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Patrol Magazine

Bailout Burns

The Bush Administration and Democrats in Congress were left palming their faces in frustrated defeat. But the crisis hasn't disappeared yet, and neither has the bailout.

Anthony Randazzo
September 30, 2008

Few things make me want to pop open a bottle of champagne at 2:30 on a Monday afternoon, but the day the Bush-Paulson bailout failed was one of them. While my office and taxpayers nationwide were celebrating like America did when Jim finally popped the question to Pam, the Bush Administration and Democrats in Congress were left palming their faces in frustrated defeat. But the crisis hasn’t disappeared yet, and neither has the bailout.

Perhaps needless to say, Americans are torn over the $700 billion bailout plan. On the one hand, it doesn’t seem right that taxpayer money should have to make up for Wall Street’s failures. On the other hand, if firms don’t get that money, it means bankruptcy. Capitalists believe it’s okay for firms to go bankrupt —sometimes that’s how the system works, and it’s better to suffer short-term economic pain than be forced to bankroll a massive bailout in the future. But many others aren’t willing to accept that fate.

The one thing everyone agrees on: something must be done.

After President Bush suggested giving the Treasury Department $700 billion dollars to bail out a number of banks, Congress was determined to add its own terms. Over the weekend, financial institutions helped bipartisan leaders create a more detailed plan that was ultimately voted down on Monday. Thanks to Rosh Hashanah, House leaders have a few days to revamp the plan before they make a second attempt to pass the plan on Thursday.

Meanwhile, America has had small window of time in which to explore the different plans being proposed and to influence the Congressional vote. But the new plan expected to show up Thursday will likely be identical to the one that failed Monday, with perhaps a slight adjustment to the perceived waterboarding of John Q. Taxpayer.

Congress is trying to solve one basic problem: banks have all their money tied up in assets that no one wants to buy, specifically, mortgage-backed securities. Because banks can’t sell them, they don’t have money to loan businesses, students, or developers, slowing down consumption and production in the economy.

Think of a mortgage as a pie. Banks grant a mortgage, slice up the pie, and sell little pieces—mortgage-backed securities—to various investment banks. If the pie ever spoiled (was foreclosed upon) then the risk would be spread amongst many banks. America used to love pie, but when America got full (when the housing bubble burst) banks were stuck with all this pie that no one wanted, decreasing its value to nearly nothing. Yet, the pie is still pie. One day, people will want to eat it. But for now, banks can’t find anyone interested in buying it.

The Bush bailout plan essentially grants the Treasury Department power to buy up $700 billion of pie so that banks can have their money back to lend to others, keeping the money flowing (and keeping the banks from going bankrupt). The two biggest problems with this are that the plan spends taxpayer money for something they shouldn’t have pay for and it continues to encourage a pattern of irresponsible investing by Wall Street, which will just look for another bailout if it ever buys too much pie in the future.

The temporarily-foiled plan calls for the creation of an unfortunately-named agency, the Financial Stability Oversight Board (F.S.O.B.), to police the Treasury Department’s purchase of pie. Banks and other financial entities would offer their unwanted slices to the Treasury, which would choose whether to buy. The F.S.O.B. and the Treasury Department would then hold onto those pie slices, the mortgage backed securities, until they regained value

Lawmakers hope that once these assets reestablish value the government will be able to sell them and recoup the taxpayer’s money, even if it takes several years. But taxpayer money is still at risk, and Wall Street’s irresponsible behavior won’t change.

The final planks of the $700 billion pillage-fest create an insurance program for mortgage backed securities that are not bought and places limits on how much money companies can pay their top executives. Democrats have long bemoaned the “golden parachutes”—multimillion-dollar severance packages—that top brass from failing companies are able to float away with after leading their companies into failure.

The bailout plan caps compensation for executives who take F.S.O.B. money at the arbitrary amount of $500,000. It is unclear why they picked that number as opposed to $250,000, the line Barack Obama chose to define someone as rich, or $10 million, the amount of money I would be willing to accept from Barack Obama for not writing this article.

The bailout plan failed by 23 votes. Though House Democratic leader Nancy Pelosi promoted the proposal heavily, 94 Democrats voted against the bill because they wanted a provision that granted cash to people struggling to pay mortgages. Most Republicans voted against the bill because it is not compatible with their free-market economics.

Republicans in the House have proposed an alternative plan: using various tax breaks to let banks to use cash they had set aside for paying taxes to cover their losses and stabilize financially. The tax breaks would stabilize the markets, be the proper capitalist response, and keep firms accountable for their actions. Some of these measures may be added to Monday’s failed plan to coax Republicans into passing something on Thursday when the Jewish holiday ends.

Of course, nothing guarantees this plan will successfully get through the Senate. Those fears have trashed the stock market, which lost 777 points in the Dow Jones average on Monday after the bailout bill failed, the largest single day drop ever. But the markets are still alive; the day after the bill failed, Wall Street gained over half of that back. The stock market is still fighting, and it appears it will live to fight another day. If all else fails, at least it’s October—time for the playoffs!


Anthony Randazzo is Director of Economic Research


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