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Awesome Bailout Rebuttal by Oregon Rep. Peter DeFazioPosted by ahc99 on September 30th, 2008

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One of the Digg members shared an email he received from his Representative Peter DeFazio in the comments section. Here is the email reprinted below:

Thank you for contacting me about the Bush Administration bailout. I am vehemently opposed to this bailout.

I was the first Member of Congress to take to the House floor and stand up in opposition to this $700 billion bailout. The financial crisis we face today does not need to be resolved by forking over $700 billion from the taxpayer to the “Masters of the Universe” on Wall Street.

The fundamental premise of the $700 billion Bush Administration bailout is flawed, reckless, and foolish. It is flawed because it is not clear it will achieve its stated objective of injecting commercial banks with liquidity and it ignores the needs of main street America, it is reckless because there are better alternatives, and it is foolish because giving away $700 billion will limit our ability to deal with the myriad of other problems we face such as healthcare, energy independence, and job creation.

To put the sheer audacity of this bailout plan in perspective, a compromise has been talked about that reduces the initial payments to “only $250 billion”. $250 billion would more than double our investment in bridges, highways, transit, and rail in the United States for five years. Investing in infrastructure creates jobs and stimulates the economy. According to the U.S. Department of Transportation, for every $1.25 billion we invest in infrastructure, we will create over 30,000 jobs and $6 billion in additional economic activity. In President Roosevelt’s Works Progress Administration, we invested in building roads, bridges, dams, hydroelectric systems and other public works projects to mend our nation’s broken economy. That money trickled up to Wall Street from Main Street and rebuilt our economy. We did not just throw money at Wall Street with the hopes that the taxpayer might some day be paid back.

I think Congress should respond, but the basic premise of the Bush Administration bailout is flawed. Almost 200 economists wrote to Congress stating “As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson”[1]. The letter went on to raise the issues of fairness, ambiguity, and the long-term effects. The former chairman of the Federal Deposit Insurance Corp in the Reagan Administration wrote, “I have doubts that the $700 billion bailout, if enacted, would work. Would banks really be willing to part with the loans, and would the government be able to sell them in the marketplace on terms that the taxpayers would find acceptable?”[2] And James Galbraith, an economist at the University of Texas, has asked “Now that all five big investment banks — Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley — have disappeared or morphed into regular banks, a question arises. Is this bailout still necessary?”[3] I believe the answer is No. I have called on my colleagues to slow down this debate and seriously debate the alternative proposals.

For example, many economists have argued that directly helping mortgage holders save their houses would be astronomically cheaper and a more effective in resolving this crisis. And helping working Americans restructure their home mortgage will increase the value of Wall Street’s depreciated assets. As the New York Time opinioned recently:

“We could make a strong moral argument that the government has a greater responsibility to help homeowners than it does to bail out Wall Street. But we don’t have to. Basic economics argues for a robust plan to stanch foreclosures and thereby protect the taxpayers .”[4]

Another serious consequence is the $700 billion hole in the budget deficit this bailout will create. The next administration, Democratic or Republican, will be unable to initiate new proposals as it charts a new course for our nation. The Bush tax cuts blew the surplus created by the last Democratic Administration and the Bush Administration bailout will prevent the next administration from implementing its mandate.

My biggest concern of this bailout is who pays the $700 billion tab. The $700 billion is to protect Wall Street investors, therefore the same Wall Street investors should pay for this infusion of taxpayer money. I have proposed a minimal securities transfer tax of ? of one percent. A securities transfer tax would have a negligible impact on the average investor and provide a disincentive to high volume, speculative short-term traders. Similar tax proposals have been supported by many esteemed economists such as Larry Summers, John Maynard Keynes and Nobel prize winners Joseph Stiglitz and James Tobin.

There is considerable precedent for this. The United States had a similar tax from 1914 to 1966. The Revenue Act of 1914 levied a 0.2% tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help finance economic reconstruction programs during the Great Depression. In 1987, Speaker of the House Jim Wright offered his support for a financial transaction tax. And today the UK has a modest financial transaction tax of 0.5 percent. This is a reasonable approach to protecting taxpayers and ensuring the federal budget doesn’t fall further into the fiscal hole.

I will continue to challenge this bailout every step of the way. Again, thanks for reaching out to me. Please keep in touch.

[1] http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm
[2] Washington Post. A Better Way to Aid Banks. William M. Isaac. Sept 27, 2008. A19.
[3] Washington Post. A Bailout We Don’t Need. James K. Galbraith. Sept. 25, 2008. A19
[4] New York Times. Editorial. What About the Rest of Us? Sept., 26, 2008. A26.

Sincerely,

Rep. Peter DeFazio
Fourth District, OREGON

******Please do not respond directly to this email*****

I need to applaud Oregon for choosing a great representative that actually cares and provides well thought out, detailed responses for its own constituents. In this day and age it is rare for them to even send an email or fax back, much less a spot-on thorough review of the critical issues.

What was in the $700 Billion Bailout Bill?Posted by ahc99 on September 30th, 2008

By now we all know that the bill was defeated by the House, but what was actually in the bill?

• Money Disbursement - The $700 billion amount is to be used in various stages. $250 billion can be used immediately by Treasury with $100 billion to be doled out in later stages. The funding is to last until December 31, 2009, unless Treasury is able to get a one year extension from Congress.
• Purchase Toxic Mortgages - The government would buy troubled mortgage loans from banks and other financial institutions. Which they would then modify the loan terms so people can start paying it back without going through foreclosure. This should provide some relief to homeowners on the brink of foreclosure.
• Taxpayer Protection - The Treasury will be paying fair market value for the assets they buy. Thus, when those assets are finally sold, the taxpayer can either end up with a net gain or loss. If there is a net loss then according to the bill, the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted. Furthermore, the Treasury gets ownership stakes in participating companies.
• Restrict Executive Compensation - Companies selling mortgages to the Treasury will not be able to deduct executive salaries paid above $500,000. In addition, they cannot write new contracts with “golden parachutes” for their top five executives if they are fired or the company goes bankrupt. However, the current contracts, including those with golden parachutes, are still allowable.
• Program Oversight - Two oversight boards will be established to oversee the program. The Financial Stability Oversight Board is in charge of enforcing those policies to protect the taxpayers and economic interests of the USA. The congressional oversight panel is in charge of reviewing the financial markets, regulatory system, and Treasury’s implementation of the rescue plan.

Game Over - House Rejects $700 Billion Rescue PlanPosted by ahc99 on September 29th, 2008

Photo by mandj98

In a shocking turn of events, the US House of Representatives rejected the $700 billion rescue plan to bailout the financial sector from imminent collapse. The legislation was defeated by 228 votes to 205 votes.

The effect of this rejection has thrown Wall Street for a loop, with the Dow Jones Industrial Average losing more than 700 points at one point while the S&P 500 and Nasdaq plunged more than 7 percent in one day! The Dow is currently down around 600 points.

Truth be told, everybody expected this bill to pass (me included) due to the aggressive lobbying that occurred prior to the House vote. Even Bush was calling people to convince that it is necessary this bill gets passed. Too bad the persuasion did not pay off and only two members were compelled to vote yes. About 60% of Democrats voted yes compared to the less than 30% of Republicans that were for it.

Prior to the vote Bush warned that it is necessary to pass this bill in order to avoid a “long and painful recession”. Unfortunately, this was such an unpopular measure that it couldn’t even pass the House vote. Now investors worldwide seem to be panicking and what was previously just a USA problem has spreaded into global markets. Even European banks are repeating American footsteps, forcing their government to come in and rescue a bunch of European financial institutions.

I personally support the results of this vote. I am firmly against Wall Street and the government in cohorts forcing “Privatization of Gains and Socialization of Losses.” There has been a call to arms all over the blogosphere to stop this bailout rescue plan, some calling it the “Great Socialization Act of America” and “The Socialization of America”. Almost everybody understands that this will only prolong the inevitable crash of the American economy. The banks are in trouble and throwing good money after bad will not make a difference. We need to give time to the economy so that it will correct itself. Instead of doing that, the government wants the taxpayers to shoulder the gross mistakes made by the financial institutions.

Like Rep. John Culberson, R-Texas said “This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions.” He most certainly is correct. In addition, if government steps in and helps now it gives a clear signal to financial institutions that if you screw up small, we won’t help you. But if you majorly mess up, we will come in a save you. How’s that for teaching Wall Street? They will then believe that they can take any risk they want and will reap all the gains while the public will assume all the losses if they screw up.

In addition, this bill was put together too fast and not given enough time for public scrutiny. Llyod Doggett, D-Texas said “Like the Iraq war and patriot act, this bill is fueled by fear and haste.” For once we Americans did not just let a major life-altering decision fall through the cracks and pass without any examination. I am proud that the House realized this decision was too big to just pass right away. Who says we don’t learn from our past mistakes?

The biggest problem with this bill is where is the money going to come from? They want to authorize the spending of $700 billion to rescue financial institutions. With the previously spent $900 billion, this totals $1.6 trillion that the government (read: taxpayers) is on the hook for. In addition to that, we have the looming problems of both Social Security and Medicare in the horizon. And of course we can’t forget that we owe the Chinese a boatload of money and we are still in war with Iraq. So once again I repeat the question, where is this money going to come from? The two presidential candidates want to cut taxes so I’m thinking maybe they aren’t going to tax this money out of us. So are they going to print more dollars? $1.6 trillion worth of dollar bills? If you thought the previous inflation with oil and other commodities (eg. rice, wheat, corn, etc…) was bad, you obviously haven’t seen ANYTHING yet. Be prepared to see massive inflation/devaluation of the dollar if that ends up happening.

With all these problems, I am staunchly against the passage of this bill. All I know is that right now the Democratic and Republican supporters are scrambling to write up another similar bill to put forth to the House for another vote before they break for the Presidential election process. They better have the kinks worked out this time or they should get hit with another resounding “No” from the House.

Three Banks Control American’s DepositsPosted by ahc99 on September 29th, 2008

Photo by Mark Strozier

Did you know that Wachovia - the fourth largest bank - has just been bought out by rival bank Citigroup? They acquired the banking operations of Wachovia for about $1 a share, or $2.2 billion total. A rough estimate shows that Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, which the FDIC will take losses beyond that. In order to compensate the FDIC for assuming that risk, Citigroup has granted them $12 billion in preferred stocks and warrants.

Just like the Washington Mutual buyout, since the distress bank was bought out by another financial institution, things will resume business as usual on the next day. This is good on two fronts: One, the FDIC has been saved from maxing out the little funds it has leftover and the taxpayer no longer has to foot a huge bill (they escaped paying $42 billion, yay USA!). Two, customers of Wachovia will not get thrown into a tizzy fit trying to pull out their deposits since they know now it is owned by a bank with deep pockets.

The scary part of all this is we have come to a consolidation in the financial industry within a matter of weeks. The majority of American’s bank deposits are held in the palms of just three banks: Bank of America, JPMorgan Chase, and Citigroup. Collectively these three banks dominate the financial landscape.

Bank of America bought out Merrill Lynch. JPMorgan Chase bought out the previously third largest bank Washington Mutual. Citigroup has now bought out the fourth largest bank Wachovia. In this mix, it is only Wells Fargo that didn’t make a buyout.

With this new power, the three banks can go unrivaled and set whatever prices they want for savings, loans, and services. Given their new monopoly-like status, I believe it is only the federal regulator’s duty to start setting some rules and put on pressure so that they will not screw the public over more than it already has. Can you imagine what would happen if the current fiasco was repeated again, only this time with just three banks? I don’t think we would ever be able to recover in that scenario. It is important that the banks act more fiscally responsible and conservatively this time around because we cannot handle another financial meltdown.

Yodlee - Best Personal Financial Management ToolPosted by ahc99 on September 28th, 2008

Yodlee Logo

I have been using Yodlee MoneyCenter for about a year now and so far it is working out great! Yodlee MoneyCenter is the personal financial management tool that is produced by Yodlee. Generally Yodlee caters to large businesses but they have a special portal in which individual users can sign up for their free service of managing basically all of their financial information at one website.

Just to give you a little background, Yodlee is a company located at Redwood City, CA and they provide account aggregation and other online financial services to many different institutions. Yodlee lets their users see their checking, saving, investment accounts, retirement accounts, loans, mortgages, rewards, emails, and house values all on one screen at one website. Then in June 27, 2006 they started providing the same kind of account aggregation service (previously only available for large businesses) to individual users at Yodlee MoneyCenter.

Although some people may have concerns about giving out their online financial usernames and passwords all to one company, I believe it should be safe because many online portals of the larger businesses you use are actually powered by Yodlee. For example, if you use Bank of America online then the My Portfolio service is powered by Yodlee. Some of the biggest businesses powered by Yodlee include the aforementioned Bank of America, ING, Fidelity, HSBC, E*TRADE, etc… and there are many more. Even fellow account aggregator service Mint is powered by Yodlee.

I personally love using Yodlee, not only because it is safe, but it helps me keep track of my accounts all at one place. That way I don’t need to log in to 5+ websites in order to check each and every one of my balances. In addition, once Yodlee gets all of the information, you can tell it to give you more useful information such as a net worth statement, graphs to analyze your spending, categorization of your expenses, and comparison of actual spending to set budgets. I also like how you can tell it to send email alerts to you when certain events happen (eg. a bill is due, unusual account activity, high balance, etc…).

I usually access Yodlee about once or twice a month to check my net worth statement and to analyze the graph that displays how much each account has change from the last time I logged in. That tool itself has been invaluable to me because sometimes it can be difficult to get a clear overall picture of all your finances. Sure, you might know how much you have in Bank of America or your retirement accounts, but do you really know what your overall net worth is? I do and I think that is important in keeping you motivated to save more for the future. When you see your net worth increasing month by month and year by year, you know you are doing something right and it definitely empowers you.