in favor of their tax dollars going to bail out these companies, especially when the bill did have any provisions in it that would stop the practices that got us to this point in the first place (subprime lending).

Suz - thanks for posting that article ...  I have been reading what the economists have to say and agree that the bailout wouldn't solve the problem ...  it's very scary - and something needs to be done - but I don't think a bailout for wall street is the answer after the articles I've read.

I too think that the congressmen listened to their constituents ..  as they are afraid that they won't be re-elected.   

Doreen 

Here is one of the best explainations for this mess that I have found:

Watching the House Burn Down: What Caused Our Economic Crisis? by Terry Easton (more by this author) Posted 09/29/2008 ET What caused our economic crisis? The housing bubble caused it. What caused the housing bubble? Sub-prime mortgages, risky mortgages, to low-income, bad-credit borrowers. Where did they come from? The "Community Reinvestment Act" (Google it. Read its Wikipedia entry). President Jimmy Carter and the Democrats passed it in back in 1977. It gave  incentives to help low-income borrowers get a home. Not a bad idea - if done right. It helped a little, but only a little -- until 1995. The Clinton Administration and the Democrats in power added massive new provisions to authorize -- require -- sub-prime loans be made.  The revisions went further, by allowing the securitization of CRA loans containing sub-prime mortgages. That forced banks to issue $1 trillion in new "sub-prime" Loans. The CRA requires that deposit-taking financial institutions (read: banks) offer equal access to lending investment and services to all those in an institution's geographic assessment area -- at least three to five miles from each branch. Before the CRA, many bankers excluded low-income neighborhoods and people from  their lending products, investments and financial services -- a practice  known as "redlining". Community activists coined the term when they discovered that the failure of banks to make loans to some low-income neighborhoods was so geographically distinct, that it was easy to draw red lines on maps to delineate the practices. Of course, marketers have recognized for years that the United States is a nation of multiple  communities each with its own distinct education,income, and religious,  social, cultural and consumer values and beliefs. You can check out your own zip-code for free using the PRIZM system (See: http://www.humanevents.com/www.claritas.com/MyBestSegments/Default.jsp?ID=20). By 2000, the CRA was funneling millions, perhaps billions of dollars to left-wing  "community activist" groups. The Clinton Administration had turned the Community Reinvestment Act into a Democrat piggy-bank and "a scheme against the nation's banks". And created sub-prime mortgage securities. Bear Sterns was the first company to do it. Remember them? Fannie Mae added fuel to the fire by purchasing $2 billion of dodgy "MyCommunityMortgage" loans. And sub-prime mortgages started  to grow. Between 1995 and 1999, Fannie Mae Sub-prime Alt-A & Other Purchases grew from under $2 billion to over $16 billion  per year! Now home prices started to rise - from under 2% to over 6% per year, year-after-year. Fannie Mae is a "Government Sponsored Enterprise". Fannie Mae guarantees mortgages and then Fannie Mae sells them to banks and investors. The more mortgages, the more money Fannie Mae makes. So how do you increase the number of mortgages? You move down the 'income ladder' (see: Washingtonpost.com: Fannie's Perilous Pursuit of Sub-Prime Loans). With "affordable mortgages", fixed-rate loans were replaced by variable-rate loans (ARMS) and in turn by interest-only loans.  These new loans gave "flexibility to lenders by allowing variances that borrowers need to qualify for loans". (CSRwire). These variances applied to: loan-to-value ratio, borrower contribution, housing expense-to-income ratio, among others. In other words, to flakes. Remember, the banks had to issue sub-prime loans or pay big penalties to the government. How do you keep these loans "affordable"? No money!  No money down! Interest only! Low variable rate! No income verification!  Bad Credit! No credit! No problem! Just sign here! ("Moneyfor nothing -- and the chicks are free!"). By 2004, 92% of Fannie Mae's sub-prime loans were variable rate. Fannie Mae told the banks "Make the loans -- we'll guarantee them". Home ownership kept rising -- and so did prices, and the demand for houses rose too. But demand for loans caused the  interest rate to rise. Basic supply and demand 101 stuff. High-school students are taught this. Apparently not Senators or Representatives. Then, gas prices shot up. Paychecks got squeezed.  Especially low-income paychecks. Some borrowers stopped paying -- so banks stopped lending. New ARMS and other "affordability loans" dropped from  nearly 20% of total market share in 2006 to just 10% in 2007. So the sub-prime market collapsed. From Fourth Quarter 2006 to Fourth Quarter 2007, Sub-prime mortgage originations dropped from $140 billion to under $18 billion, a drop of 88%. Foreclosures started pilling up. No buyers, only sellers. Home prices started falling. Down 2%, 4%, 6%, 8%... More borrowers stopped paying. 60 day+ delinquencies went from under 8% in 2006 to over 25% by mid-2007. Fannie Mae "Guarantees" became worthless - because they kept overstating their assets. (See Bloomberg.com: Regulators Spin Public to Boost Fannie, Freddie). Banks collapsed due to worthlessness. Government Sponsored Securities issued by Fannie Mae became worthless. Jobs disappeared -- and here we are. (See Guardian.co.uk: 'IMF says US crisis is largest financial shock since Great Depression'). Why is the expansion of the Government's Community Reinvestment Act to blame? Before CRA expansion, home prices simply increased with the underlying inflation rate, going up by 200% from 1975 through 1995 as the dollar dropped in value by the same amount. Home prices and home ownership rates were essentially flat - after adjusting for inflation. After CRA, home prices  became unhinged from inflation, jumping 100% from 1996 to 2006 while  inflation increased by 'only' 33%. CRA caused home prices to rise too fast. Economic fundamentals did not support this growth. Government regulation-mandated credit did. A bubble -- waiting to burst! So, did it have to happen? NO! The Bush administration and some of the members of Congress (read: John McCain) proposed to create a new agency to oversee Freddie Mac and Fannie Mae (See NYT: Sept 11, 2003).  "The Bush Administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and load crisis  a decade ago". "A new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddy Mac." But the Democrats in Congress stopped it: "Supporters of the companies said efforts to regulate the lenders tightly under those agencies might ‘diminish their ability to finance loans for lower-income families'".  Barney Frank said everything was just fine: "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of 'affordable housing'". This, of course, was wacky. By now, the creation of dodgy loans created a demand for housing -- which drove up the price of all houses -- and pushed the price of housing  out of reach for the very people the CRA was supposed to help. And by 2007, the home ownership rate was falling - rapidly. The time bomb was ticking. John McCain's "Housing Enterprise Regulatory Act of 2005" was neatly shot down by his Democrat opponents (See: www.govtrack.us Bill S-190). Fannie Mae had friends in the Senate: Senator Chris Dodd (D-CT)  and, the new junior senator from Illinois, Barack Obama, who proceeded to  appoint Jim Johnson, former head of Countrywide Mortgage, and Lehman  Brothers, and - Fannie Mae - as his close personal advisor. (Johnson was also Democrat Walter Mondale's campaign manager for the 1984 presidential race). He's now on the board of Goldman Sachs (which used to be run by our current Secretary of the Treasury, Democrat Hank Paulson). See: Center for Responsible Politics (http://www.humanevents.com/www.opensecrets.org). Golly, it gets incestuous. Nobody likes discrimination. Everybody deserves a home. Not a house of cards. Poor people didn't cause this debacle. Free markets didn't cause this mess. Deregulation didn't cause it. A bad federal law caused it - that forced main street banks to become  predatory lenders to fulfill a well-meaning but economically-bankrupt government mandate to offer souped-up, shell game "affordable  mortgages". Self-interested lawyers continued the fiasco, along with greed and stupidity on Wall Street (and fear of powerful politicians in Congress). So what were created were lots of "affordable mortgages" that people couldn't afford - and the rest of us will get poorer in the process. Bad social engineering caused this mess, creating the environment and the wrong incentives that set up low income families to fail, to have their dreams torn away by reality while getting Wall Street to finance it all - and drive itself into bankruptcy in the  process. This is what you get when you let idiots and socialists run the public policy of the United States Government - especially our fiscally-bankrupt fiscal and financial policy. A lot of the above ideas - and the wording - were taken directly from researchers at John McCain's election campaign. You can't improve on the perfect. It's amazing they got it so right. (See: http://www.humanevents.com/www.youtube.com/watch?v=H5tZc8oH--o). But will any of these facts make any difference? Mr. Easton teaches University economics and is passionate about technology and entrepreneurship. He is rosy about the long-term future: �The glass isn�t half full, it�s overflowing!� Advertise | Privacy Policy | Terms and Conditions Copyright © 2008 HUMAN EVENTS. All Rights Reserved.

sorry to say, the meltdown goes beyond wall street. it is effecting the credit market that keeps many corporations, franchises and small businesses in the $$$ - all that employ millions of american taxpayers.

in short, business has become hard pressed for the dollars it needs to carry on and move forward.

our economy is failing. for months the treasury has been propping it up the best it can, not in the interest in the americans like you and i, but in hopes to keep the fears of the international governments and investors invested in the american market to feel secure.  

the futures markets, those that buy long or short on future business, are looking horrible. 

this bailout is far from perfect as any major decision made in 11 days for a problem that has been going on several years could be.

but time is of the essence to protect taxpayers wealth. definitely a day late and a dollar short.

washington and the world was stunned that it did not go through today.

tuesday world markets will bare out this fact and tomorrows american market will most likely continue to fall, the market does not like the unknown.

keep in mind, this is just my opinion. i am a daytrader, trading stocks for twenty years with an emphasis on fannie and freddie and ambac financial group,inc.  for the last four months. the volatility in these, have produced generous returns. a very small group is making millions while millions lose millions. where is that?

long story short, a bailout has to happen and washington knows that. imperfect as any last minute legislation can be, at this time there is very little choice.

every lost day makes longer recovery .

every american, democratic or republican lost out here.

Laura, well put.  I don't think the average American realizes how far reaching this problem is.  This is not a Wall Street problem and the bailout is not a windfall for Wall Street.  This whole "Wall Street" vs. "Main Street" discussion is way off base.  It's not one vs. the other or one instead of the other; the fact is that Wall Street must be helped in order to save Main Street.

If the situation continues as it is, every American will be impacted, whether it's a significant loss in the value of their retirement fund, the loss of a job because their employer has to cut back due to increased costs & decreased revenue & reduced financing, a severe crunch on their credit because their bank is pulling back loans or increasing rates, or simply higher prices on just about everything they buy. 

And while the root cause of this fiasco is entirely American (the sub-prime mortgage crisis), the repercussions are being felt worldwide.  BinVA, you said that Canada is starting to look good right now.  Well, as a Canadian, let me tell you that we never had sub-prime mortgages and our banks & investment houses (which are mostly tied in with our banks) are amongst the safest in the world. So things should be looking good, right?  Afraid not.  As the largest trading partner of the U.S., the Canadian stock markets and individual Canadians are getting hit just as bad as Americans.  Thanks to the decision of the idiots in Washington to not support the bailout, the Toronto stock exchange lost 841 points on Monday.  This was after a loss of 421 points on Friday.  That's a 10% reduction in value in 2 days.  Year to date, the market is down 18.4%.   Take a look at other stock markets worldwide - Tokyo, London, etc. - they are all down, a lot.  This is not some minor crisis that will resolve itself.  This is a major global financial crisis that was caused by the U.S. and that can only be solved by the U.S..  But instead, your politicians are playing politics.  Pointing fingers, taking potshots, adding earmarks to the bill, voting against the bill because it's an easier sell when campaigning for re-election.... the level of irresponsibility is astounding.  If you ask me, there is a lot more broke than just the financial system.

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Without a bailout plan, my fiance loses his job, and his entire company will go under.

He works for Prudential Douglas Eliman, and they never did any SHADY loans... Even in the crisis they were #4 in the country, and business, though taking a loss, was still trending in the right direction.

When Mike Bloomberg said for every Wall street job that is lost, two other jobs are lost as well, I certainly understand.

I'm done with the blame.  There needs to be a solution NOW.

By 2-1, 44-21 percent, the Republicans in Congress are seen as mainly responsible for rejection of the plan. Blame for the current financial situation more broadly is widely cast, falling most heavily on George W. Bush (25 percent), followed by the financial institutions themselves (18 percent); 8 percent blame the federal government overall, 8 percent Congress.


http://abcnews.go.com/PollingUnit/Politics/Story?id=5918879&page=1