The Bailout: Fed and Treasury Won't Give Up

The Emergency Economic Stabilization Act of 2008 failed in the House—225 to 228— on September 29. In an unprecedented and unconstitutional move, the bill was sent to the Senate, loaded up with pork and overwhelmingly passed—75 to 24— with no substantive change to the provisions that caused it to be rejected by the House.

So, we want to know, where’s the stimulation?

What the Bill won’t do:

1. Stimulate employment:
The plan has no direct affect on employment. Buying old bad debt from banks in exchange for brand-new, at-least-temporarily-good new debt does not decrease leverage, does not increase the money supply, and does not motivate banks to start lending. Really, who are they going to lend to in a rapidly deteriorating economy?

Further, it has little direct affect on employment other than on the Wall Streeters who will manage the pools of money.

It does not lighten the burden on Americans who are already in deep financial trouble; in fact, it increases the burden. The Treasury and Fed do not have an extra $700bn; they will have to borrow it. This bailout, the first tranche—not the whole thing, the first tranche— of which is $700bn, will be the largest tax increase in history.

2. Increase monies for mortgages:
Banks are not going to make mortgages on real estate that is rapidly decreasing in value, not should they. They are not going to give or refinance mortgages for people who do not have jobs. Anymore, that is. On the contrary, larger downpayments are being demanded and terms are tightening. There is even some anecdotal evidence of redlining, ironically in both low-priced areas and the highest-priced areas where real estate values are expected to erode fastest.

3. Increase, or even stabilize, sources of consumer debt:
Sources of consumer debt have been steadily drying up. HELOC lines are being frozen and cancelled, credit-card lines are being withdrawn, and other direct lines of credit, such as auto loans, are being cut off.

4. Free up other traditional sources of lending, like the bond market:
As an example, the front-page headline this morning in the LA Times: “The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch.

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500 million bond sale, Massachusetts had to pull the plug halfway into a $400 million offering, and Maine is considering canceling road projects that were to be funded with bonds.”

Municipalities have been coming to the bond market since the collapse of the ARS (Auction Rate Securities) market at the beginning of this year. Now that source of money has dried up.

The House is expected to vote on the revised plan today. As Drudge would say, developing . . .

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