Bailout Bill Historic Vote: An irony-induced coma

Word on the street is that the pols are about finished Christmas treeing the bailout bill. The House of Representatives prepares to cast its historic vote today.

Here at the Daily Reckoning...we stand back...aghast...agog...paralyzed by the whole spectacle... from the lunatic assumptions of the credit bubble...to the solemn farce now taking place in the US Congress.

Yes, dear reader, we are suffering from senselessness overload...the absurdities are coming too fast for us now; we can’t keep up. We fear we are going into a irony-induced coma.

Could any scriptwriter have come up with such a preposterous story? Could any director have found such a clownish caste of characters?

It was only a few months ago that all the leading men and women of this drama claimed to believe in free enterprise so fervently they were willing to spend hundreds of billions of dollars forcing it on others. It was free enterprise that separated us from the barbarians and made the country rich, they said. But now, they’re turning many of these free enterprises over to the bureaucrats to run...and desperately trying to make sure that the others don’t go broke. It’s capitalism without the creative destruction. Capitalism with seatbelts, helmets, and airbags. Capitalism without bankruptcy. It’s like taking the crucifixion out of Christianity. What’s left is as empty and foolish as a Congressman’s head.

And then, it was only a few months ago that they were telling us that there was nothing to worry about...the subprime problem was contained...property prices had hit bottom...everything was fine. Really.

Then, two weeks ago, Ben Bernanke and Hank Paulson appeared before Congress and warned that if Congress didn’t put up $700 billion of taxpayers’money pronto, the whole world economy could meltdown. Ben Bernanke, former head of the economics department at Princeton, and now head of the world’s biggest banking cartel – the Fed – told the politicians:

“If we don’t do this, we may not have an economy on Monday.”

Of course, this alarm turned out to be as silly as his previous assurances. Monday came. The economy still functioned. And Congress got to work – Christmas treeing the bailout bill.

A colleague sends this handy inventory of a few of the gaudy balls so far, (as they appear in the actual bill):

Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits.
Sec. 102. Extension of increased alternative minimum tax exemption amount.

Sec. 201. Deduction for State and local sales taxes.
Sec. 202. Deduction of qualified tuition and related expenses.
Sec. 203. Deduction for certain expenses of elementary and secondary school teachers.
Sec. 204. Additional standard deduction for real property taxes for nonitemizers.
Sec. 205. Tax-free distributions from individual retirement plans for charitable purposes.

Sec. 304. Extension of look-thru rule for related controlled foreign corporations.
Sec. 305. Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space.

Sec. 307. Basis adjustment to stock of S corporations making charitable contributions of property.
Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands.
Sec. 309. Extension of economic development credit for American Samoa.
Sec. 310. Extension of mine rescue team training credit.
Sec. 311. Extension of election to expense advanced mine safety equipment.
Sec. 312. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.

Sec. 314. Indian employment credit.
Sec. 315. Accelerated depreciation for business property on Indian reservations.
Sec. 316. Railroad track maintenance.
Sec. 317. Seven-year cost recovery period for motorsports racing track facility.
Sec. 318. Expensing of environmental remediation costs.
Sec. 319. Extension of work opportunity tax credit for Hurricane Katrina employees.
Sec. 320. Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone.
Sec. 321. Enhanced deduction for qualified computer contributions.
Sec. 322. Tax incentives for investment in the District of Columbia.
Sec. 323. Enhanced charitable deductions for contributions of food inventory.
Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory.
Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.

Sec. 401. Permanent authority for undercover operations. (as related to tax provisions)
Sec. 402. Permanent authority for disclosure of information relating to terrorist activities. (as related to tax provisions)

Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit.
Sec. 502. Provisions related to film and television productions.
Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children.
Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation.
Sec. 505. Certain farming business machinery and equipment treated as 5-year property.
Sec. 506. Modification of penalty on understatement of taxpayer’s liability by tax return preparer.
Subtitle B—Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008

Sec. 601. Secure rural schools and community self-determination program.
Sec. 602. Transfer to abandoned mine reclamation fund.

Sec. 702. Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding.
Sec. 704. Temporary tax-exempt bond financing and low-income housing tax relief for areas.
Sec. 709. Waiver of certain mortgage revenue bond requirements following federally declared disasters.
Sec. 710. Special depreciation allowance for qualified disaster property.
Sec. 711. Increased expensing for qualified disaster assistance property.

Bernanke and company didn’t want to wait for the lighting ceremony and the back patting. Nowhere in the US Constitution does it give the Fed the power to put each and every taxpayer on the line for about $2,000. But who cares about that? The Fed, on its own initiative, began passing out the cash. $49 billion on last Wednesday alone went to the banks. That same day, the Fed lent $146 billion to investment firms. By the time people went home for the weekend, $410 billion had passed from the Fed to private firms. The money was lent, says the Bloomberg report, at about 2.25% interest. By our calculation, that’s about half the rate of inflation...and precisely 1.4% less than the government’s cost of money, based on 10 year T-note yields.

Two weeks ago, Bernanke was asked by Barney Frank how much money he had available for this kind of rescue operation. He said he had $800 billion. Last week, he was lending it out at an average daily rate of $44 billion. Let’s see, at that rate, the Fed is probably about 5 days from going broke itself.

This should be interesting...when the Fed needs a bailout!
More news:

And more thoughts...

*** “I can’t believe what is going on...it’s unbelievable,” said a companion last night. We had a group of Americans for dinner. “I never thought I see the day...”

We thought he was referring to the disappearance of investment banking....or to the bear market on Wall Street. Yesterday, the Dow lost a further 348 points, as investors awaited a bailout. Oil dropped $4.56. The euro slipped down to $1.38. And gold fell like a corpse – down $46.

De...de....de...de...flation. Unemployment is rising. House sellers are getting ‘desperate,’ says the Seattle Times, because buyers are stalling. Car dealers are closing down their lots.

“Well, that’s what you get at the end of a credit expansion....” we replied.

“No...I’m talking about politics. Have you seen that woman Palin? I liked her at first. At least she was refreshing. But they have to coach her on every question. She’d be out of her depth in a bathtub. It’s pathetic...

“And do you know that the odds that she would have to take over from McCain at his age are 1 in 4? What was he thinking? Imagine her at the head of the world’s biggest economy...and biggest military? It’s scary...what are they thinking?”

We gave our theory: that people come to think what they must think when they must think it. For example, there was a time when the United States really was a nation governed by laws. The steady rule of law helped it grow into the world largest superpower. But now, it’s got more debtors than creditors...and more people beholden to the government than free men. Now, people just want a quick fix; the law be damned. Another colleague sent this note:

“I'm sure you've all had a chance to go through the bill the Senate passed last night 74-25. You can find it at the link below:

http://banking.senate.gov/public/_files/latestversionAYO08C32_xml.pdf

Of course a spending Bill cannot originate in the Senate because as we know, Article 1, Section Seven of that useless piece of paper (the Constitution) says: " All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills."

So the Senate lobotomized a Bill already passed by the House, which included, among other ridiculous spending provisions, Section 503 ( EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.)

According to Bloomberg: "Senators attached a provision repealing a 39-cent excise tax on wooden arrows designed for children to an historic $700 billion bank rescue that is likely to pass tonight. The provision, originally proposed by Oregon senators Ron Wyden and Gordon Smith, will save manufacturers such as Rose City Archery in Myrtle Point, Oregon, about $200,000 a year."

***

Ghosts of the Great Depression

By Bill Bonner

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system...values will be adjusted, and enterprising people will pick up the wrecks from less competent people …”

That is the advice from a ghost – US Treasury Secretary Andrew Mellon. But this is 2008, not 1928...the climate has changed. This week began with heavy weather – and then got worse. Over on the continent Fortis was going under. And in British waters, the government had a rescue helicopter hovering over Bradford and Bingley. The Baltic Freight Index ran aground on the coast of Brazil, after the Chinese refused to kowtow to Vale’s new price demands for its iron ore. Shipping costs went down by 25% last week – 10% on Friday alone. Apparently, the Chinese turned off their heavy factories before the Olympics; now, they can’t seem to find the switch to get them going again. Then, by Friday, the railroads were in crash mode too. Housing prices are falling faster than ever in the US. In Britain, the average house is falling by 93 pounds per day; the average wage is only 65 pounds per day.

We do not usually give advice to governments. To be fully transparent about it, none has ever asked. It is enough to try to advise Daily Reckoning readers. If we were to save the entire world’s financial system, at least we would want something in exchange...say, a signed photo of our president with a thank you note. Still, in the spirit of public service we undertake to unclog the following drain:

Taking into account even the most “severe assumptions” on default rates, Barron’s columnist Jonathan Laing calculated that Paulson’s bailout plan would have given the feds positive carry [the difference between the cost of borrowing money and what you earn from it] of at least 7% or 8%. He figured that the government would have ended up with a $75 billion profit in two years. But even with the hope of profit before it, the House of Representatives rejected the plan...and then, the hurricane winds blew even harder. The world’s stock markets had their worse day ever. The choice is clear, warned a flange of kibitzers, either a bailout bill or a Great Depression. Most likely, today, Congress will vote for the former and get something close to the latter.

By Wednesday, scores of commentators had been to the cemetery. Most were channeling Franklin Roosevelt. He “understood that his first job was to restore confidence,” wrote David Brooks in the New York Times. Over in the Financial Times, Martin Wolf even quotes Roosevelt’s puerile remark that “the only thing we have to fear is fear itself”. What about 25% unemployment, one is tempted to ask?

“[W]e might have done nothing. That would have been utter ruin. Instead we met the situation with proposals...of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.... Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom... We determined that we would not follow the advice of the bitter-end liquidationists...”

That quotation comes neither from Paulson nor Bernankes, but from another ghost. Herbert Hoover has gotten the reputation for being a “do nothing” president. Would it were so. When the Herbert Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression. You see, ghosts are often morons too.

Poor Andrew Mellon was shouldered aside in the early ‘30s. Then, Hoover got to work. His first improvement is known to us by two knuckleheads who turned it into law – Misters Smoot and Hawley. The idea was to protect US business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers and other notables realized that blocking trade at the onset of an economic slump would be suicide. They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.

He called on the Fed to provide “an ample supply of credit at low rates of interest,” and initiated a program of public works – including the Hoover Dam, a massive lump of concrete that blocks the Colorado river. He threatened federal regulation of the New York Stock Exchange and attacked short selling.

Hoover’s chief concern seems to be to hold up the price of labor. He cut off immigration, in an effort to keep out wage competition. Then, he got the business community to pledge that it would not reduce wages. Since the cost of labor was then too high for the closely shaved profit margins, businesses could not hire. Unemployment rose.

Roosevelt was a better politician, which is to say – he was more shameless. He attacked Hoover for spending too much money – won the presidency -- and then spent more. He began so many agencies and projects – from the AAA (Agriculture adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act) -- he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries.

What was the result of all these good intentions? Instead of a panic and quick recovery – a la 1921 – the US economy went into a long, hard on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the ‘50s had it not been for the biggest public works program of all time came along – WWII.

And now the ghosts of the Great Depression haunt the Capitol, while today’s Smoots and Hawleys vote on a new plan. They’ve pledged a new bailout program by the end of the week. When last we looked world markets were turning up their faces, hopefully...like a girl expecting a kiss. What they’re more likely to get is a good fright.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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