The No Bailouts Act

Congressman Peter DeFazio from Oregon has sent a letter to colleagues offering an alternative to the current $700 billion bailout.  It is worth a look.

DeFazio Introduces the No BAILOUTS Act | Print |

The following is a Dear Colleague sent by Representative DeFazio introducing his No BAILOUTS Act, which would Address the current financial crisis without putting the American taxpayer on the hook for billions of dollars.


Dear Democratic Colleague:


 The House of Representatives rejected the $700 bailout yesterday. Distinguished economists across the world have stated it would not have solved the problem at hand. However, we can potentially solve this liquidity problem at little cost to the taxpayer.  I am proposing that Congress drop the Paulson Plan, and instead pass the No BAILOUTS Act.  The No BAILOUTS Act provides an alternative to the Paulson Proposal to address the current credit crunch.  Once Congress addresses the liquidity shortfalls in our financial markets, a Democratic Congress can turn to Democratic solutions to address the broader economic crises we face today.  Specifically, Congress can work to resolve the housing crisis across the country and pass effective job stimulus, which is the response Main Street America expects and deserves.      

While Democrats and Republicans may disagree on the underlying solutions to solve the economic crises we face, the No BAILOUTS Act – a regulatory based proposal – has the potential for significant bipartisan support. 

 The Paulson Premise Flawed

Simon Johnson, a former chief economist as the International Monetary Fund, stated today in the New York Times of Paulson’s plan, “It’s our view that this package, in a fundamental sense, will not solve the problem.”  Other economic analysts noted yesterday that the credit markets around the world were almost entirely dysfunctional even when political leaders and investors assumed that Congress had reached a deal and would easily approve the bailout.  There is no reason to believe Paulson’s plan will work.



We have credible alternatives to the Paulson/Bush $700 billion gamble.  William Isaac, the chairman of the FDIC during the previous worst financial crisis in the United States during the 1980s, believes Congress can address the current crisis with simple changes to Securities and Exchange Commission (SEC) rules.  Mr. Isaac points out that while we face serious financial challenges today, many banks are still in good shape.  This allows Congress to take swift, uncomplicated steps to ensure the financial markets return to working order. After that, we can work to resolve the housing crisis and pass effective job stimulus.

 Today I am offering an alternative to the Wall Street bailout that will correct the capital shortfalls experienced by many financial institutions and help protect the integrity and quality of the securities market.  My plan could be implemented promptly meeting the demands of the Bush Administration to act immediately without putting the American taxpayer on the hook for billions of dollars.

     No BAILOUTS Act

Bringing Accounting, Increased Liquidity, Oversight and Upholding Taxpayer Security 

1)      Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.

 This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.

 2)      Require the Securities and Exchange Commission to restricting naked short sells permanently

 This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.

 3)      Require the Securities and Exchange Commission to restore the up-tick rule permanently.

 This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market.  On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies “to protect the integrity and quality of the securities market and strengthen investor confidence.” This rule prevents market crashes brought on by irrational short term market behavior.

 4)      “Net Worth Certificate Program”

 This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future.  For those entities that qualify, the FDIC should purchase net worth certificates in these institutions.  In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount “borrowed” as capital on their balance sheets.  This exchange provides short term capital, with not cash outlay.  Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.

 Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management.  Financial records and business plans should be subject to scrutiny while participating in the program.

 In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance.  From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.

 5)      Increase the FDIC Insurance limit from $100,000 to $250,000.

 The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.




Peter DeFazio

Member of Congress

Crisis Strategy: Getting it Right the first time

(Cross-posted at The Confluence)

There are very little details out in the public concerning the supposedly ironed-out terms that will solve the current financial crisis.   Almost every one is worried that the terms of the rescue will involve taxpayers bailing out Wall Street High Rollers and their bonus-loving CEOs.  If you review Financial Economics literature, you will discover that there are several findings in the studies done by economists that can provide guidance to every one on the best way to approach the bail-out.  One of the most recent studies comes from the International Money Fund.  It is by Luc Laeven and Fabian Valencia and was posted this month at the IMF research website.

If you’re not familiar with regression analysis which is the analytical method of choice here, stay away from the last half of this paper.  However, you may find some interesting things in the first section because it includes a huge database that looks at all systematically important financial crises between 1970 and 2007.  This means the database has 42 crises in 37 countries. It looks at steps taken by government to solve these crises and the length and depth of the crisis.

Here’s the link:

Another good source of information for suggestions is the Brit Magazine The Economist.  Many of its articles are also available on line and are not technical in nature.

If you’re not up to looking at the details, let me try to explain some of the things that Financial Economists have learned since the Great Depression.  You should look for some of these dos and don’ts when we finally get to see the details of the plan. Sixty years of study and growing theories has shown us that the tactical approaches–which mostly involve containing the crisis–are very expensive and don’t work too well.  Usually, containment approaches happen while the crisis is unfolding.  As an example of this, I will point to the bail-outs of individual banks and financial institutions that have happened to date.  We’ve seen this containment tactic most of this year.

Governments can respond to these kinds of crises in many ways.  In a lot of cases, we see reallocation of wealth from taxpayers to Banks and other institutions that hold debt. When wealth transfers like this happen, many problems happen in the general economy.  The existing research done in this area shows that providing assistance to banks and their borrowers can actually increase loan losses to banks and in many cases lead to laxes in regulation that can be abused. Study-after-study shows that individual bank bail-out is usually not a good approach.  Other costly and not that efficient tactical steps can include accomodative policies like direct government guarantees of bank liabilities or injecting ‘liquidity’ into the bank itself by lending money to the bank.  The literature shows that none of these steps necessarily lead to a speedier recovery.

So what strategies can our country adopt to staunch the current crisis?  Proposals vary, but a good example of something that worked would be the comprehensive plan we had back under the first Bush administration during the S&L meltdown.  The RTC (Resolution Trust Corporation) was set up in 1989 to deal with the many, many S&L bankruptcies.  The purpose of the RTC was to dispose of failed S&L assets in a way that didn’t drive prices on the properties and assets down.  It put a bottom price on things like farm land or houses that were the underlying assets held by the thrifts.  In the case of situation now, a new ‘agency’ would buy troubled mortgage-backed securities from the market and hold them until there was a turn around in their value.

This new agency could also serve another purpose similar to a depression-era institution called the Home Owner’s Loan Corporation.  Hillary has suggested this type of agency whose purpose would be to buy and restructure existing mortgages.  This would basically keep many folks in their homes with mortgages they could handle.  For this to work, it has to be geared towards folks that can actually follow-through and make their payments.  It could not be a social largess program because that would only create more loan losses in the long run.  It’s purpose would be to keep folks in their homes as well as put faith back into house prices and the mortgage market.  It would also alleviate the downward pressure on home prices.  A new agency would be allowed to hold the loans and troubled securities until the market function agains and the assets once again become valuable.  Many of the assets in some of these securities are fine now and could just be repackaged.  The profits need to be returned to the taxpayer and used to pay down the debt.  We should ensure that the proceeds do not go to any politician’s pet project.

At the same time, we need to look for better oversight of derivatives markets.  The big issue that can be layed squarely at the feet of the Bush Administration and Greenspan is their inability to see the need for regulation of these markets.  The existance of this market (which serves a similiar function to insurance) injected more ‘moral hazard’ into the banking community.  This means if you think you’ve got something insured, you’re more likely to act haphazardly.  We already had banks being encouraged to loosen their underwriting standards for certain borrowers by Fannie and Freddie.  With the invention of these innovations, banks were covered, or so they thought, even if they did practice lax lending standards.  These derivatives were an attempt to manage credit risk.  However, as we have seen, actually placing accurate vales on this contracts just created more uncertainty.  The implied consent and guarantee of the government via Fannie and Freddie exacerbated the misvaluation in a market with no oversight.  We need to re-visit the regulatory responsibilities of the SEC and the FED and update them so that they reflect the existence of these extremely sophisticated and difficult to understand markets.  Also, something has to be done about Fannie and Freddie and how their role to feed loans to creditworthy middle class Americans warped into some social engineering plan that began the lax lending standards and provided opportunities for exploitation.

So, do we need a bail-out?  Yes.  Unfortunately, financial contagions do act as a disease and can create economic downturns that impact everyone.  All you have to do is crack a book on the Great Depression to see how problems in banks and stock markets eventually transfer over to Main Street.  What is needed is the least expensive and most prudent approach.  The literature tells us that it must be systematic and not just tactical.  You need to strengthen the market, not just select players.  I’ve outlined a few things that financial economists have learned about past crises.  I’d hope we get the details out pretty soon so you can look and see if the bailout is consistent with these principles.

Back to the Roots of the Problem (cross-posted at The Confluence)

I feel a strong need to remind people at this time of the roots of this financial crisis. They are not found beneath Wall Street, but in Washington, D.C. with Freddie Mac and Fannie Mae and the senators and congressman that empowered them.  

The beginning of this crisis was the subprime mortgage market and the loose underwriting standards encouraged by FNMA and FHMLC on mortgage loans.  Fannie (FNMA) and Freddie (FHLMC) are involved with about half of the mortgage loan originations in that market.  Loose standards were set up to expand home ownership to folks who couldn’t pay home loans back and to improve the odds of high compensation for its CEOs.  Before any bail-out, rescue, or whatever you want to call it,  regulation has to be put in place to STOP this from happening again.  It’s really a nice social goal to increase the level of minority ownership in the country and to move the poor into homes of their own, but you can’t force it by giving folks loans they are not prepared to handle.  The House and Senate Democrats, and specifically the Black Caucus, are squarely behind this problem.  It is folks like Chris Dodd and Barack Obama–folks expected to clean up this mess–that were the beneficiaries of Fannie and Freddie largess that created very poor public policy and lack of regulation that led to this problem.

Wall Street did buy up these loans up after they were “packaged” into securities by Freddie and Fannie.  Freddie and Fannie bonds have been assumed to be nearly as safe as Treasury bonds so no one figured there were these toxic loans stuck into the mix.  Banks are also allowed to invest in Fannie and Freddie bonds.  They can’t invest in really risky assets like equities.  Who would have thought that Fannie and Freddie would be so poorly run that what they were investing in, what they were originating and selling to Fannie and Freddie, and what was being put together by Fannie and Freddie, would be so risky as to send their capital into regulator  panicking levels?   Ask Jim Johnson.  Ask Franklin Reines.  Ask Barack Obama and the Black Caucus.  They felt prudent underwriting was basically discriminatory and worked hard to change banks into speculators.

Here’s some examples:

Credit History: Lack of credit history should not be seen as a negative factor…. In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. For lower–income applicants in particular, unforeseen expenses can have a disproportionate effect on an otherwise positive credit record. In these instances, paying off past bad debts or establishing a regular repayment schedule with creditors may demonstrate a willingness and ability to resolve debts….

If you’d like to know more about the loosening of standards,  here’s a really good study to check out:

Recently, there were an entirely inexcusable number of underwriting lapses allowed and in fact, encouraged  by Fannie and Freddie (including spurious sources of income and no down payments) that increased the demand for housing by allowing people that should not have been in the housing market, into the housing market.  This drove up prices and led to the bubble and increasing speculation.  Once it became apparent, that there was increasing risk popping up in mortgages,  the financial innovations of derivatives (Wall Street enters now) popped up to help banks manage the risk and pass them on to folk supposedly more able handle the risk.  These things were supposed to act as insurance and were valued based on the idea that traditional Fannie and Freddie were very risk-free and there was implied government oversight, regulation, and back-up.

It is no wonder that the FBI is now looking at Fannie and Freddie.  It should also look at the democratic appointees and the senators and congressman that enabled them.  When credible economist like Greg Mankiw came to the senate and congressional committees to warn of this problem in 2003, folks like Barney Frank yelled at him for worrying more about safety and soundness rather than housing for the little guy.  The Wall Street Journal was all over this back then.

This is the same Barney Frank that is bloviating and stomping his foot about the inability of House Republicans to get with his program.  Well, Congressman, it was your program that put us in this position to begin with so why would we trust you now?

House and Senate Democrats also had a chance in 2005 to increase oversight and regulation of Fannie and Freddie.  John McCain was a co-sponsor of this bill called Federal Housing Enterprise Regulatory Reform Act of 2005.  At the time McMcain made this comment that seems almost psychic now.

“If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”

You know how Senator Obama is going around saying the Bush administration is the one that hates regulation and led to this?  As a professional economist and Puma, may I just say this: liar, liar pants on fire!

 WASHINGTON – Treasury Secretary John Snow urged Congress to restrain Fannie Mae and Freddie Mac, giving the Bush administration’s blessing to efforts to create a new regulator with broad power over the huge mortgage companies.

If you read the article, you’ll see that Allan Greenspan was also in front of congress and the senate begging for more oversight.

More from that article:

“The statements by Greenspan and Snow lent support to a new effort by Republican lawmakers to tighten controls on Fannie Mae and Freddie Mac, which hold or guarantee more than 45 percent of all mortgage loans in the country. Legislation recently proposed would set up a regulatory agency with the power to compel the companies to sell off any assets deemed not to be in line with their mission of making homeownership more widely available.

Notice the guarantee point.  Wall Street and Banks rely on these instruments to be low risk basically because of that guarantee.  This includes AIG and all the investment banks that just crashed.  They undervalued the risk on these instruments because of the implicit guarantee.

My point here?  Congressional republicans (who I usually find a source of great evil) are NOT the bad guys here for once.  They tried but were told they were racist and that they hated poor people if they didn’t go along with the plan of extending house loans to people that basically could not afford them.  Most of the blame for this financial crisis belongs squarely in Washington and the Democrats are relying on our extremely short memories.  Since all of this comes under my teaching and research responsibilities, I cannot have a short memory. The MSM should start asking Biden, Obama, Frank, and Dodd some very tough questions.  First Questions?  Why didn’t you support regulating Fannie and Freddie back before all of this snowballed into a financial crisis?  Why are you now saying that you always supported more oversight and regulation and Republicans and the Bush Administration did not when the record clearly shows it was the opposite?

I’d like to suggest one of the first CEOs to turn back his salary and face the FBI is Franklin Raines.

He turned Fannie Mae into a mortgage factory to get higher bonuses and was investigated for cooking the books.  He is undoubtedly one of the folks that has interested the FBI.  Another person is Jim Johnson. (You’ll recognize these names because they are both Obama friends and advisors).

In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report  on September 20, 2004, alleging widespread accounting errors, including shifting of losses so Raines and others could earn bonuses.

In June 2008, the Wall Street Journal reported that two former CEOs of Fannie Mae, James A. Johnson (1991-1998) and Franklin Raines (1999-2004) had received loans below market rate from Countrywide Financial. Fannie Mae was the biggest buyer of Countrywide’s mortgages.  Don’t forget the three biggest recipient of FNMA money are Dodd, Kerry, and Obama. Dodd also appears to have a sweetheart mortgage deal.  The Democrats are not the white knights in this mess.  They would probably like to get this deal through as quickly as possible so voters do not find out that the bailout is not just a Wall Street Mess.  It is a K Street and Washington-created mess.  There is plenty of blame and greed to go around.

The very same people that created this mess are the ones writing the terms of the bail-out.  Be afraid!  Be very afraid!  I never put a steak on the kitchen counter and leave the dog alone in the room with it.  I would not leave the U.S. economy in the hands of these folks who are deciding the fineprint in a room with closed doors either.

Here we go again …

It’s true.  On issue after issue, I pretty  much disagree with Sarah Palin.  I see nothing positive about hunting or fishing unless you have no other way to eat.  I see killing things for fun as a completely immoral action.  I do not consider a gestating protohuman to be ‘ensouled’ and the same as a walking talking human being or even a walking, eating moose.  I’d rather see Nebraska, Kansas, and North Dakota be turned into fan farms than drill in ANWAR.  I’d also rather see Arizona turned into a one big solar panel that do any more drilling off the Florida coast.  I think the death penalty is something right out of the dark ages and has no place in a civilized country.  I don’t care if gay people marry, they have every right to be as miserable and trapped in dead end relationships as straight folks.  I’m definitely a libertarian on the civil rights issues.  My position on anything like this–even those multiple wife holding Mormon men– is it’s not my business and it’s certainly not the government’s business. If you’re not hurting some one and it applies to a person capable of giving reasoned consent (exceptions for minors and the disabled), it shouldn’t be the subject of a law. I don’t even care if folks smoke marijuana or use heroin as long as they stay put where they are and don’t try to drive a car.  I am pro-science and I think Christianity was invented by the Romans to control slaves.  I think folks that believe in it are victim to the biggest on-going sham in history. That pretty much puts me very much at odds with about everything Sarah believes in.  But you know what?  She has a right to say it, believe in it, and run for vice president without being called every nasty, misogynistic, stereotypical, hateful thing you can call a woman.  Senator Obama delivers lectures to us on racism and his campaign accuses every one of using subtle racist code words.  However, he and the rest of his democratic cronies are more than happy to use not so subtle code words or ads against women and the elderly.    Today’s example from the NY Times Op-Ed page.

I have to hand it to Palin, she may be onto something in her batty way: the election is very much about American exceptionalism.

Roger Cohen in Today’s New York Times

When I read “batty”, all I can think of his Archie Bunker calling Edith a ‘dingbat’. It’s the ultimate insult to any woman’s intellgence.

While I’m at it, I’d like to say that any of my gay and lesbian friends and their related activist groups need to start looking (without stars in their eyes) at a candidate that will announce a series of Values Forums and be seen in public over and over again with a homophobic, gay-baiting preacher.  It is also time for Senator Obama to start having a conversation about hating on homosexuals with the black religious community.  He is not holding them to the same standard of supporting civil rights that he expects of white people when it comes to the civil rights of black people. So it’s okay for Obama and this group to hate on gay folks AND it’s okay for Obama and his cronies to hate on women who hold socially conservative positions since racism is the only relevant evil in this race. Is that the deal here?

Also, Senator Obama and his nation of clueless cult members should be more respectful of their elders and stop using ageism in his commercials attacking Senator McCain.  I think portraying the elderly as addled, unable to keep up with technology, and incapable of change is exactly what Obama keeps pulling on Senator McCain.  Any one who spends time teaching at universities, as Senator Obama has, should know that the emeritus professor is the most respected position.  Many, many professors continue teaching and researching way into their nineties.  They may need some additional support from staff, but they continue to be vibrant contributers to their areas way past their retirements.  If Senator Obama thinks that he doesn’t want to be judged on his “funny name” or the color of his skin,  he needs to extend the same level of respect to older Americans.  Not all folks with Hussein in their names are terrorists and not all senior citzens have alzheimer’s disease. The latest mailing I keep getting from the Obama supporters to get McCain to release his ‘real’ medical reports is a thinly veiled whisper campaign made to make folks take notice of McCain’s age.  While there are hate groups out there to remind folks of Obama’s race, there are only Obama supporters out there bringing up McCain’s age and Senator Palin’s sex and fundamentalist beliefs.  Like I said, I disagree on almost every social position possible with the Republican party, but I’ve never seen them say anything blantantly racist about Senator Obama.  However, I see Obama and his supporters spew misogynistic, ageist, and gay-hating terms daily.  I’ve also seen them play the race card at the drop of a hat. This should stop. It’s ugly and it’s un-American.


From Fox New:

Florida Rep. Alcee Hastings on Wednesday warned two minority groups to beware of Sarah Palin because “anybody toting guns and stripping moose don’t care too much about what they do with Jews and blacks.”

Hastings, who is black and a Democrat, made the comment in Florida at a panel discussion hosted by the National Jewish Democratic Council.



Biden: Gaffe or Being Honest?

Every one who knows Senator Joe Biden knows he has a tendency to talk a lot and not always with his political brain attached to his vocal chords.  It shouldn’t be all that surprising to the Obama folks and their uberly scripted Presidential candidate that they would not be able to put a muzzle or a message collar on Biden.  Senator Biden gave an opinion the other day on a tasteless Obama attack ad.  It was the one that showed McCain as old, crotchety and unable to use Internet.  What the Obama campaign failed to find out was that McCain doesn’t use a PC because of his war injuries that limit the flexibility and use of his arms.  Senator McCain usually has some one operate the machines for him.  This some one is usually wife Cindy.

After that exposure, the Obama attack ad came off as petty, uninformed, and insensitive to the disabled.  Biden called it like it was–not the best of moves on the part of the Obama/Biden campaign and something that he wouldn’t have done if he’d have called the shots.   This so-called gaffe is different than some of the doozies that have given him ink and news time (see below).  I don’t think this was a gaffe.  I actually think he was just being honest.  The ad was a low blow and some one with knowledge and credibility wouldn’t have run it.  Guess we’ll see how the press spins it shortly.  Anyway,  love this YouTube offering and I thought I’d share it too… it’s a Gaffe contest between Biden and Obama.   I thought I’d put it here rather than post it to the huge content I have on the Gaffe and flip-flop patrol page.  I can’t wait for the debates.  I’m expecting so many actual gaffes that I’ll be busy posting them throughout the next couple of weeks.

The Biden Criticism: