Foster, Bean vote aye on bailout

Area Democratic congressmen Bill Foster and Melissa Bean voted aye on the failed $700B bailout today. Will it help them or hurt them in their reelection bids?

The text of House Speaker Nancy Pelosi’s rancorous remarks preceding the vote:

PELOSI: When was the last time anyone ever asked you for $700 billion?

It’s a staggering figure and many questions have arisen from that request. And we have been hearing a very informed debate on all sides of this issue here today. I’m proud of the debate.

$700 billion. A staggering number, but only a part of the cost of the failed Bush economic policies to our country. Policies that were built on budget recklessness when Pres. Bush took office, he inherited Pres. Clinton’s surpluses - four years in a row budget surpluses on a trajectory of $5.6 trillion in surplus. And with his reckless economic policies, within two years, he had turned it around. And now 8 years later, the foundation of that fiscal irresponsibility, combined with an “anything goes” economic policy, has taken us to where we are today.

They claim to be free-market advocates, when it’s really an anything goes mentality. No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute and the taxpayer will bail you out.

Those days are over. The party is over in that respect.

Democrats believe in a free market. We know that it can create jobs, it can create wealth, many good things in our economy. But in this case, in this unbridled form, as encouraged and supported by the Republicans — some Republicans, not all — it has created not jobs, not capital, it has created chaos. And it is that chaos that the Secretary of the Treasury and the Chairman of the Fed came to see us, just about a week and a half ago. It seems like an eternity, doesn’t it? So much has happened. The news was so bad. They described a very dismal situation.

You would think a speaker would know when to strike a tone of partisanship and when to act in a bipartisan manner.

If House Republicans are going to remain opposed to this bailout, however, they need to formulate a serious argument against it, not on the basis of fairness (averting economic meltdown trumps that), but on the basis of economics. Will this bailout help, hurt or not affect the coming recession at all? That’s what really needs to be determined.

The Treasury and the Federal Reserve are frightened to death of a severe contraction in the money supply, as they should be. But the bailout proposal represents only one way to stabilize money supply. They talk about the market for commercial paper drying up. This is a legitimate concern, but why doesn’t the Treasury step in and buy commercial paper? That’s far more palatable than buying bad mortgages.

The idea behind buying the bad mortgage portfolios of Wall Street–besides saving the fortunes of Wall Street denizens–is to improve the capital ratios of the banks and investment banks. But the feds can also improve capital ratios simply by injecting equity into the banks, and in the process wiping out existing shareholders, which is what needs to happen anyway. The nice side benefit of this is that the board of directors–for the duration of government ownership–will be populated by federal appointees who will not be generous, presumably, when it comes to executive compensation.

Regardless of what the government does, a severe recession–by the standards of recent history–is unavoidable. You have a tremendous oversupply of overpriced houses that will hang over the economy until the market for real estate makes bottom which is yet far off in terms of price, and if the government intervenes too much, probably also in terms of time.

It’s interesting that Speaker Pelosi blames Republicans for this mess. In pointing the finger at Barney Frank and Congressional Democrats, here’s what the Boston Globe has to say:

The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and “redlining” because urban blacks were being denied mortgages at a higher rate than suburban whites.

The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to “meet the credit needs” of “low-income, minority, and distressed neighborhoods.” Lenders responded by loosening their underwriting standards and making increasingly shoddy loans. The two government-chartered mortgage finance firms, Fannie Mae and Freddie Mac, encouraged this “subprime” lending by authorizing ever more “flexible” criteria by which high-risk borrowers could be qualified for home loans, and then buying up the questionable mortgages that ensued.

All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices. A manual issued by the Federal Reserve Bank of Boston advised mortgage lenders to disregard financial common sense. “Lack of credit history should not be seen as a negative factor,” the Fed’s guidelines instructed. Lenders were directed to accept welfare payments and unemployment benefits as “valid income sources” to qualify for a mortgage. Failure to comply could mean a lawsuit.

And here’s what another one of Frank’s hometown newspapers, the Boston Herald, had to say:

The answer is actually quite simple: Freddie and Fannie happened. And they couldn’t have without the ferocious support of Barney Frank.

Freddie and Fannie were supposed to be safe suppliers of mortgage money for relatively low-risk loans. If you could qualify for a loan, F&F would make sure the banks had access to the money to make that loan, cheap money because it was backed by the American taxpayers.

But liberals like Barney Frank wanted more. They wanted the low cost of low-risk loans to be extended to higher-risk borrowers with lower incomes, fewer assets or less-solid credit. Barney and friends used the regulations of the Community Reinvestment Act to threaten lenders into making these loans. And banks, trying to meet Frank’s demands, expanded riskier lending schemes like subprime mortgages.

By some estimates, Hispanics hold 40% of all subprime mortgages in the country. Blacks probably hold a similar amount. Liberals in their crusade to use the government to bring about an American utopia, bankrupted the very people they were trying to help. It calls to mind one of the favorite sayings of Ronald Reagan: There is nothing more frightening than a knock on the door and a man there who says, “I’m from the government, and I’m here to help.”

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