11/18 Letter from Mr. DeFazio

A number of weeks ago, I heard an interview with Peter DeFazio, US Representative for Oregon's Fourth District. He outlined a five step alternative to the $700bn bailout that now appears to be a free-for-all spiraling into a strange assortment of loans, public ownership of private entities, regulations, and mission creep. I wrote to Mr. DeFazio expressing support for his bipartisan program. Today, I received the following response.

I disagree with Mr. DeFazio on a number of issues, but this is an exception. Although I support government intrusion in this situation, I do not agree the program passed by Congress and signed by the President. Unfortunately, history seems to be supporting the skeptic.

Provided in its entirety:



Thank you for contacting me about the Bush Administration bailout. This bailout put the taxpayer at risk and didn't address the fundamental underlying economic problems. I voted against it both times it came to the House floor for a vote. Unfortunately, the bill passed the House of Representatives 263 to 171.

I was the first Member of Congress to take to the House floor and stand up in opposition to this $700 billion bailout. I authored three letters to my Democratic Colleagues urging them to vote against this bailout. You can see them on my website. I also was a key member of the "Skeptics Caucus" a group of Democratic Members who vigorously fought against this bailout. And I spoke numerous times against the bailout to the Democratic Caucus, all 235 House Democrats. The financial crisis we face today does not need to be resolved by forking over $700 billion from the taxpayer to the "Masters of the Universe" on Wall Street.

I was appalled that the legislation was loophole ridden allowing Wall Street executives to continue to receive golden parachutes, bonuses, and stock options. The media accounts of AIG executives attending a high priced resort after the government's bailout is unforgivable.

The fundamental premise of the $700 billion Bush Administration bailout is flawed, reckless, and foolish. It is flawed because it is not clear it will achieve its stated objective of injecting commercial banks with liquidity and it ignores the needs of main street America, it is reckless because there are better alternatives, and it is foolish because giving away $700 billion will limit our ability to deal with the myriad of other problems we face such as healthcare, energy independence, and job creation.

To put the sheer audacity of this bailout plan in perspective, a compromise has been talked about that reduces the initial payments to "only $250 billion". $250 billion would more than double our investment in bridges, highways, transit, and rail in the United States for five years. Investing in infrastructure creates jobs and stimulates the economy. According to the U.S. Department of Transportation, for every $1.25 billion we invest in infrastructure, we will create over 30,000 jobs and $6 billion in additional economic activity. In President Roosevelt's Works Progress Administration, we invested in building roads, bridges, dams, hydroelectric systems and other public works projects to mend our nation's broken economy. That money trickled up to Wall Street from Main Street and rebuilt our economy. We did not just throw money at Wall Street with the hopes that the taxpayer might some day be paid back.

I think Congress should respond, but the basic premise of the Bush Administration bailout is flawed. Almost 200 economists wrote to Congress stating "As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson"[1]. The letter went on to raise the issues of fairness, ambiguity, and the long-term effects. The former chairman of the Federal Deposit Insurance Corp in the Reagan Administration wrote, "I have doubts that the $700 billion bailout, if enacted, would work. Would banks really be willing to part with the loans, and would the government be able to sell them in the marketplace on terms that the taxpayers would find acceptable?"[2] And James Galbraith, an economist at the University of Texas, has asked "Now that all five big investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or morphed into regular banks, a question arises. Is this bailout still necessary?"[3] I believe the answer is No. I have called on my colleagues to slow down this debate and seriously debate the alternative proposals.
Many economists have argued that unfair and abusive mortgage loans should be renegotiated to help distressed home owners save their homes. This would be astronomically cheaper and more effective in resolving this crisis without burdening the taxpayer. Helping working Americans stay in their homes would ultimately increase the value of Wall Street's depreciated mortgage backed assets. This plan would let the benefits of any bailout, paid for by taxpayers, trickle up to the banks and Wall Street, rather than hope the benefits trickle down. As the New York Times opined recently:

"We could make a strong moral argument that the government has a greater responsibility to help homeowners than it does to bail out Wall Street. But we don't have to. Basic economics argues for a robust plan to stanch foreclosures and thereby protect the taxpayers ."[4]

Another serious consequence is the $700 billion hole in the budget deficit this bailout will create. The next administration, Democratic or Republican, will be unable to initiate new proposals as it charts a new course for our nation. The Bush tax cuts blew the surplus created by the last Democratic Administration and the Bush Administration bailout will prevent the next administration from implementing its mandate.

My biggest concern of this bailout is who pays the $700 billion tab. The $700 billion is to protect Wall Street investors, therefore the same Wall Street investors should pay for this infusion of taxpayer money. I have proposed a minimal securities transfer tax of ? of one percent. A securities transfer tax would have a negligible impact on the average investor and provide a disincentive to high volume, speculative short-term traders. Similar tax proposals have been supported by many esteemed economists such as Larry Summers, John Maynard Keynes and Nobel Prize winners Joseph Stiglitz and James Tobin.

There is considerable precedent for this. The United States had a similar tax from 1914 to 1966. The Revenue Act of 1914 levied a 0.2% tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help finance economic reconstruction programs during the Great Depression. In 1987, Speaker of the House Jim Wright offered his support for a financial transaction tax. And today the UK has a modest financial transaction tax of 0.5 percent. This is a reasonable approach to protecting taxpayers and ensuring the federal budget doesn't fall further into the fiscal hole.

I have authored the Bringing Accounting, Increased Liquidity, Oversight and Upholding Taxpayer Security (No BAILOUTS) Act of 2008, that would through a series of regulatory fixes resolve much of the liquidity crisis we face at no cost to the taxpayer. I believe this is a far more rational approach.

I also authored an amendment to the bailout bill that sought to protect taxpayers by requiring the Treasury Secretary to implement a low-cost FDIC program to restore liquidity before spending the $700 billion. I believe it is common sense to try the cheaper program first. My amendment also made sure Wall Street paid for the bailout with a minute transfer tax on securities spread over ten years. Wall Street should ultimately pay the taxpayer back for this bailout.

Again, thanks for reaching out to me. Please keep in touch.


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[1]
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm
[2]
Washington Post. A Better Way to Aid Banks. William M. Isaac. Sept 27, 2008. A19.
[3]
Washington Post. A Bailout We Don't Need. James K. Galbraith. Sept. 25, 2008. A19
[4]
New York Times. Editorial. What About the Rest of Us? Sept., 26, 2008. A26.

Sincerely,
Rep. Peter DeFazio
Fourth District, OREGON