Why the Bank Bill Should Pass
Nobody is happy with everything in the legislation.
STENY HOYER
Few days in the 27 years I've served in Congress were as remarkable as Monday. It's not every day that Republicans second Barney Frank. It's not every day that Democrats stand and cheer for Minority Leader John Boehner.
But Monday was a day of consequence. Crises have the power to unite us in strange ways, and on Monday, the true dividing line was between those who understand the high cost of doing nothing, and those who haven't yet been convinced. I only hope that economic events won't do the convincing for us.
I can't think of a more dramatic vote than Monday's, from the news of a tanking stock market that reached us on the floor, to the dead silence that fell across the chamber as the speaker gaveled the vote closed.
It's been clear all along that a bill to stave off financial catastrophe would take the support of both parties, on both sides of the Capitol. House Democrats lived up to our end of the bargain: 60% of us voted for a financial rescue.
Many of us had significant reservations. But most Democrats were persuaded by economists who told us the dangers of inaction. And we were moved by stories of a credit crunch already starting to endanger families and small businesses. One senator spoke last weekend about a car dealer in small-town Utah who called his office to say, "I'm not going to be able to pay my employees next week. I can't get the kind of credit line from the bank that I've had through my entire career unless you do something."
That is why financial recovery legislation is still essential. On Monday, it failed on the House floor. But today we are bringing back a modified bill that has already passed the Senate -- and we hope to pass it, as well.
It's useful to consider the history of the recovery proposal, from its beginning as a merely three-page document proposed by the Bush administration, to the altered bill debated in the House and Senate. Legislative compromise may be messy to watch, but it significantly upgraded the recovery package.
The heart of the bill remains a plan for the government to buy up bad Wall Street assets, restoring the flow of necessary lending and cutting down on home foreclosures. But we fought to ensure that taxpayers will be the first to profit if and when those assets rise again in value -- making the true price-tag nowhere near the widely reported $700 billion. Wall Street will also be obligated to pay the taxpayers back for its loan.
We restricted executive compensation, because CEOs whose recklessness helped bring on this crisis do not deserve taxpayer-subsidized golden parachutes.
The Treasury secretary's spending decisions will be subject to strong oversight and judicial review.
Finally, the bill helps homeowners renegotiate their mortgages, to prevent a further flood of two million projected foreclosures that would devastate our communities.
After Monday's vote, the Senate added a further provision raising federal insurance of bank accounts to $250,000 from $100,000, protecting more Americans from any potential bank runs. The Senate's decision to add tax cuts is more controversial, because the cuts are not paid for and would add to the deficit.
Few of us, if any, are happy with every change. But Rep. Frank put it well: "If we aren't prepared to accept some of the things we don't like, we will not have the power to deliver for the people we care about."
For me, those people are families unable to take out a loan to buy an appliance or pay for college; Americans who have worked their whole lives, only to see their retirement accounts threatened; and millions of workers fearing a pink slip they did nothing to earn.
In the long run, the only way to prevent a crisis like this from recurring is to look to the crisis's roots. Because a failure of responsible regulation got us into this mess, we will work to restore sensible and effective oversight to our financial markets. And because record foreign borrowing and massive debt has shaken the world's confidence in our financial system, we will put America back on the path of financial responsibility.
A vital bill may have been defeated Monday. But the danger isn't going away until we join together, Democrats and Republicans alike, to solve the problem. There will be time to deal with the irresponsibility that caused this crisis -- right now, though, it will take all of us to fix it.
Mr. Hoyer is House majority leader.
House set for fresh bail-out vote
 President Bush has said the bill is the best chance of rescuing the economy |
The US House of Representatives is debating a $700bn (£380bn) plan to rescue the US financial sector and is expected to vote within a few hours.
Party leaders are hoping the House, which stunned global markets by rejecting the initial plan, will follow the Senate and back a new version.
The Senate bill added about $100bn in new tax breaks in the hope of gaining more support from House Republicans.
The package is aimed at buying up the bad debts of failing institutions.
The New York stock exchange opened shortly after the debate began and the Dow Jones Industrial Average jumped more than 200 points in morning trading.
Bush plea
As the House debate opened, many of the legislators told stories of the hardship being suffered by constituents but were divided on whether the bill would help ordinary Americans.
Democrat Rahm Emanuel said addressing the balance sheets of banks was "only the first step".
 | NEW MEASURES IN BAIL-OUT BILL Increased protection for saving deposits Increased child tax credits More aid for hurricane victims Tax breaks for renewable energy Higher starting limits to alternative minimum tax |
"The next step must now address the chequebooks for middle class families and the struggles that they face."
Fellow Democrat Peter DeFazio said he would continue to vote "No".
"Do not [authorise] George Bush an unprecedented use of financial force under the threat of financial weapons of mass destruction."
House Republican leader John Boehner said the bill might not be perfect but he was optimistic it would pass. "It's time to act," he said.
Republican Virginia Foxx and Democrat Steven Cohen speaking ahead of the vote
The lawmakers have passed a measure by 223-205 allowing a final vote on Friday.
President Bush has urged the House to back the revised bill following the rejection by 228 votes to 205 on Monday.
Both the Democratic and Republican parties are pressing their members in the House to swing behind the revised bill and party leaders expect it to pass.
Pressure will particularly be applied to the 133 House Republicans who went against party affiliation to reject the bill, correspondents say.
The bill successfully passed through the Senate on Wednesday after it was amended to raise the government's guarantee on savings from $100,000 to $250,000.
|  I have decided that the cost of doing nothing is greater than the cost of doing something  John Lewis, Democrat, Georgia  |
It also now includes tax breaks to help small businesses, expand the child tax credit and extend help to victims of recent hurricanes.
Most importantly, it extends the tax break aimed at boosting the provision of alternative energy such as wind farms.
The additional cost of these unrelated tax breaks - which could add $100bn to the bill - have worried some fiscally conservative Democrats in the House of Representatives.
The US witnessed more evidence of the financial volatility on Friday.
US bank Wells Fargo announced it would buy troubled rival Wachovia in a $15.1bn (£8.5bn) deal, while the US also reported its biggest monthly job loss in more than five years.Palin stops the bleeding, just
Sarah Palin delivers an adequate performance against Joe Biden in the vice-presidential debate
UNDER normal circumstances a vice-presidential debate is a snooze. Voters care about the top of the ticket. Unless the running-mate goes berserk, all will be well. But the conventional wisdom goes out the window when one of the candidates is a culture warrior in collapse. The past few weeks have been hard on Sarah Palin, the running-mate of John McCain. In one disastrous interview the Republican vice-presidential candidate was unable to name a Supreme Court decision other than Roe v Wade. So interest in the debate on Thursday October 2nd between Mrs Palin and Joe Biden, the running-mate for Barack Obama, was unusually high. Republicans girded themselves for grim news. Democrats were cautiously optimistic. Some sensed a trap. Mr Obama’s campaign manager insisted that Mrs Palin was “one of the best debaters in American politics.”
The good news for the McCain campaign is that Mrs Palin was confident and assertive, and made no big errors. The bad news is that a mediocre performance counts as good news. But they will take what they can get at this point.
The McCain campaign had lobbied for a constricted debate format: two-minute questions, without long freewheeling exchanges. This worked well for Mrs Palin. It seemed that she had memorised some talking points and was determined not to deviate from them. “And I may not answer the questions the way that either the moderator or you want to hear,” she said, near the beginning. “But I'm going to talk straight to the American people and let them know my track record also.”
This was effective, if blunt. One telling exchange came when the moderator, Gwen Ifill, asked Mr Biden whether Americans have the stomach to put troops on the ground in Darfur, a war-torn region in western Sudan. Mr Biden noted his early advocacy for an intervention in Bosnia, the objections that were raised and the eventual success of the mission. He concluded that America should rally the world to intervene in Darfur.
Mrs Palin offered a response first to comments on Iraq. “Oh, yeah, it's so obvious I'm a Washington outsider,” said Mrs Palin. “And someone just not used to the way you guys operate. Because here you voted for the war and now you oppose the war.” She went on, however, to agree that a no-fly zone should be supported in Darfur.
At other points Mrs Palin was baffling. Mr Biden criticised the Republicans for having too much faith in drilling as a solution to the energy crisis. “John McCain has voted 20 times against funding alternative energy sources and thinks, I guess, the only answer is drill, drill, drill,” he said. “The chant is 'drill, baby, drill',” she corrected, playing some kind of gender card against herself.
Both of the vice-presidential candidates, like their running-mates, were sour on Wall Street and big on Main Street. They tussled as they tried to prove their credentials. Mr Biden said that he has a friend who cannot afford to fill his car with petrol. Mrs Palin talked about sidling up to other parents at the football field and offered “a shout-out to all those third graders at Gladys Wood Elementary School.” Mr Biden movingly defended his case: “Look, I understand what it's like to be a single parent,” he said. “When my wife and daughter died and my two sons were gravely injured, I understand what it's like as a parent to wonder what it's like if your kid's going to make it.”
Mr Biden may also have benefited from low expectations. Democrats had feared that he would seem condescending or pompous. Republicans had chortled over the same possibilities. No one gave him much credit.
But Mr Biden gave a strong and disciplined performance. He was self-effacing and downplayed his past disagreements with his running-mate. He shrugged off their mismatched votes on the bankruptcy bill by saying that “Barack Obama saw the glass as half-empty. I saw it as half-full”. He was affable but aloof to Mrs Palin, and kept his sights trained on the main target. He said that he loves his friend John, but that Mr McCain has the same policies as George Bush and is not a real maverick. The voters who were mesmerised by Mrs Palin may have been bored to hear so much about Mr McCain. But as Mr Biden knows, boring is not such a bad trait in a running-mate. The Republicans have learned that one the hard way.
Oct. 3 (Bloomberg) -- Republican vice presidential nominee Sarah Palin combined a folksy appeal to Middle America with relentless criticism of Democratic presidential candidate Barack Obama as she sought to establish her fitness for national office.
Her Democratic counterpart, Joe Biden, repeatedly tried to tie Republican presidential nominee John McCain to what he called the failed policies of incumbent George W. Bush during a vice presidential debate in St. Louis last night.
Palin, 44, sometimes used humor in seeking to deflect Biden's criticisms as backward-looking partisanship that she said gave voters little idea of how he and Obama would govern.
``Say it ain't so, Joe, there you go again pointing backward,'' Palin said at one point. ``Now, doggone it, let's look ahead and tell Americans what we have to plan to do for them in the future.''
Biden, the 35-year Washington veteran, also sought to project a human side. One of the more poignant moments of the debate was when he choked up speaking about how he understands the trials that Americans face.
He mentioned raising two children on his own and not knowing whether a child is going to live. Biden, 65, was a single father after his first wife and daughter died in a car accident in 1972; one of his sons, Beau, is now headed to Iraq.
``The notion that somehow, because I'm a man, I don't know what it's like to raise two kids alone, I don't know what it's like to have a child you're not sure is going to -- is going to make it -- I understand.''
Populist Note
Palin struck a populist note early in the debate, blasting ``predator lenders'' and Wall Street for bringing on the nation's financial crisis.
``There was deception there, and there was greed and there is corruption on Wall Street,'' Palin said. ``We're going to follow through on that, getting rid of that corruption.''
Biden blamed McCain for not fighting in the past for more oversight. He pointed out that McCain said ``I'm always for less regulation'' in a Wall Street Journal interview.
``We let Wall Street run wild,'' Biden said. ``John McCain, and he's a good man, but John McCain thought the answer is that tried-and-true Republican response: deregulate, deregulate.''
Palin often avoided engaging the substance of questions on such issues as health care or bankruptcy legislation, instead pivoting away to advertise her middle-class roots and values.
Best Barometer
On the first question from moderator Gwen Ifill of PBS, she was asked whether the wrangling over an economic-rescue package on Capitol Hill represented the best or worst of Washington. Palin replied that the best barometer of the economy can be found at a soccer game.
``Turn to any parent there on the sideline and ask them, `How are you feeling about the economy?''' Palin said. ``And I'll bet you, you're going to hear some fear.''
At one point, Palin even advertised her lack of responsiveness, saying, ``I may not answer the questions that either the moderator or you want to hear, but I'm going to talk straight to the American people and let them know my track record.''
Biden won the debate, according to 46 percent of respondents in a CBS News poll afterward of 473 people who said they weren't yet committed to a candidate; 21 percent said they thought Palin triumphed.
`Surge' Strategy
The candidates clashed over foreign policy issues, especially Iraq and Afghanistan. Palin said Obama's plan to withdraw most U.S. combat troops from Iraq within 16 months constituted ``a white flag of surrender''; Biden said McCain had no plan to end the war.
Palin, paraphrasing McCain, said the ``surge'' strategy that the Bush administration adopted in Iraq needs to be exported to Afghanistan. That drew a sharp retort from Biden, who said the U.S. commander in Afghanistan ``said the surge principle in Iraq will not work in Afghanistan.''
Palin disputed that point, mispronouncing Army General David McKiernan's name as she did so: ``McClellan did not say definitively the surge principles would not work in Afghanistan.''
McKiernan, in a briefing at the Pentagon two days ago, said U.S. forces in Afghanistan can't copy a central element of American military success in Iraq -- directly recruiting local tribes to support them -- because the Afghan tribal structure is far more complex and has been shattered by 30 years of war.
``What I find in Afghanistan,'' McKiernan said, ``is a degree of complexity in the tribal system which is much greater than what I found in Iraq.''
Losing Points
The debate came as polls show that Palin has been losing points with voters. Conservative commentators including George Will and Kathleen Parker have questioned Palin's qualifications, and she's trying to overcome stumbles during recent TV interviews that have caused concern in party circles.
In one interview, with CBS, Palin had trouble naming any U.S. Supreme Court decisions she disagreed with other than the 1973 ruling that legalized abortion nationwide.
In a Bloomberg/Los Angeles Times national poll taken Sept. 19-22, 46 percent of registered voters said she wasn't qualified to be president, compared with 41 percent who said she was. The poll showed that hopes she might draw more women to the ticket are misplaced: 49 percent of women said they planned to vote for Obama and Biden; 40 percent picked McCain and Palin.
Charlie Cook, editor of the nonpartisan Cook Political Report in Washington, said Palin's performance last night may allay some concerns about her ability to serve as vice president.
`Only Good Thing'
``A lot of Republicans have to feel relieved,'' Cook said. ``This debate is the only good thing to happen to Republicans all week.''
Kathleen Hall Jamieson, director of the Annenberg Public Policy Center at the University of Pennsylvania, said the ``new information'' from the debate was that Palin ``could hold her own on tough questions with a much more experienced senator.''
Biden has had his own missteps. During an interview with the same CBS anchor, Katie Couric, Biden pointed to former President Franklin Roosevelt as an example of a good leader during a crisis. He said Roosevelt immediately got on television to talk about the stock market crash in 1929. The only problem was that Herbert Hoover was president at the time and Americans didn't have televisions.
Overshadowed by Palin
Yet Biden's penchant for gaffes is well-known and any missteps have been overshadowed by the attention on Palin. In the Bloomberg poll, 68 percent of registered voters said they believed Biden had the necessary experience, compared with 15 percent who said he doesn't.
During the debate, the candidates also clashed on domestic issues. Palin accused Obama of voting 94 times in the Senate to raise taxes or block tax cuts; Biden retorted that by that criterion, McCain has voted for higher taxes 477 times. ``It's a bogus standard,'' he said.
On health care, Palin touted McCain's plan to provide a $5,000 tax credit for those buying their own health insurance. Biden replied that McCain would pay for that benefit by taxing employer-provided coverage, which he said would cause millions of people to lose such benefits.
``I call that the ultimate bridge to nowhere,'' he said, alluding to a controversial transportation project in Palin's home state of Alaska.
`Maverick'
Palin used the word ``maverick'' six times during the debate to describe herself and McCain. Toward the end, Biden took her on over that point, saying: ``He has been no maverick on the things that matter to people's lives.''
Before tonight, there had been seven face-offs for vice presidential candidates since debates became a standard part of presidential elections in 1976. While some have offered memorable lines -- such as when Democrat Lloyd Bentsen told Republican Dan Quayle ``you are no Jack Kennedy'' in 1988 --none have changed the dynamics of the race.
Oct. 3 (Bloomberg) -- U.S. stocks rose for the first time in three days as a bigger-than-forecast decrease in jobs spurred expectations Congress will pass a bank-bailout plan and the Federal Reserve will cut interest rates to bolster the economy.
Bank of America Corp., General Motors Corp. and United Technologies Corp. climbed more than 3 percent as futures traders bet the Fed will lower its benchmark rate by as much as 0.75 percentage point at its next meeting. Wachovia Corp. rallied 77 percent after Wells Fargo & Co., the biggest West Coast bank, agreed to buy the lender for about $15.1 billion. National City Corp. climbed 27 percent and Sovereign Bancorp Inc. added 13 percent.
``This economic report is putting a gun to Congress's head that they've got to do something,'' said Peter Jankovskis, the Lisle, Illinois-based co-chief investment officer at Oakbrook Investments LLC, which manages $1.4 billion. ``There's no wiggle room for Congress, and that makes it very likely the bailout package will be passed soon.''
The Standard & Poor's 500 Index gained 21.18, or 1.9 percent, to 1,135.46 at 10:04 a.m. in New York. The Dow Jones Industrial Average added 129.82, or 1.2 percent, to 10,612.67. The Nasdaq Composite Index rose 39.31, or 2 percent, to 2,016.03. Eleven stocks gained for every two that fell on the New York Stock Exchange.
The S&P 500, which has fallen 6.8 percent over the past five days, pared losses at the end of its worst week since 2002. The benchmark index for U.S. stocks tumbled 4 percent yesterday as reports on jobless claims and factory orders reignited concern the economy is sinking into a recession.
Wachovia Rallies
Wachovia rallied $3.02 to $6.93 on the New York Stock Exchange. The Wells Fargo offer values the Charlotte, North Carolina-based bank at $7 a share, the companies said in a joint statement today.
Citigroup Inc., which had agreed four days ago to buy Wachovia's banking operations, declined $3.15, or 14 percent, to $19.35.
National City, Ohio's biggest bank and the subject of takeover speculation earlier this week, gained 27 percent to $4. Sovereign, the second-largest U.S. savings and loan, increased 13 percent to $5.95.
Fed Funds futures trading on the Chicago Board of Trade show a 92 percent chance the Fed will reduce its target rate for overnight bank loans by a half-percentage point to 1.5 percent at its Oct. 29 meeting and 8 percent odds of a 0.75 percentage- point cut.
`Part of the Solution'
``We wouldn't be surprised to see the Fed cut rates 50 points even before the next scheduled meeting,'' James Shugg, a senior economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. ``It actually helps boost, to some extent, bank profitability. An interest-rate cut is an important part of the solution to the current serious problems confronting the U.S. economy.''
Payrolls fell by 159,000 in September, the biggest decrease in five years, the Labor Department said. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964.
Railroad Rally
CSX Corp. jumped $2.38, or 5 percent, to $49.59. JPMorgan Chase & Co. upgraded shares of the Jacksonville, Florida-based railroad to ``overweight'' from ``neutral,'' saying an 11 percent tumble yesterday left the stock at a ``compelling valuation'' given its ``strong visibility'' for earnings growth next year.
Burlington Northern Santa Fe Corp., also raised to ``overweight'' from ``neutral'' by JPMorgan, climbed $1.71, or 2.1 percent, to $84.71. The Fort Worth, Texas-based railroad whose largest investor is billionaire Warren Buffett dropped 7.3 percent yesterday on concern falling commodities and factory orders may foreshadow a decline in freight volume.
General Growth Properties Inc. gained $4.10, or 54 percent, to $11.69. The Chicago-based mall owner whose shares slumped 48 percent yesterday fired its chief financial officer and suspended dividend payments to weather the seizure in financial markets.
Equities retreated from Sao Paulo to London to Tokyo this week, sending the MSCI All-Country World Index to an 8.9 percent decline, as an increase in bank failures exacerbated the credit freeze that pushed up borrowing costs for companies and consumers around the globe.
The S&P 500, down 23 percent this year, still trades for 21.6 times profit from the past 12 months. Only four of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan, Colombia and Morocco -- have a higher price-to-earnings ratio, according to data compiled by Bloomberg yesterday.
Europe's Dow Jones Stoxx 600 Index trades at 10.8 times earnings, near the lowest since at least 2002.
Oct. 3 (Bloomberg) -- The U.S. House of Representatives cleared the way to complete action on a Senate-passed $700 billion financial-market rescue package that was refashioned to entice enough votes for passage.
By a vote of 223-205, the House prevented members from offering amendments that could snarl the proceedings. The tally signaled the plan has enough support to clear Congress and be sent to President George W. Bush to be signed into law.
At least 12 House members said they will drop their opposition to the plan and support it. The measure failed by a dozen votes earlier this week. The House roll call was scheduled for early this afternoon.
``Today we have a second chance,'' said Representative David Dreier, a California Republican. ``The federal government must now do its part to undo the damage.''
The Bush administration issued a statement today saying it ``strongly supports and urges swift House passage'' of the bill.
The legislation lets the government buy troubled assets from financial institutions rocked by record home foreclosures. It contains provisions favored by House Republicans, including $149 billion in tax breaks, a higher limit on federal bank-deposit insurance and changes in securities law.
It also restates securities regulators' authority to suspend asset-valuing rules that corporate executives blame for fueling the crisis. The Senate approved the bill Wednesday 74-25.
Sweetening the Pot
The add-ons may help sway lawmakers such as Jim Gerlach, as did phone calls from his suburban Philadelphia constituents. Many of his supporters shifted to backing the bailout following the record 778-point drop in the Dow Jones Industrial Average after the House's 228-205 defeat of the bill.
The Dow rose 206.37 points, or 2 percent, to 10,689.22 at 10:53 a.m. in New York.
Among those abandoning their opposition were Democrats Shelley Berkley of Nevada and Gabrielle Giffords of Arizona and Republicans Ileana Ros-Lehtinen of Florida, John Shadegg of Arizona and Jim Ramstad of Minnesota. At least three other Republicans, Gerlach and Tim Murphy of Pennsylvania and Patrick Tiberi of Ohio, and Democrat Bill Pascrell of New Jersey, may vote yes on the measure.
Signaling Confidence
House Majority Leader Steny Hoyer and the Republican leadership signaled their confidence in advance that the measure would pass.
``There is a broad feeling that the economy is at risk and that average Americans will be badly hurt if the economy continues to go downhill, and that action is necessary,'' Hoyer said.
Minority Leader John Boehner had said the plan wouldn't come up for a vote until leaders were assured of passage and today predicted approval. Republicans cited the economy as the main reason they were switching.
Shadegg said on Bloomberg Television that he would support the measure, citing a ``breakdown'' in credit markets that makes it difficult for small businesses to pay employees. Ros-Lehtinen said in a statement she would back the bailout because it boosts Federal Deposit Insurance Corp. limits and adds tax breaks for families.
Company Support
Companies are also pushing Congress to pass the measure, saying the curtailment of credit may result in job cuts.
Automakers said tougher loan standards partly accounted for a 27 percent plunge in U.S. auto sales last month.
The market for commercial paper, short-term borrowing by businesses, suffered the biggest one-week drop on record, the Federal Reserve said yesterday. The amount of commercial paper outstanding fell by $94.9 billion, or 5.6 percent, during the week ended Oct. 1.
Yet the addition of the tax cuts and special breaks for companies such as an Oregon-based maker of wooden arrows and Virgin Islands rum-makers may turn off some deficit-wary Democrats.
Representative Mike Ross, an Arkansas Democrat who supported the original bailout bill, said he didn't know how the so-called Blue Dog coalition of fiscally conservative Democrats would vote on the version with the Senate's add-ons.
``I don't even know what I'll do,'' Ross said.
The extra spending on federal projects is also repelling some Republicans.
Still Opposed
Representative Spencer Bachus, an Alabama Republican who supported the earlier bailout plan, called the Senate version ``a travesty,'' saying in an interview that he is ``strongly considering'' voting against it.
As the House prepared to approve the rescue plan, the rate banks charge each other to borrow dollars overnight dropped to 1.996 percent after soaring to 6.875 percent on Sept. 30, the day after the House vote rejecting the earlier bailout proposal.
The London interbank offered rate for three-month loans in dollars, however, rose to 4.33 percent, the highest since January. The Libor rate for three-month euro loans rose to a record 5.33 percent.
The Labor Department reported today that the U.S. lost 159,000 jobs in September, the biggest monthly drop since March 2003. For the second straight month, the unemployment rate was 6.1 percent -- the highest level since September 2003.
Yesterday, the department said 497,000 people filed first- time applications for jobless benefits during the week ended Sept. 27, the highest level in seven years.
Thursday, October 2, 2008
How Government Stoked the Mania
Housing prices would never have risen so high without multiple Washington mistakes.
RUSSELL ROBERTS
Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.
![[How the Government Stoked the Mania]](http://s.wsj.net/public/resources/images/ED-AI320_ROBERT_DV_20081002164646.jpg)
David KleinPart of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.
Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.
For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area's median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10% down.
Fannie and Freddie also purchased hundreds of billions of subprime securities for their own portfolios to make money and to help satisfy HUD affordable housing goals. Fannie and Freddie were important contributors to the demand for subprime securities.
Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.
The Community Reinvestment Act (CRA) did the same thing with traditional banks. It encouraged banks to serve two masters -- their bottom line and the so-called common good. First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.
Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.
By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch.
Fannie and Freddie and the banks opposed these policy changes at first through both lobbying and intransigence. But when they found out that following these policies could be profitable -- which they were as long as rising housing prices kept default rates unusually low -- their complaints disappeared. Maybe they could serve two masters. They turned out to be wrong. And when Fannie and Freddie went into conservatorship, politicians found out that budgetary dollars were on the line after all.
While Fannie and Freddie and the CRA were pushing up the demand for relatively low-priced property, the Taxpayer Relief Act of 1997 increased the demand for higher valued property by expanding the availability and size of the capital-gains exclusion to $500,000 from $125,000. It also made it easier to exclude capital gains from rental property, further pushing up the demand for housing.
The Fed did its part, too. In 2003, the federal-funds rate hit 40-year lows of 1.25%. That pushed the rates on adjustable loans to historic lows as well, helping to fuel the housing boom.
The Taxpayer Relief Act of 1997 and low interest rates -- along with the regulatory push for more low-income homeowners -- dramatically increased the demand for housing. Between 1997 and 2005, the average price of a house in the U.S. more than doubled. It wasn't simply a speculative bubble. Much of the rise in housing prices was the result of public policies that increased the demand for housing. Without the surge in housing prices, the subprime market would have never taken off.
Fannie and Freddie played a significant role in the explosion of subprime mortgages and subprime mortgage-backed securities. Without Fannie and Freddie's implicit guarantee of government support (which turned out to be all too real), would the mortgage-backed securities market and the subprime part of it have expanded the way they did?
Perhaps. But before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?
Part of the answer is a political class greedy to push home-ownership rates to historic highs -- from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.
Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.
Mr. Roberts is a professor of economics at George Mason University and a scholar at the Mercatus Center. His latest book is a novel on how markets work, "The Price of Everything: A Parable of Possibility and Prosperity" (Princeton University Press, 2008).
The two US vice-presidential candidates have traded blows on the financial crisis, climate change and foreign policy in their only TV debate.
Democrat Joe Biden sought to link Republican presidential candidate John McCain to the policies of President Bush, saying he was "no maverick".
Republican Sarah Palin defended herself against claims of inexperience and said the McCain ticket would bring change.
Observers said she appeared more confident than in recent TV interviews.
The debate at Washington University in St Louis, Missouri, was seen as particularly crucial for Mrs Palin, whose ratings have fallen amid concerns about her ability to lead.
The BBC's Jane O'Brien in Washington says Mrs Palin played to her strengths and her image as a mother in touch with ordinary Americans.
For the most part she spoke fluently but simply about the economy, climate change and the war in Iraq, our correspondent says, and there were few of the stumbling gaffes that have become the staple of late-night comedy shows.
Practised lines
Asked by moderator Gwen Ifill who was at fault for the current problems with the US banking system, Mrs Palin blamed predatory lenders and "greed and corruption" on Wall Street.
She also urged Americans to exercise personal responsibility and not take on debt they could not afford.
| It would be a travesty if we were to quit now in Iraq Sarah Palin Republican vice-presidential nominee |
Mr McCain would "put partisanship aside" to help resolve the crisis, she said, and had raised the alarm over mortgage giants Fannie Mae and Freddie Mac long ago.
She said "Joe six-packs and hockey moms across the country" - referring to middle-class voters - needed to say "never again" to Wall Street chiefs.
She accused Democratic presidential candidate Barack Obama of seeking to raise taxes but Mr Biden rejected that claim.
He said the economic crisis was evidence that the policies of the past eight years had been "the worst we've ever had".
'Dead wrong'
On foreign policy, Mrs Palin accused Mr Obama of refusing to acknowledge that the "surge" strategy of extra troops had worked.
"It would be a travesty if we were to quit now in Iraq," she said, describing Mr Obama's plan to withdraw combat troops a "white flag of surrender".
Joe Biden attacks foreign policy claim
Mr Biden countered by saying Mr McCain had been "dead wrong" on Iraq and had yet to present a plan to end the conflict.
"You've got to have a time line to draw down the troops and shift responsibility to the Iraqis," he said.
He said the US was wasting $10bn a month in Iraq while ignoring the real front line in the fight against terrorism, Afghanistan.
The pair also sparred on the issue of climate change.
Mrs Palin, governor of energy-rich Alaska, said human activities were a factor in climate change but that climatic cycles were also an element. She urged US energy independence as part of the answer.
Mr Biden pointed to climate change as one of the major points on which the two campaigns differed, saying: "If you don't understand what the cause is, it's virtually impossible to come up with a solution."
He said he and Mr Obama backed "clean-coal" technology and accused Mr McCain of having voted against funding for alternative energy projects and seeing only one solution: "Drill, drill, drill."
Poll shift
According to a Pew Research Center poll, two-thirds of voters planned to follow the debate, far more than in 2004.
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A new poll by the Washington Post suggests that 60% of voters now see Mrs Palin as lacking the experience to be an effective president.
One-third say they are less likely to vote for the Senator McCain, as a result.
Independent voters, who are not affiliated to either political party, have the most sceptical views of the 44-year-old Alaska governor.
Another poll, for CBS News, gives Senator Barack Obama 49% to 40% for Mr McCain.
It is the latest in a series of opinion polls that have shown a significant shift in the direction of Mr Obama, the Democratic presidential candidate, since the economic crisis began.
Mrs Palin, whose fiery speech at last month's Republican convention inspired Christian conservatives, produces unusually strong feelings - both positive and negative - among voters.
Although Mrs Palin has succeeded in mobilising conservative Republicans, her key challenge is to appeal to the swing voters who could determine who will win the battleground states, analysts say.
In particular, she needs to win over the "Wal-Mart moms" - white, working-class married women.
A recent poll of customers of discount giant Wal-Mart suggested that Mr McCain was slightly ahead with this group in Ohio and Florida, while Mr Obama was leading in Virginia and Colorado.
Meanwhile, the McCain campaign is scaling back its operations in another swing state, Michigan, effectively conceding the advantage to Mr Obama there, the Associated Press reports.
The Tax Issue Still Resonates
KARL ROVE
Conventional wisdom says tax cuts have lost their political power. "Cutting taxes has run its course," "America's great fever for lower taxes . . . has cooled," and "Republicans relied too easily on tax cuts," are among the assertions I've seen recently from different pundits.
One reason offered for the alleged decline of tax cuts as a potent issue is that since 2000, tax cuts have taken 13 million filers off of the income tax rolls. Today, one-third of all filers have no federal income tax liability and nearly 40% of all federal income taxes are now paid by the top 1% of taxpayers (60% by the top 5%). The fewer people who are paying taxes, the fewer people who care about tax cuts, or so goes the reasoning.
But don't tell the presidential candidates tax cuts are unimportant. Mr. McCain promises to renew the '01 and '03 tax cuts and proposes new tax cuts for health care, education and business.
Mr. Obama says he's for "middle-class tax cuts." He has pledged to cut taxes in at least 16 speeches in the past month. Polls and focus groups have clearly convinced the Obama high command that advocating tax cuts is critical to victory.
Taxes still matter because they are highly visible and unpopular. In a July 2008 Pew Poll, 52% of Americans said it was "difficult to afford" taxes. By comparison, 46% said the same about health care, 49% about home heating/electric bills, and 38% about food.
And in times of economic challenge, concern about taxes rises -- especially among blue-collar households skeptical of promises that tax increases won't affect them. Voters understand that taxes are paid not by someone behind the tree, but ultimately by them. The share of GDP going to federal taxes this year is 17.9% -- close to the 18.3% average of the past 40 years.
About Karl Rove
Karl Rove served as Senior Advisor to President George W. Bush from 2000–2007 and Deputy Chief of Staff from 2004–2007. At the White House he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs and was Deputy Chief of Staff for Policy, coordinating the White House policy making process.
Before Karl became known as "The Architect" of President Bush's 2000 and 2004 campaigns, he was president of Karl Rove + Company, an Austin-based public affairs firm that worked for Republican candidates, nonpartisan causes, and nonprofit groups. His clients included over 75 Republican U.S. Senate, Congressional and gubernatorial candidates in 24 states, as well as the Moderate Party of Sweden.
Karl writes a weekly op-ed for The Wall Street Journal, is a Newsweek columnist and is now writing a book to be published by Simon & Schuster. Email the author at Karl@Rove.com or visit him on the web at Rove.com.
So while Mr. Obama says that only the top 5% will pay higher taxes under his proposals, many voters are skeptical. Nearly three out of every four filers who'll pay higher taxes under a President Obama are small businesses, the source of most new jobs and growth. An Urban Institute-Brookings Institution Tax Policy Center study found that 663,000 (73%) of the 912,000 filers hit by Mr. Obama's tax increases will report business income -- i.e., they are small business owners. His tax hikes will affect every worker at those enterprises.
While Mr. Obama claims his tax increases will pay for "tax cuts," much of his increases are actually earmarked for a massive new spending program that will send tax "rebate" checks to 45.6 million filers who have no income tax liability. These filers will get a check of up to $500 a person or $1,000 a couple even though they do not pay federal income taxes.
While Mr. McCain argues that tax increases would harm our fragile economy, there is another powerful argument he has yet to deploy. He needs to make a principled argument against tax increases by grabbing Mr. Obama's favorite tax term -- "fairness." Mr. McCain should argue that fairness dictates that there are reasonable limits on how much government can take from someone. Nearly all Americans agree. The Tax Foundation, for example, found last year that 91% of Americans thought the maximum anyone should pay in taxes was 30% or less of their income.
Mr. Obama wants to raise the top marginal rate by nearly a fifth to about 40%. With Medicare taxes and his proposed increases in Social Security taxes on the wealthy added in, this would result in over 50 cents out of every additional $1 earned in the top income brackets going to government. We are a nation that rejects class warfare, yet these powerful sentiments have yet to be tapped by Mr. McCain.
Most Americans hold an intuitive belief that one of the most effective ways to keep government in its appropriate place is to limit its access to our wallets. They have a well-grounded, experience-based suspicion that if government can take anything it wants from some (high-income) people, it can, and most likely will, take it from everyone else, too. They are unenthusiastic about massive new spending because they understand tax increases both feed government and whet its appetite for more.
The tax issue has lost its political punch in the eyes of some commentators, but not among voters. So the presidential candidates recognize this year's election could hinge on who better convinces Americans that he has the right plan to cut taxes.
Mr. Rove is a former senior adviser and deputy chief of staff to President George W. Bush.
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