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October 3, 2008
Exclusive: Ready for More Bailouts? Congress Debates Corporate Welfare, Ignores Free-Market Reforms
The massive $700 billion-plus bailout plan to have the federal government buy up bad mortgages that was defeated in the House Monday would have been is a massive transfer of wealth - from the
American taxpayer to Washington bureaucrats to funnel to favored investors.
There is much to object to in this bailout, and neither John McCain nor Barack Obama acquitted themselves well by endorsing the measure, and then fleeing Washington as quickly as possible - only to return Wednesday night to vote for a bipartisan Senate bailout package that was arguably even worse. House Republicans deserve credit for forcing some modest improvements to the legislation, but in the end their bill was still a massive boondoggle that sent precisely the wrong message to the private sector: You can make irresponsible, stupid loans to people who have no possibility of paying them back, and taxpayers will bail you out.
If anything, the bill passed by the Senate Wednesday night, with the support of ordinarily reliable conservative Republicans including Tom Coburn (Oklahoma), Jon Kyl (Arizona), John Cornyn (Texas), John Thune (South Dakota) and Orrin Hatch (Utah). While that measure includes some tax breaks, it also includes another incremental step towards socialized medicine via government-mandated benefit: a requirement that group health plans that include mental health or addiction treatment that is comparable with other mental health coverage (which could have the perverse unintended consequence of persuading some businesses to decide not to offer mental health coverage at all).
Republicans have been praising a provision in the Senate bill that would increase from $100,000 to $250,000 the limit on federal bank deposit insurance. While it is certainly true that this will increase confidence for the business community, the conservatives backing this neglect to mention the major downside - it also increases the taxpayers' exposure, particularly if the bailout fails to fix the situation. (Sen. Richard Shelby, Alabama Republican and a hero of the taxpayer on the bailout issue, was one of the few lawmakers to point this out.)
Perhaps the most bizarre aspect of this was Mr. McCain's performance. In recent months, he has been relentless in attacking "pork barrel spending" and earmarks - precisely what McCain-Obama bailout bill is laden with, including extensions of tax earmarks for such things as wool research, Virgin Island and Puerto Rican rum, auto racing tracks and Indian tribes. Yet Mr. McCain voted for this monstrosity in the end, and you can bet his opponent will use this to depict him as a fraud when it comes to opposing government waste.
Today (Friday) the House of Representatives is scheduled to take up the latest version of what Minority Leader John Boehner rightly referred to as a "crap sandwich" (which he reluctantly supports). Meanwhile, the serious reforms that could actually improve the economy and the mortgage/banking situation were not even seriously discussed in either the House or the Senate. These include, for starters, cutting income taxes and capital-gains taxes, reforming and privatizing federally sponsored enterprises like Fannie Mae and Freddie Mac to ensure that they get out of the business of underwriting loans to non-creditworthy persons, and getting rid of the noxious Community Reinvestment Act - a law used by liberal politicians and left-wing groups like ACORN (where Obama cut his political eye teeth) to bludgeon financial institutions into making loans in poor, "underserved" areas: in other words, to make bad financial investments in order to curry favor with e politicians and bureaucrats.
The bills debated in the House and Senate did nothing to bring about these structural reforms, but they nonetheless received the backing of the Republican congressional leadership which didn't want to be blamed for starting the Great Depression of 2008. On Monday, the overwhelming majority of House Republicans voted to reject the legislation, due in no small part to the failure to make the sort of free-market changes listed above. But on Wednesday, the overwhelming majority of Republicans joined Minority Leader Mitch McConnell in voting for their own "crap sandwich."
The $700 billion bill - costing more than the entire annual defense budget - would be just the latest in a continuing series of bailouts to protect business from what are in large part the consequences of their poor economic decisions. Earlier, the federal government left taxpayer money exposed in order to bail out Bear Stearns. Then, September became "bailout month." There was an $85 billion bailout for the insurance company AIG. Washington bailed out the government- sponsored housing enterprises Fannie Mae and Freddie Mac ($200 billion). Over the weekend, Congress quietly passed $25 billion in loan guarantees for GM, Chrysler and Ford. That's more than $300 billion since the beginning of the month. That doesn't include the announcement by the Federal Deposit Insurance Corporation, which announced last week that it may need $150 billion. The $700 billion measure before Congress would bring the total to more than $1 trillion in bailouts since Labor Day.
Taxpayers are told not to worry - that the $700 billion (Paulson's estimate of what it will cost for the federal government to buy up "toxic" financial assets targeted by the measure) will actually turn out to be much less than that, because the government will sell some or all of these assets at a profit. Don't bet on it. Some analysts say that the $700 billion figure put forward by Paulson is far too low, and that the actual cost could be double that: $1.4 trillion. Over the past year or so, Paulson has made one reassuring statement after another about Fannie, Freddie and problems in the corporate world, nearly all of which have turned out to be incorrect. Now, taxpayers are expected to sign on the dotted line and do what the Omniscient One demands.
The American people have good reason to be angry over the unseemly haste of the Bush Administration (in particular, Paulson, its bailout point man) in demanding that Congress pay up right away or bear responsibility for a Great Depression. These apocalyptic predictions - echoed by powerful people like Federal Reserve Chairman Ben Bernanke and folks like House Speaker Nancy Pelosi, House Financial Services Committee Chairman Barney Frank and Senate Banking
Committee Chairman Christopher Dodd - warning that people could lose their IRAs or 401(k)s if tax money is not forked over right away - can become self-fulfilling prophecies. And have no doubt, this or any other bailout bill did not magically fix things and the economy continued to deteriorate, many of the same politicians and government officials who assured us this would cost less than $700 billion would be demanding that taxpayers put more money on the line, lest there be another apocalypse.
Instead of continuing to push fatally flawed bailout legislation, here are a few real reform ideas that conservatives could put forward:
* Want to protect people's IRAs and 401(k)s? It's time to abolish the corporate income tax. Quinn Hillyer, writing in the American Spectator, points out that this tax brings in $300 billion a year.
That's a great deal of money - until you put it up against the $1 trillion worth of bailouts put forward since Labor Day. But eliminating the tax would be at least partially offset by increased tax receipts as dividend payments increase. Similarly, cutting the capital-gains tax would be a tremendous shot in the arm to the private economy, something that would aid capital formation and lower the costs of producing goods and services. And we know, based on nearly 40 years of experience in which cap-gains tax rates were increased and revenues went down, and they were lowered and revenues increased, that the "revenue loss" from that tax cut may be nonexistent.
*Another thing conservatives can do is to press for reform of Fannie and Freddie. American Enterprise Institute scholar Kevin Hassett points out that back in 2005, the Security and Exchange Commission's chief accountant told Franklin Raines, the disgraced former Fannie Mae chief, former Clinton OMB director and sometime Obama housing advisor, that Fannie's position on a relevant accounting issue was not even "on the page" of allowable interpretations. Meanwhile, Senate liberals, led by Dodd, who received more than $165,000 from Fannie and Freddie PACs and employees, and Obama, who received $125,000, along with Hillary Rodham Clinton, killed efforts by conservatives to reform Fannie and Freddie. In the House, Frank spearheaded efforts to block Bush Administration proposals to reform those agencies, despite pleas from then-Fed Chairman Alan Greenspan to enact major changes in the way they do business.
*During the 1990s, the Clinton Administration aggressively used the Community Reinvestment Act, a law enacted during the Carter Administration to require banks to provide mortgages to poorer communities.
Under the Clintonistas, banks that failed to do this would have merger plans blocked or face legal challenges from the Justice Department. University of Texas-Dallas economics Professor Stan
Liebowitz writes that, working in conjunction with ACORN, "flexible" lending and "flexible underwriting standards" (i.e., lending to people who are bad credit risks) expanded massively.
The Fannie Mae Foundation issued a report gushing praise for Countrywide, the nation's largest mortgage lender, for expanding its commitment to low-income loans from $1 billion in 1992 to $80 billion in 1999 and $600 billion by 2003. Countrywide, whose former chief boasted of how lenders "had to stretch the rules a bit," has since gone into bankruptcy.
*No one in Washington seems to be looking at the role of illegal immigration in the mortgage mess. Columnist Michelle Malkin points out that some of the areas most hard hit by the mortgage debacle include illegal-alien havens like Stockton, Calif., the San Joaquin Valley, Las Vegas Phoenix and Loudoun County, Virginia. Mortgage-fraud rings have used illegal aliens as straw buyers, according to the FBI, and illegal-friendly organizations like the National Council of La Raza have been particularly active in getting federal funds to "counsel" their constituents on obtaining mortgages with little or no money down. Wachovia bank, which just collapsed due largely to bad loans, had been among the most aggressive marketers to illegal aliens.
If conservatives are smart, they'll begin to drive these points home as possible alternatives to big bailouts. At a minimum, its time to start asking questions about the behavior of some of the supposed reformers like Obama, Dodd and Frank. If conservatives don't start showing some backbone by demanding real reform instead of corporate welfare, Washington will continue debating stale bailouts and McCain will continue falling in the polls. And then, five weeks from today, Americans will elect one architect of the mess as president.
FamilySecurityMatters.org Contributing Editor Joel Himelfarb is an editorial writer for The Washington Times. The views expressed here are his own. Feedback: editorialdirector@familysecuritymatters.org.
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