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$700 Billion Bailout Signed Into Law
Many readers reminded us of what no-one can have failed to hear: that the Congress passed and the President signed a $700B bailout bill in an attempt to avert the meltdown of the US economy. The bill allocates $700 billion to the Treasury Department for the purchase of so-called "toxic assets" that have been weighing down Wall Street balance sheets. This isn't particularly a tech story, though tech will be affected as will virtually all parts of the economy, and not just in the US. Among the $110B in so-called pork added to the bill to sway reluctant legislators are extensions of popular tax benefits for business R&D and alternative energy, relief for the growing pool of people subject to the alternative minimum tax, and a provision raising the FDIC's ceiling of guaranteed deposits to $250,000. Some limits were also imposed on executive compensation, though it's unclear whether they will be effective.
Why is it that really bad legislation always seems to pass on a Friday?
Go green: turn off your refrigerator.
Henry Paulson, the CEO of Goldman Sachs until 2006 and current U.S. Treasury Secretary succeeded in scaring the public and Congress into giving him a $700B blank check to bail out his friends. If you think that money will "trickle down" to you or small business owners, or anyone other than the people it's directly going to, you are mistaken.
...and our Congresspeople fell for it.
The DOW plummeted to 10,365 on Monday September 29th when the bailout bill failed to pass. Every proponent of the bailout screamed, "I told you so!" Then on Tuesday September 30th, even without the bailout bill the DOW rocketed up to 10,850. Then on Friday October 3rd when the bailout bill passed and was signed into law, the DOW dropped yet again to 10,325 (even lower than Monday when the bailout bill failed).
This bill will not help the credit markets, the debt markets, the equity markets or anyone reading this comment. It will help Goldman Sachs, Morgan Stanley and the rest of the former investment banks de-leverage from 60:1 leverage down to traditional 12:1 leverage on your dime while the economy goes down the tubes.
They pulled out all the steps - even threatening martial law:
http://www.youtube.com/watch?v=HaG9d_4zij8
I'm a big tall mofo.
I seem to remember reading the BBC and noting that countries overseas wanted this bill as much as some in the US.
Shai Schticks:"You don't make peace with friends, you make peace with enemies"
First, let's understand what caused this crisis. Then you'll understand why the bailout won't work.
Economist: Why Bankruptcy is better than bailout
The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities ( written EIGHT YEARS before this crisis, predicting everything down to the dollar amount)
Now, check out the $150 Billion in pork-barrel projects that were added by the Senate to the original 100-page bailout that failed in the House, turning it into a 450-page bailout:
- "Wooden arrows designed for use by children" (Sec 503)
- Wool Research (Sec. 325)
- Film and Television Productions (Sec. 502)
- Litigants in the 1989 Exxon-Valdez oil spill (Sec. 504)
- Virgin Island and Puerto Rican Rum (Section 308)
- American Samoa (Sec. 309)
- Mine Rescue Teams (Sec. 310)
- Mine Safety Equipment (Sec. 311)
- Domestic Production Activities in Puerto Rico (Sec. 312)
- Indian Tribes (Sec. 314, 315)
- Railroads (Sec. 316)
- Auto Racing Tracks (317)
- District of Columbia (Sec. 322)
This is the bill that senators are screaming about, saying "IT MUST BE PASSED OR DOOMSDAY!" Who believes them? And yet the bill easily breezed through Congress.
Scumbags managed to lose lots of their money, now they can rejoice for they now can lose your money. If you are an american taxpayer, your participation means that you are down roughly $5k.
In theory there is no difference between theory and practice. In practice there is. - Yogi Berra
I have had the chance to speak with other business owners and some executives of, let's just say, large, corporations. The general feeling is that while action was necessary there was a much better approach:
- ~500 billion USD given to the Fed
- Allow the Fed to disperse the money through the discount window with loans at 1% fixed for 18 months then reset to Prime-0.5%
- All mortgages that are currently in MBS tranches have their rates reset to Prime+1 for 24 months.
- Have the US AG seek felony charges for lenders that committed fraud.
The current bill is like trying to get fuel into a car through the tailpipe instead of filling up the gas tank.
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Yep
I read it too.
If you're in banking, you must have noticed the fact that the increased cap of FDIC insurance from $100k to $250k will only apply until December of 2009, after which it reverts back to the limit of $100k per named account holder per financial institution.
How many people might get suckered into longer term CD's (Certificates of Deposits, not the ISO-9660 type) that might go over the boundary of the TEMPORARILY raised FDIC insurance caps and end up either inadequately covered or stuck with early-withdrawal fees?
Either way, NONE of the articles I have read make any statement about the fact that the so-called increase in the FDIC insurance from $100-thousand to $250-thousand is only going to last the length of calendar year 2009. That's a sham and a disgrace.
Kris
It's starting to look more and more like all those ideals were just a relatively short-lived fluke as we barter away our true freedoms for freedom from responsibility.
Both the bill that was shot down and the bill that passed were disapproved by the majority of the citizenry. The People had no say so in the matter, the whole thing was rammed twice through the House in three days. If the House had shot it down again, the fucking bill with ever increasing pork and tax breaks would probably have been rammed three, four, five times in the course of the next week.
Why did the bill return to the House just after being rejected? And considering that the Fed quietly pumped around $600 billion into the casino known as Wall Street on Tuesday, even as the House was voting "nay" on the bill, are there any doubts that The People have absolutely no say so in the matter?
Lil' Thindime, lilting a lacrimose lament, krashes the kwaint konfines of Kokonino Kounty
The problem with this is it drives up interest rates. A bunch. If I'm losing 12% a year due to inflation, and I want 3% interest for my risk and profit, I will not loan out money for less than 15%, as it's a losing proposition.
We are in defect spending right now, and cutting services is political suicide. Here's the options:
1) Continue deficit spending. Eventually, that compound interest catches up, and we default. At that point, the US can't get debt as easily, and spending is cut to meet income. What a novel concept.
2) Inflation. Do it too much, and it gets too expensive for us to borrow. If we can't borrow, we're in the same boat as #1. This is effectively a tax on people with money.
3) Cut spending. This is a good thing. Running a house with a vicious cycle of debt never works. Why would it work for a government?
4) Taxes. Lots and lots of taxes. This leads to tax evasion, businesses (and people) leaving the country, etc. Excessive taxation is horrible for business, and places an unnecessary burden on small businesses and the poor (no matter how "progressive" it is.)
Sadly, it looks like #4 is the way we're largely going to go. With all the liabilities we have, we're in for some real pain in the not-so-distant future. This will not work as they think, either.
Here's a quick example:
I run a software company. We are a US corporation, hiring US workers, with US taxes. All of our sales are done in-person, or over the internet. Corporate income tax can be avoided to a large extent through business expenses, leading to an effective tax rate not too much more than the income tax. Company pays employees, employees pay taxes, done. It works out to something like 40%, all said and done.
Now, suppose the tax climate gets really nasty. A company like mine doesn't have to be located in the United States - most of our customers aren't anyway.
So, it is possible to:
1) Set up shop in Panama (who doesn't tax corporations on income derived outside the country).
2) Move to another country (for example, Japan). Japan doesn't tax foreign-derived income for people who aren't "permanent residents". The US exempts the first $80,000. So, the first $80,000 are tax-free.
3) If you can live off $80,000 for a while, you can get paid in options. Provided you meet the criteria, this can end up capital gains. So, your taxes on this ends up at 15%.
So, for a hypothetical person making $150,000 - the taxes would be approx $10,500, or a 7% tax rate.
Large companies can do similar things, like "license" a bunch of technology from a company they own, located in a jurisdiction that doesn't tax them (like Ireland). This lets them reduce their taxable income and funnel the profits to something taxed at a much lower rate. Invest in Irish corp, license _from_ Irish corp, pay 15% taxes.
Yes, closing the capital gains "loophole" would even things out a bit; however, it has a lot of collateral damage; including people renouncing citizenship, reduced investment, etc. Given the credit crunch we're having, it really doesn't make a lot of sense.
You realize, of course, that you've left a lot out?
You realize, of course, that the CRA did not force banks to make loans to individuals who couldn't afford them? What it did do was say that you could not refuse credit based on location or area (redlining) and instead had to base your loan evaluation on the INDIVIDUAL, and upon the individual's ability to pay. (Try reading the bill and not the Wiki.)
You realize, of course, that the vast majority of the subprime loans that are going belly-up were made by financial institutions like CountryWide... which are not banks, and as such, WERE NOT COVERED BY THE CRA IN THE FIRST PLACE.
You realize, of course, that in early 2005, the Office of Thrift Supervision (under GW Bush) implemented new rules that substantially weakened the CRA, and as such, its impact on credit markets?
You realize, of course, that a good portion of our current crisis is caused by the Gramm-Leach-Bliley Act, introduced by Senator Phil Gramm (R-TX), which in 1999 repealed part of the Glass-Steagall Act, opening up "competition" among banks, securities companies and insurance companies. Which in turn lead to our current set of mega-institutions that are so large and intertwined they can't be allowed to fail?
The same Phil Gramm, BTW, that was John McCain's presidential campaign co-chair and his most senior economic adviser. The same Gramm that in July explained the nation was not in a recession, stating, "We have sort of become a nation of whiners."
I could continue, but suffice to say that there's a lot of information that your oh-so-insightful post left out.
Do you work for the Republican campaign? I only ask because such blatant cherry-picking of the facts to suit your own position is a party trademark.
Any sect, cult, or religion will legislate its creed into law if it acquires the political power to do so.
Reposted: originally by Greyfox:
Early on in this administration they changed the bankruptcy rules to make it harder to declare bankruptcy, stating that individual Americans need to be more responsible with their borrowing. At the same time they've driven this country into historic levels of debt and are now debating a bail out package for their friends on wall street with $700+ billion of taxpayer dollars. Time and again they vote to support their friends in big business, but if you're an individual facing possible homelessness they'll treat you to some weasel words and turn their back on you.
This November we should all vote with one voice, Democrat and Republican, against the current corrupt congress. We should vote across the board, not Democrat or Republican but against anyone sitting in office. We should kick every single one of those bastards out, and we should keep kicking them out after just one term until they once more represent the people and not the businesses that contribute millions of dollars a year to their campaign funds. We should keep kicking them out until they spend more time doing the jobs we elected them to do instead of gallivanting around and campaigning for most of their terms. We should keep kicking them out until we find some people who actually take the responsibility to fix the major problems in thus country.
It is time to put aside our petty differences and root out this corruption that infects our very core, before it destroys this country.
I know at least 20 people including myself that are planning to do just this. I wonder how many others are going to vote against the incumbent?
There is a war going on for your mind.