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.


________________________________________
[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

Obama and the economy

The more financial guarantees a person gives you, the lower the opportunity for independence that will be offered.

Presidents are the fortunate (or unfortunate) benefactors of timing. Economies have a business cycle somewhat independent of who’s in the White House or how long they’ve been there. Economists work to smooth out the volatility of the business cycle, but clearly managing an economy is more of an art than a science. Obama may be the fortunate benefactor of this business cycle. We're headed up. It just so happens that an incredibly unpopular Congress may have the opportunity to work with a controversial White House to appear the hero for bringing our nation back to prosperity. The truth is, every transaction leads us make bring us closer to a balanced economy, in large part, regardless of which party is in power. Barack Obama just doesn't have anything to add.

Our economy can be fixed by a combination of four simultaneous movements. First, government will need to spend money on goods and services that are necessary and will address real needs (not just spending for the sake of spending). Second, those with a propensity to save and invest need to not be punished and discouraged from to saving and investing. Third, those with real welfare needs should be assisted, not just by more government handouts but by balancing government handouts with incentives and opportunities to get off welfare. Finally, we need to reduce our national debt. Deficit spending has it's place, but borrowing our way to prosperity is the same as trying to lift ourselves up by our boot straps. Eventually we’ll lose our balance and fall on our face.

(There is a fifth option, and that's to enforce our tax laws, removing incentives for employers to hire illegal aliens, but that's a topic for another post.)

Unless we raise taxes (contradicting the second point) or cut benefits (contradicting the first and third points) we must raise our level of production. Naturally, we do that by figuring out what we’re better at than the rest of the world and selling it to them or identifying what import we can compete with and replace it with a US product. Either way, we need to make more than we spend. Sound easy? Of course not!

Obama’s answer is to raise taxes and raise welfare. Certain segments of the population will have a few more dollars to spend, but those will be at the expense of others. The number one way rich people got rich was by keeping more of what they earned than Uncle Sam could take. Accountants and bankers make tons of money protecting the wealth of the affluent. Why do I bring this up? Because I don’t know a lot of people who work for broke people. In fact, most of the people I know work for rich people. Don’t we want them spending and investing their money. Punishing them for being better at capitalism will only hurt us. We'll see an increase in black markets and tax shelters decrease in taxes.

For all the schooling that Obama has done, he seems to have missed these fundamental economic theories. Since I like to form my own opinion rather than trusting strangers, I went to the Obama/Bidden “Blueprint for America” on the economy.

$1000 energy rebate for “windfall profits on excessive oil company profits.” The obvious question should be, since when do we tell people/companies in this country they make too much money. Better question, who’s to say what too much is? I’m not talking about price gouging. I’m talking about a someone being punished for making too much money. How does that work? When we talk about energy, our minds go to gas prices, but when you buy a gallon of gas, do you know who gets paid? In ascending order, you’re paying for the crude oil (which is set by the global market), Federal, state, and city fuel taxes, and refining capacity (which is a constraint caused by lobbyists for environmentalists). That’s not to say that the oil company doesn’t make profit. ExxonMobil made a profit margin of 7.6% in 2007, just slightly above the profit margin of 5.8% for all U.S. manufacturing. Wow! Look out for the wind.

“Making Work Pay” to provide tax relief for 95% of American workers. This puts a greater burden on the other five-percent of American workers, the five-percent that pay the most. For some perspective, the top 10% of tax payers pay 70% of the bill, the bottom 40% don’t pay Federal income taxes, and the bottom 50% only pay 10% of the tax bill. Under this plan, the US Treasury starts cutting checks to all those who pay little or nothing in taxes and collect more and more from the few people who do pay the bill.

Create the American Opportunity Tax Credit: an additional $4000 annual credit for college education. Marylhurst University, a private university just outside of Portland, charges $349 per credit hour. Portland State University charges $109 per credit hour. Why does Marylhurst charge three times as much as PSU? Is it because it’s just that much better? Are the instructors that much better? Are the programs unique? Are the facilities more expensive? What makes the cost of one credit hour at MU three times as much as PSU? PSU (and the rest of our education system) is already heavily subsidized by the tax payers. Obama’s additional tax credit would cover the cost of another 36 credit hours per year at PSU. That’s great for me but why should the rest of the country pay more for my education? It's great for the individual receipinat but not so great for the people who would other wise use that money to stimulate the economy.

He wants to create a universal mortgage credit so home buyers can deduct the interest from their home loan in addition to taking the standard deduction and adjust bankruptcy laws to allow home buyers to forceably renegotiate the terms of their mortgage which will cause serious problems in the secondary market. He thinks he can prevent future mortgage crises through investigating mortgage fraud and creating another form the borrower’s have to sign and pretend to care about. The Truth-in-Lending Disclosure already does what his HOME score proposes. Creating a Federal crime for mortgage fraud is a nice idea but its already a crime at the state level and most associated crimes are already illegal that the state and Federal level. Again, more nothing.

The list goes on and on, and basically the Obama/Bidden plan is just rhetoric. It's pages of programs that showcse his lack of innovative and disregard for our budgets. I’m not saying that they’re nice ideas. I like the idea of you paying for my college, incentives for green jobs, strengthening infrastructure, and fair trade, but at the end of the day, this will be a repeat of the 2006 Democratic revolution in the Congress where we were promised the world and they only managed to raise the Federal minimum wage from $5.15/hour.

Regardless of who inherits our economic woes, they’ll be looking at a 2009 budget deficit in excess of $500 billion! They’ll be forced to renege on campaign promises. So, even though I certainly would enjoy having college paid for, the interest on my mortgage paid for, and all the other wonderful giveaways Obama’s trying to buy our votes with, it’s not government's job to cater to my every whim. We already receive hundreds of billions of dollars in welfare and it’s bought us a $10 Trillion debt and $45 Trillion unfunded liabilities. We have to prioritze our spending more carefully. Trickle-down economics works. The problem is that 95% of people don't know how to manage money so will always end up with more month at the end of the money no matter how much free stuff they get.

You have to ask yourself, if you don't stand up when government wants to take away what others have earned, who's going to stand up for you when they come knocking on your door?