Bailout?

Yesterday, despite dire warnings from the administration, the House of Representatives voted 228-205 against the proposed economic “bailout” known officially as the “Emergency Economic Stabilization Act of 2008″ (abbreviated EESA) or H.R. 3997.

The Most Important Legislation of Our Lifetime?

First of all, I need to make a quick sidetrack. The bill is technically called “Heroes Earnings Assistance and Relief Tax Act of 2007″ or, if you read the Senate version, it is called “The Defenders of Freedom Tax Relief Act of 2007.”

The entire financial bailout is actually an amendment to a bill that has absolutely nothing to do with bailing out our economy – a bill to give a tax break to veterans, firefighters and members of the Peace Corps.

HOW does this happen, you might ask? It is simple. The Senate was considering H.R. 3997. In fact, H.R. 3997 was passed by the House in November of last year (410-0) and then by the Senate in December. The bill was in “conference committee” which means the House and Senate were sorting out differences between their versions of the bill before forwarding it to the President.

Because the bill was already dealing with Department of Treasury issues (the IRS is part of Treasury), the President had someone in that conference committee attach the EESA and resubmit it to the House. The House had already approved H.R. 3997, so they just needed to vote to accept the amendment.

They didn’t.

What does that means? It means the Senate cannot vote on it until the House approves it; so the bill goes back into conference committee and has to be re-submitted to the House, who next meet at noon on October 2.

The most important legislation of my lifetime is hung up because it was written as an amendment rather than as a bill in its own right. This just smells fishy to me. When FDR bailed out the country to end the Great Depression, at least he did it out in the open.

Reasons to Be Uneasy

There’s something about the EESA that people don’t like.

1. The Way No One Seems to Know What Is Going On

Personally, I am uneasy about the way someone is trying to ram it through Congress. This economic situation did not catch economists or wily investors off guard. They knew this was going to happen weeks, if not months, ago. That means that people in the White House or the Department of Treasury also knew it was coming.

But even after the announcement of the plan, no one – including the President and the Treasury Secretary – seem to really understand how this bailout is going to work. Sure, we have a sort of high level perspective on it; but the details are a little hazy.

Let’s start with just the consideration of human resources here, ok?

I worked for a global investment firm who handled trillions of dollars in assets. They required 41,000 employees to manage those investments. How many people will the Department of Treasury need? Where will they come from? Who will they report to?

Who is going to manage this massive slush fund of our debt? Edward Yardeni calls the mess that will be generated by the EESA a “a state-sponsored sovereign wealth fund…100% debt-financed…the world’s largest leveraged blind pool.”

What types of systems will be used to track this information? Will the money be added to the Federal Reserve Bank’s balance sheets? Like the other bailouts earlier this year?

And who will buy it? Since the proposed method of financing this is the sale of no-risk treasury bonds, who will pick those up? The investors who weren’t investing in the debt instruments BEFORE? Why, now that they’re “backed” by the federal government would investors buy them now?

It doesn’t appear to me (or the majority of Republicans in the House) that anyone has thought this thing through very carefully.

2. The Management Strategy

The only solution the Department of Treasury can come up with is a last minute, $700 billion line of credit from the American people to its government?

Oh, didn’t they mention that “line of credit” bit on the news? That’s how this thing is going to work.

We’re going to give the government an additional 6% of our gross domestic product, and they’re going to buy up all of our outstanding debt instruments at a price they decide upon; and then “hold them in trust” until the situation stabilizes and they can be sold to someone else at a profit. Meanwhile, they’re going to use the debts to back no-risk treasury bonds, hoping that people will scoop them up.

In fact, Elizabeth McDonald says, “The sales could yield at least triple what the government borrowed in the markets to finance them. Bloomberg calculates that a spread between borrowing at 3% to buy assets yielding 10% could reap income of $40 bn to $60 bn annually for US taxpayers.”

I’m sorry. Did she say “for US taxpayers”?

3. The Sheer Amount of Money

My final, and biggest, concern is that no one seems to be able to figure out where the figure of $700 billion is coming from. When asked if he could see a rationale for the amount, Gus Faucher of economy.com replied: “Not that I can tell.” Faucher actually believes that the price tag will be around $200-$250 billion.

That’s not chump change, but it does mean that if Faucher is right, we’ll be giving the federal government 2-3 times what it will actually need.

I’m sure they’ll issue a refund for everything they don’t use.

This is insanity.

If You Really Want to Fix Things

Borrowing money from ourselves to buy up our own debt is not the solution to this mess. Here’s an idea. What if the federal government tightens its own bootstraps for a little while and pays the tab on this crisis – since they created it in the first place.

Oh, did we forget that the reason all these subprime mortgages were extended, the reason that people were buying houses they could not afford, was because the government forced lenders to do it. This was all in the name of the “American Dream.”

So, let the government pay for it by cutting things:

  • We spend $275 million per day on the War in Iraq.
  • In 2006, we spent $461 million in a bribe to Jordan so they would not attack Israel. We bribed Columbia with $558 million to keep an eye on the drug traffic and gave $213 million to Kenya for some reason.
  • We gave Israel and Egypt over $4 billion for armaments. This is ironic since the last war both of them fought was with each other.
  • Our base budget for the United States Armed Forces for 2009 is $651 billion. This does not include the cost of the War on Terror or providing for Veteran’s Affairs. It also does not include the $23 billion we will spend to maintain our nuclear warheads.
  • A Nimitz class nuclear aircraft carrier costs $4.5 billion to build. And the next class of carrier has an estimated acquisition cost of approximately $13.7 billion.

I’m not criticizing the function of any of these expenses. I’m simply pointing out that if the government really wanted to find the money, they could. They could do it without costing the American people any more than we already pay.

Let me bring up another interesting government statistic. The IRS took in $2.5 trillion in 2006. I’m not sure what the amount was in 2008, but I’m sure it was more than that. And yet, they estimate that the American public owes an additional $300 billion.

As such, providing the $700 billion bailout would amount to increasing the American tax burden by nearly 28%! This is a hefty price tag considering that the government just borrowed a huge amount of money to finance our “economic stimulus” checks in May. Any money we received in our tax rebate checks is now going to be going right back to the government to bailout the mortgage companies.

Since we are virtually guaranteed to never see a red cent of the profits from the resale of our debt, what does that mean for the American people?

This is insanity.