REVISED 2:53 pm and edited 5:23 pm
This morning, it looked as though Congress had reached accord on the terms of the financial institution bailout. See this text of the bill (provided by the Wall Street Journal), the provisions of which are briefly summarized and discussed in the second following paragraph.
Since that first version of this post, the House has voted to scuttle the deal 228-203. See House Rejects Bailout Plan 228-203, but New Vote is Planned; Stock Market Plunge, New York Times, Sept 29, 2008. (Note: other news reports describe the vote variously as 228-205 and 228-207.) Even John Boehner voted for the bill, acknowledging the extent of the current financial crisis.
Regretably, some of the negative votes apparently were from representatives determined to hold to a Reagan rose-colored glasses version of reality, that governments can let markets run themselves without regulation and without intervention in times of crisis. So Darrell Issa, a California Republican, saw this as a "nail in Ronald Reagan's coffin." Reagan, of course, preached deregulation and supply-side economics (the widely discredited view that you can cut taxes on the rich and cause so much economic growth that the tax cuts pay for themselves and trickle good times down to everybody else), but practiced huge spending increases for the military. Ultimately Reagan recognized the need to increase taxes (though it was payroll taxes that increased especially sharply under Reagan) and went along with the bipartisan 1986 Tax Reform Act to lower rates but compensate by broadening the base and removing loopholes (including, for those who have forgotten, eliminating the capital gains preference).
In the initial version of this post, I noted my concerns with the apparent accord reached in the House, although it was clear that some action must be taken. In particular, one worries about the degree of discretion the bill lodges in the Secretary of the Treasury--to determine what assets to buy, what price to pay, and who to hire to handle the assets on behalf of the government. The bill did provide, however, for a congressional oversight panel, and a "Financial Stability Oversity Board consists of the heads of Treasury, Fed Reserve, SEC, Federal Home Finance, and Housing. I would have liked to see some people with interests outside the administration and financial institution community on the oversight group. There is, importantly, a "special inspector general" with authority to audit and oversee the program, funded by $50 million of the program funding (initially set at $250 billion, but with mechanisms for increasing to $700 billion). Judicial review is also permitted under the difficult "aribtrary, capricious or an abuse of discretion" standard. Equitable relief is very limited. The bill does make some provision for Treasury benefitting from upside gains. There is still no provision for homeowners' right to bankruptcy workouts of mortgage loans, probably the single most important provision that could help homeownersm but the Treasury is encouraged under the bill to permit modifications to loans the government purchases. The authority expires on Dec. 31, 2009, unless the Secretary extends it to two years from enactment through a certification process. The debt ceiling is increased to more than $11.3 trillion. The SEC is given authority to suspect mark-to-market accounting, and ordered to undertake a study of mark-to-market accounting. Interesting. (What will be the consequences of this change in accounting policy, if it is undertaken by the SEC, for broker-dealers that mark to market for tax purposes and are permitted to use, under the regulations issued by the Treasury, their financial accounting mark-to-market numbers for tax?)
Joseph Stiglitz, in an article in the Nation titled "A Better Bailout", criticized the government for failing to act with a real stimulus package and noted that Paulson's original bailout plan was another wall-street-centric proposal that ignored the needs of ordinary people by not providing for bankruptcy modification of mortgages. See this excerpt and related comments on AngryBear.
The markets reacted negatively to the House's failure to pass the bailout. See Grynbaum, Dow Drops More than 400 Points, NY Times, Sept. 29, 2008 (before the end of the market day). The Dow ultimately posted a decline of more than 777 points. Jeff Claybaugh, BusinessFirst of Louisville, Dow Jones Posts Record Decline as Rescue is Rejected; Grynbaum, For Stocks, Worst Single-Day Drop in Two Decades, NY Times, Sept. 29, 2008.
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