Wednesday, October 01, 2008
Senate passes the Bailout with a rout, But...
OK, The Senate passed the Bailout 74-25 (sounds like an overwhelming football rout) and it looks like Congress is in the game of adding unrelated riders to try to shove this thing through. For one thing, Congress is apparently adding about $100 billion in extra “benefits,” going into the whole even more. That’s what the failed vote on Monday means.
The add-ons are of varied relevance. Sure, it makes sense to up the FDIC limit, and to rework the mark-to-market accounting rules that some say force the crisis so suddenly. It makes sense to help owners of foreclosure-exposed homes. It’s a little bit worrisome, though, to add other less related tax breaks, including a property tax deduction for homeowners who don’t itemize deductions, reducing the threat of the alternative minimum tax, playing with some very distant health insurance rules and even retirement issues. These might be desirable individually, but they should be addressed on their own merit. It’s odd that the bill is a rider to the 1974 ERISA act and even a genetic non-discrimination bill.
Other add-ons, according to media reports, include federal deductions for sales taxes in states without state income tax, extending sunset tax cuts, renewable energy credits, tax breaks for teachers who buy their own classroom supplies, incentives for domestic research and development, opening new restaurants, doing business in the District of Columbia, paying rural counties hit by logging business declines, and even covering mental illness in health insurance.
What’s worrisome is the temptation to get into other areas where there appears to some people to be a need for more “regulation,” or to trade off special interests. When does this stop? You never know who could get bit.
It sounds like European governments are going through similar deliberations. That may help soften the effect on the dollar, if Europe has to follow suit with bailouts.
The real problem, though, is that Americans (and many other westerners) have been living beyond their means in terms of real wealth. You can’t deplete oil to the tipping point and not drill more, then pour more CO2 into the atmosphere without more renewable energy, and continue depending on cheap labor overseas that you can’t do yourself forever. It’s not sustainable.
Warren Buffett calls the current crisis an "economic Pearl Harbor" (or a "financial 9/11").
On Thursday morning, Steven Pearstein, in the Washington Post (business), reminded readers of some facts of life. Increasing deposit insurance limits could entice weaker banks to take more risks again; mark-to-market rule changes should be accompanied by multiple alternative disclosures to investors; bailing out imprudent homeowners still bails out reckless Wall Street investors, and recapitalization of banks would cost a lot more than $700 billion. There are no easy fixes. The link ("No Silver Bullets Here", Oct. 2, Business, p D1, is here.)
The Oct 2 Wall Street Journal offers, on p A19, a constructive plan by R. Glenn Hubbard (Columbia University) and Chris Mayer, “First, Let’s Stabilize Home Prices,” in which the government allows all primary residences to be refinanced at 5.25% 30 years fixed. They give some complicated details, setting up a GSE Homeowner’s Loan Corporation to handle upside-down mortgages. They claim this would save the government over $300 billion of the $700 billion (plus, now) bailout. The link is here.
Oct. 2: 7 PM
The votes still aren't there yet!