I’m not sure what to think of the failure of the House’s $700 billion “rescue plan” for a loan and capital crisis that was largely government made in the first place. Keep in mind, to be clear, that the bill itself isn’t $700 billion, but rather a line of capital up to that amount. Meaning, it might be substantially less. But how much less when said and done? $500 billion? Who knows.

First Point

The first thing that must be noted is that it was a bipartisan rejection. Despite the Pelosi Democrats best attempts to blame the Republicans for its failure to pass, a whopping 95 Democrats joined 133 Republicans in a 228-205 vote opposing the measure.

This fascinating cartogram shows the true bipartisan opposition. Even blue states are covered in red. And red states peppered with blue.

Jim Geraghty sums it up best:

Pelosi has 235 members. She needed 218. She could spare 17 members and still pass the bill. The GOP spotted [gave] her 65 members, for a bill that made most Republicans’ skin crawl in both broad outline and in terms of detail.

That meant Pelosi could afford to lose 82 Democrats. She lost 95. Think about it – the majority party is insisting that the minority party is responsible for the bill not passing with a majority.

Ditto Barack Obama, who telephoned in his vote, couldn’t even bother to be there. For Democrats to argue that “12 Republicans” are to blame is ridiculous when a courting Obama may have pursuaded 12 Democrats to vote Aye.

But I nonetheless agree with Mary Katharine Ham who noted that Republicans miscalculated on not focusing on Pelosi/Obama’s lack of leadership for her own party opposed to her alienating Republicans.

But more importantly

But the question remains, besides what now, was the bill good for Americans to begin with, or was it becoming a pork-laden taxpayer funded juggernaut?

It’s across the board, just like that House vote.

Take for example this letter from a Midwest banker to NRO:

The failure of the House to pass the bill – combined with the resulting bickering – will likely lead to a substantial market sell-off. We’re seeing part of that occur right now, but we may well see much worse over the coming days as the inevitable sell-off hits overseas markets, followed up by another collapse at home as forced selling really kicks in and many institutional investors are required to liquidate their leveraged positions. While it would be nice if all this was confined to a few select Wall Street bad apples, the reality is ordinary people will be hurt very badly as their investments deteriorate and the economic environment turns even more negative. Unemployment will likely spike sharply from here, and the lack of available credit will impair many small businesses that rely on credit lines to finance their operations.

Or this counter-argument from last Monday by Andrew McCarthy. To whit: while many of the loans are tied to actual houses and assets that could be sold, other loans from credit card and student loan defaults are not:

Orwell must be having a good laugh today. Nancy Pelosi yesterday released a summary of the bailout. Under the heading of “Protection for Taxpayers …” Madame Speaker includes this whopper (my italics): The scheme “[a]llows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families.”

So in addition to rewarding irresponsible lenders and borrowers, we taxpayers are now to be “protected” by buying the toxic debt of states, cities and municipalities. It’s one thing to throw a life-line to the credit industry; local governments, by contrast, have the ability to cut spending drastically or raise taxes if their inhabitants want government services. Elected politicians are then accountable for runaway spending and mismanagement. If Detroit or Chicago is sinking because of big-government policies, that’s what the citizens of those cities asked for by voting for Democrats year in and year out. Why should the rest of us be on the hook for that?

And again back to the pro-bailout argument, this one from Dean Barnett:

Suffice to say that if our banking and financial system doesn’t recover its footing, the overwhelming consensus is that we’re headed for very rough times.

Here’s what’s been lost in the debate while people on both the right and left have offered ignorant jeremiads about “bailing out Wall Street.” If the economy tilts into a deep recession or even a depression, it’s not the wealthy or even Barack Obama’s cherished middle class who will pay the deepest price. In any such circumstance, it’s the people on the economic margins who get hurt the most. The ones without a nest-egg and without a 401(k) are the ones who have no safety net when they lose their jobs and health insurance. If unemployment goes from 6% to 10%, it won’t be the investment bankers who start heating their homes at 56 degrees in January. Populist rhetoric is almost always misguided. That has never been more the case than over the past week.

And another anti-bailout, this one from the supply-side Club for Growth:

The bill increases the federal debt by billions of dollars, rewards bad decisions made by failing banks, and establishes a dangerous precedent for government bailouts down the road. This bill should be defeated, and it is clear from the precipitous drop in the Dow this morning that the markets are equally unimpressed with this legislation.

Instead of passing this bill, Congress should do two things immediately to help our credit markets. First, Congress should immediately suspend mark-to-market rules for banks. Second, Congress should lift the cap on the FDIC’s guarantee on transaction accounts at banks. Last week, the government instituted an unlimited guarantee on money market funds, creating an incentive to withdraw deposits from banks. The last thing the government should be doing is encouraging a run on banks. The best way to fix this under current circumstances is to lift the FDIC’s cap.

What’s the answer? Is there one that’s short term?

Perhaps not. But there does seem to be room for a middle ground where if some of the fat was trimmed off the bailout bill, and combined with some of the alternatives, including those by CFG above, or by Rep. Marsha Blackburn, the bill would have a better chance to pass and perhaps better impact once passed.

By Roger Kimball:

Powerline links to a video that answers this question with admirable clarity. I’ll link to the video below. First, here are a few data points from the video and other sources:

The Root Cause

* According to Senator Chris Dodd (D. CT) the “root cause” of the problem is “the housing foreclosure crisis.”

Not 100% accurate, perhaps–it’s really a credit crisis–but close enough for government work, especially from someone who has just happens to chair the Senate Banking Committee and who, completely coincidentally, has been such a conspicuous beneficiary of preferential mortgages and who, also coincidentally, leads the list of those who have received campaign contributions from Fannie Mae and Freddie Mac. (Guess who comes in 2nd and 3rd?)

* But what caused the housing crisis to which Senator Dodd alludes? The housing “bubble.”

* And what caused the housing bubble? “Sub-prime,” i.e., risky, mortgages; that is, mortgages made to people who, in the normal course of things would have to pay a premium in order to obtain a mortgage (if they could obtain one at all) because

a) they had bad or non-existent credit

b) their income was insufficient or

c) both.

Packaging the American Dream

A home of your own. It’s part of the American dream. Work hard, save up for a down payment, pay your bills on time and, presto, you, too, can buy a home.

For decades the government has done things to help Americans to realize the dream, e.g., graciously allowing citizens to keep some of their own money to help pay for the interest on a mortgage (the official term for this is a “tax deduction,” but I prefer my locution since it emphasizes the fact that it is YOUR MONEY we are talking about).

But what about people who do not work hard (if they work at all)? What about people who have not saved up for a down payment? What about people who do not pay their bills on time (if they pay them at all)? Why shouldn’t they get to live the American dream?

That was the question that led to

”The Community Reinvestment Act” (see here for more).

* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.

The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.

* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”

Bottom line? It forced banks to issue $1 trillion in sub-prime mortgages.

$1 trillion, i.e., a thousand billion dollars in sub-prime,i.e., risky, mortgages, in order to push this latest example of social engineering.

But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties. As Howard Husock, writing in City Journal way back in 2000 observed: “Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A’s for effort. Only results—specific loans, specific levels of service—would count.” Way back in 1994, for example, Barack Obama sued Citibank on behalf of a client who charged that the bank “systematically denied mortgages to African-American applicants and others from minority neighborhoods.”

* In 1997, Bear Stearns–O firm of blessed memory–was the first to get onto the sub-prime gravy train.

* Fannie Mae & Freddy Mac–were there near the beginning, too.

Anatomy of a bubble

Step 1. The intoxication: “My house is worth millions!” From 1995 – 2005, the number of sub-prime mortgages skyrocket. So did the house prices.

Step 2. The hangover: “Oh my God, my house isn’t selling. What went wrong?”

Why didn’t someone try to stop it?

Someone did: “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago,” The New York Times, September 11, 2003.

But someone intervened to stymie the Bush administration. Who? The New York Times reports:

Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. . . . “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Why didn’t someone else ring the alarm?

Someone else did. In 2005, John McCain co-sponsored the “Federal Housing Enterprise Regulatory Reform Act,” which among other things provided for more oversight of Freddie & Fannie. The bill didn’t pass. Guess who blocked it?

The bill was reintroduced in 2007. But again, no luck. Fannie Mae and Freddie Mac had friends in the Senate:

* Chris Dodd, a recipient of “sweetheart” loans from a Freddie and Fannie backed company.

* The junior senator from Illinois, i.e., Barack  Obama, who turned to Jim Johnson, former head (1991-1998) of Fannie Mae, to help advise him on whom to pick for the vice-presidential slot on his ticket. From 1985 to 1990, incidentally, Johnson was managing director of Lehman Brothers. Remember them?

* You might also want to check out one of Barack Obama’s other advisors: Franklin Raines, former CEO of Freddie Mac: see here , for example, or here , or here.

Towards the end of the video, we read this salutary observation: “Everyone deserves a home, not a house of cards.”

Who gave us the house of cards? Watch the whole thing here (original link was  here). And then pass it along to everyone you know.

Maybe a little too optimistic, but what do I know?

[Brian Wesbury] Never in history has a drop in consumer confidence caused a recession. But that does not mean there won’t be a first time. It could happen in the next few months and we would expect to see some very negative data on economic activity. But this would be followed by an offsetting increase in activity following the psychological slowdown.

Productivity is still booming, and so are exports, the Fed is exceedingly accommodative and tax rates have not been hiked. Moreover, oil prices are below $100 per barrel. Finally, all it would take to fix financial market problems today is a temporary suspension of mark-to-market accounting for a targeted set of illiquid assets.

In other words, any economic problems that the US faces in the next few months or quarters is temporary. Financial markets have priced in Armageddon, and as a result still present one of the greatest buying opportunities of our lifetimes.

He also trashes Bush and other politicos for adding emotional fuel to the fire.

See: Community Reinvestment Act.

Hat tip to Powerline.

While you’re at it, watch this one too, about 1:00 in:

Absolutely. Good intentions. Isn’t that how most Congressional meddling begins? And it’s exactly why the “fixes” so often cause more harm. For example, take campaign finance reform. Years from now they’ll pass more campaign finance reform to “fix” the McCain-Feingold act (the 527s mess), which was passed to “fix” Nixonian era reforms, and so on.

And you’re message of the day:

It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.

– Stephen Schwarzman, chairman of Blackstone Group.

McCain: Lowering business taxes is necessary because if a business can get an 11 percent tax in Ireland, and must endure 35 percent here, that business will leave the U.S. We must prevent that by giving American businesses a chance to give plenty of people jobs and opportunity.

Nicely done.

At the root of this mess is not the failure of capitalism but political interference in the market. It was Democrats who pushed for and passed the Community Reinvestment Act of 1977 that forced banks to serve their “whole communities” and required them to offer loans to people who were not credit worthy. In 1995, the Clinton administration’s Department of Housing and Urban Development, headed by Andrew Cuomo, implemented new regulations requiring banks to meet numerical quotas in lending and demonstrate the diversity of their borrowers.

While housing prices were rising, the bad loans were hidden. But as soon as prices began to fall and adjustable ARMs kicked in, the defaults began.

It was Democrats who closed ranks to insulate their pet projects — Fannie Mae and Freddie Mac — from proper oversight and regulation. A New York Times article from 2003 described the opposition to a Bush administration proposal to enhance oversight: “Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.” Rep. Barney Frank (D., Mass.) claimed of the thrifts, “These two entities … are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” Representative Mel Watt (D., N.C.) added, “I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing.”

– Mona Charen

Here’s an interview with Amity Shlaes, an author who recently explored The Great Depression and government response to it. I found a few facts interesting, such as that people who owned 90% of their homes still lost them, whereas today we’re talking about people losing their homes when only owning 10% of it. Likewise, interest-only loans were common prior to the depression, but fell out of favor after it (until recently).

Here’s Shlaes on McCain’s action yesterday:

Lopez: Is McCain overreacting with his delay-the-debate plea?

Shlaes: This seemed a counterproductive on move on McCain’s part. Foreigners watching U.S. markets T.V. learn that a leading politician is actually interrupting campaigning because of the crisis. That’s unusual for the U.S., it takes the emergency to a new news level, and so sends a creepy message. McCain’s version of crisis mode generates fear, not calm. He shoots from the hip way too much on the economy. No wonder the Nikkei has already fallen two percent (9:52 P.M.). It’s disappointing since he has the capacity to lead an adequate clean up action.

Like I said yesterday, be very afraid of what Pandora’s Box Congress will open with their socialist takeover “fix” of the mortgage and banking crisis.

Libertarian columnist Radley Balko says: “Corporatism” — an odd mix of corporations and government central planning — not Capitalism was the cause of the crisis.

Balko asks we imagine a company that spends $400k more annually than it takes in, doesn’t account for future liabilities, cooks the books and practices dirty accounting including “forward funding,” “advance funding,” and “delayed obligations,” and borrows from its workers’ pension plan to pay debt, and you’ve got — TA DA! — the U.S. Government.

If any private corporation employed the same accounting tricks Congress and the White House use to hide the government’s massive debt and financial liabilities, its board and executive officers would all be in prison. In the government, it’s common practice. And that’s not even considering the funding of our two ongoing wars, which somehow emanates from outside the normal budget process.

If the government were required to abide by the same accounting standards as private industry, its debt would be in the trillions, not billions. Last May, Dallas Fed President Richard Fisher said that the government’s unfunded liability for Social Security and Medicare alone comes to a staggering $99.2 trillion, or $330,000 for every man, woman, and child in the United States. It’s an impossible figure.

So when congressional leaders and presidential candidates Sen. Barack Obama (D-Ill.) and Sen. John McCain (R-Ariz.) call for more government oversight of our struggling financial institutions, go ahead and laugh. You know you want to. The idea that the private sector would be in better shape today if only we demanded more oversight from our politicians is preposterous. Our politicians wouldn’t recognize “fiscal responsibility” if it spat in their ears.

Wall Street moguls may be “greedy,” as both John McCain and Barack Obama have described them, but at least there are real consequences when their greed becomes excessive. They go out of business.

Except, that is, when the government bails them out. Thus far, in addition to being on the hook for the federal government’s own massive debt, taxpayers are also putting up $85 billion to back insurance giant AIG and up to $100 billion each to back Freddie Mac and Fannie Mae, and we’re funding the Bear Stearns backstop. Congress is also expected to approve at least $25 billion in corporate welfare for the big three automakers. You can probably expect more handouts down the road. All of this has some analysts now questioning the U.S. government’s bond rating, and worse, wondering whether the government itself may soon collapse under the weight of its own debt.

When you, Joe Citizen, spend frivolously and default on your loans, the bank takes your house. When the government spends your tax dollars frivolously, it simply cooks the books to cover its excesses. When the books are left in ashes, the government just takes more of your money, or it prints more money, leaving the money it hasn’t already taken from you devalued. Over the last few weeks, we’ve learned that you now face the prospect of an additional indignity: When your neighbor’s bank spends frivolously and defaults on its loans, the government’s going to take your money then too, to keep the bank in business.

Over-regulation brought us to this crisis, not under-regulation. If we get the diagnosis wrong, then the prescription will be wrong too.

… That’s what more regulations would mean. Place salary ceilings on “every company that benefits in any way whatsoever from the bailout” as Barney Frank said today on CNBC, and you’ll get a talent exodus. Give judges the power to obviate existing mortgage contracts with investors around the world – the dollar will plunge. Every one of those proposals is another hole in the boat.

– Jerry Bowyer.

[Chicago Sun Times] A $100,000 state grant for a botanic garden in Englewood that then-state Sen. Barack Obama awarded in 2001 to a group headed by a onetime campaign volunteer is now under investigation by the Illinois attorney general amid new questions, prompted by Chicago Sun-Times reports, about whether the money might have been misspent.

The garden was never built. And now state records obtained by the Sun-Times show $65,000 of the grant money went to the wife of Kenny B. Smith, the Obama 2000 congressional campaign volunteer who heads the Chicago Better Housing Association, which was in charge of the project for the blighted South Side neighborhood.

Well, that’s interesting, eh? It’s a good thing Obama is a Democrat else this story would have been plastered page one of the New York Times, Washington Post, et al., not to mention the subject of incessant cable news.