Shelby, DeMint now oppose bailout

posted at 9:15 am on September 24, 2008 by Ed Morrissey

It may be time for the Bush administration to start looking for a Plan B.  Two Republican Senators have now come out in opposition to the Paulson bail-out plan, and with Democrats like Chris Dodd allying themselves to the conservative rebellion in Congress, the White House has begun looking very isolated in its attempt to resolve the credit crisis.  Richard Shelby and Jim DeMint have begun a conservative pushback to rescuing Wall Street from a situation that they claim is all Wall Street’s doing.

First, DeMint:

“There are much better ways of dealing with this problem than forcing American taxpayers to pay for every asset some investor doesn’t want anymore. We should start by reforming government policies and programs that created this mess, including the Federal Reserve’s easy money policy, the congressional charters of Fannie Mae and Freddie Mac, and the Community Reinvestment Act. Then Congress should pass a number of permanent and proven pro-growth reforms to encourage capital formation and boost asset values. We need to make permanent reductions in the corporate tax and the capital gains tax rates. We have the second highest corporate tax rate in the world, which encourages companies to take jobs and investment overseas.”

“It’s a sad fact, but Americans can no longer trust the economic information they are getting from this Administration. The Administration said the bailout of Bear Stearns would stop the bleeding and solve the problem, but they were wrong. They said $150 billion in new government spending using rebate checks would solve the problem, but they were wrong again. They said new authority to bailout Fannie Mae and Freddie Mac would solve the problem without being used, but they were wrong again. Now they want us to trust them to spend nearly a trillion dollars on more government bailouts. It’s completely irresponsible and I cannot support it.”

The Wall Street Journal profiles Shelby’s opposition:

With anger mounting from the left and right against the Treasury Department’s proposed financial bailout, one of the opponents’ most powerful allies is Alabama Sen. Richard Shelby, a Democrat-turned-Republican who espouses free-market principles with a populist streak.

Mr. Shelby, the ranking member of the Senate Banking Committee, said in an interview Tuesday that he is likely to vote against the proposal. “I’ve never supported a direct bailout,” Mr. Shelby said. “I voted against Chrysler when I was a freshman congressman. They said, ‘Well, Chrysler will fail.’ And well maybe if it’d failed then we wouldn’t have the problems facing us today.” …

“I think we’re going down the road of France now,” Mr. Shelby told one television interviewer Tuesday, before quickly adding, “in all due respect for my French friends.”

While I’m pleased that both Senators are standing up for conservative principles, and from DeMint this comes as no surprise, the fact is that this mess is not just of Wall Street’s making [see update below].  Right now, Congress is doing its level best to pretend it had nothing to do with this failure, and Chris Dodd — as the chair of the committee that was supposed to exercise oversight on this industry — is spinning the fastest.  The more Congress can shove the blame entirely onto Wall Street, the better off it looks, but that’s simply not the case.

The heart of this failure came from a mandate by members of Congress from both parties that demanded easier loan terms for marginally-qualified buyers.  At first, this meant working-class families, but it also resulted in easier terms all the way through to the highest income levels.  Lower qualifiers meant more buyers, and buyers buying bigger houses.  The net effect of this was to create a much higher demand for housing and for mortgages.

How did these get structured?  The trouble came when people stopped providing solid down payments to ensure equity from the start of the loan.  They got adjustable-rate mortgages for loans they couldn’t afford, betting that the quickly-rising price of housing would continue its trajectory and magically give them enough equity by the time the ARMs adjusted so that they could refinance their loans to something affordable.  And for a few years, that’s exactly what happened — and so more and more people followed that example.

This produced two other effects.  First, the government had Fannie Mae and Freddie Mac sponsor many of these questionable loans and convert them into investment products, which essentially infected the entire investment community with massive, poorly-secured loans.  Second, the demand touched off a residential building boom as people attempted to provide inventory for the massive amount of buyers coming into the market.

Unfortunately, this created a big Ponzi scheme, one dictated by Congress and two administrations.  It only worked as long as housing prices continued to increase.  When the bubble finally popped late last year, it was analogous to the margin calls of 1929, only in slow motion.  Once homeowners realized that their houses would not increase in value, they knew that they were stuck in ARMs that they wouldn’t be able to afford.  The defaults would not just sink the banks but also the investors who bought the securities.

Who created this Ponzi scheme?  Congress did.  Who demanded lower qualifiers for home mortgages and then insisted on having Fannie/Freddie turn them into investments to support the lenders?  Congress did.  The lenders share the responsibility as well, but without Fannie/Freddie making their bad lending decisions profitable, they would never have jumped into the sub-prime market with the kind of enthusiasm they did.  Now Congress wants to leave them holding the bag and all the blame — and that’s pretty convenient for Congress.

DeMint gets closer to the truth here than Shelby.  Congress didn’t demand that Chrysler build K-cars and other lousy models and poor business practices that led to their bad performance, which is why Congress shouldn’t have had anything to do with the Chrysler bailout.  That doesn’t apply here.  DeMint, though, rightly points out that this is actually Bailout v4.0 in this crisis, and versions 1-3 didn’t solve the problem.

Taxpayers don’t want to be on the hook for the credit-market failure, but in the end, we’re responsible for Congress.  Not many objected when home loans got so plentiful and our home equity skyrocketed over the last ten years.  We need a responsible, market-based plan that undoes the damage our Congress created, and that means we’re going to have to shoulder some of the burden in the short term to make it happen.  That’s our penalty for letting Congress run wild, and it should result in a lesson learned for the American taxpayer that, in Robert Heinlein’s words, there ain’t no such thing as a free lunch.  The plan should have accountability for those running it, and it should include a plan to completely dismantle the government’s reach into private lending markets permanently.

Update: I want to clarify something regarding Jim DeMint.  He’s really been one of the best voices on this, and he agrees that government got us into this meltdown:

Sen. Jim DeMint, a South Carolina Republican, differed with Schumer, saying Congress should resist the Bush administration’s pleas for the legislation. He said, “The government broke it. I don’t trust them to fix it.”

DeMint isn’t passing the buck.  He’s got the right diagnosis.  Now we need Congress to fix what it broke, and to keep itself from breaking more in the future.


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Comments

maybe play this video.. to the press.

http://www.youtube.com/watch?v=AiEWCnpNnBQ

Chakra Hammer on September 24, 2008 at 2:44 PM

Thanks for that link, Chakra. I watched it late last night and sent it off to all I know this morning.

Excellent find. EVERY American needs to see that video. If you haven’t seen it, you need to invest the small amount of time it takes.

We should demand that the dems that actually caused this, and that are in power and are being set up to inherit ALL the power are cast out of government forever.

Nail. Them. To. The. Wall.

techno_barbarian on September 24, 2008 at 3:00 PM

SaintOlaf on September 24, 2008 at 1:53 PM

LOL

Do you have any more hyperbolic options to entertain us with?

LimeyGeek on September 24, 2008 at 3:00 PM

LimeyGeek on September 24, 2008 at 3:00 PM

The problem is that its not that hyperbolic. No credit = massive contraction in the money supply = great depression.

phronesis on September 24, 2008 at 3:04 PM

No suggestion that Paulson engineered this mess. The cause of the mess (government intervention, greed, corruption) has already been well documented throughout the thread.

IrishSamurai on September 24, 2008 at 2:59 PM

Low interest rates and leverage helped make the bubble as big as it was. Credit rating agencies that didn’t do their job or understand the products they were rating led additional investors into very bad investments.

dedalus on September 24, 2008 at 3:08 PM

Low interest rates and leverage helped make the bubble as big as it was. Credit rating agencies that didn’t do their job or understand the products they were rating led additional investors into very bad investments.

dedalus on September 24, 2008 at 3:08 PM

If you actually think that there wasn’t corruption and greed in the derivatives market at every financial institution, you need to read this article which articulates the point rather eloquently:

http://financialsense.com/fsu/editorials/amerman/2008/0917.html

IrishSamurai on September 24, 2008 at 3:12 PM

I just heard Maxine Watters expressing her concern… more speed in accomplishing the “loan modifications necessary” to keep people in their homes.

Golly. Let’s bail it out so we can keep doing the same stupid stuff. This is truly the Keystone Cops.

CC

CapedConservative on September 24, 2008 at 3:24 PM

OK Patrick. I misunderstood. I thought you were one of those people who want 100% free markets. My sister is an auditor and she bemoans SOx to me all the time. I agree that it was a panacea that did nothing to prevent the type of scandals that prompted its creation.

How do you think we should address the rating issue Patrick? There is still some fundamental funk on these securities, even if theyre not forced to market.

k2aggie07 on September 24, 2008 at 2:59 PM

K2, I don’t know. I admit my career on the street was as a broker/trader. That stuff was on the institutional side. What I do know is that a more accurate analysis is always arrived at if it is not forced.

A second admittance. Even though I pound the table about mark to market, will it be a problem solver? I don’t know that either. What I do know based on past experience is that forced selling of what ever nature, limit downs etc, never arrives at true value. Don’t get me wrong, margin calls are a good thing, a time to reappraise. In fact they should never/rarely be met. However if the whole market gets a margin call on the same day I want to look at the trigger mechanism. At the moment that looks like this provision.

That said I would love to see what would happen if the SEC etc waived it akin to their constraining the ability to go short as they work on the bailout. You know, throw us a bone. Or if this analysis is wrong have them explain why without resorting to “just because, there might be a depression if we don’t act”.

Is that too much to ask?

And if that doesn’t work I’ll think of something different! Just kidding…

patrick neid on September 24, 2008 at 3:26 PM

If you actually think that there wasn’t corruption and greed in the derivatives market at every financial institution, you need to read this article which articulates the point rather eloquently:

IrishSamurai on September 24, 2008 at 3:12 PM

I don’t doubt it. I’ll take a look at the article, thanks. There were many ingredients in this stew.

dedalus on September 24, 2008 at 3:28 PM

I just heard Maxine Watters expressing her concern… more speed in accomplishing the “loan modifications necessary” to keep people in their homes.

CapedConservative on September 24, 2008 at 3:24 PM

She’s speaking in sound bites for her local evening news. All of them are. She probably doesn’t understand clearly much of what Bernanke says anyway.

dedalus on September 24, 2008 at 3:31 PM

I just heard Maxine Watters expressing her concern… more speed in accomplishing the “loan modifications necessary” to keep people in their homes.

Golly. Let’s bail it out so we can keep doing the same stupid stuff. This is truly the Keystone Cops.

CC

CapedConservative on September 24, 2008 at 3:24 PM

You bet! Keep in mind this is the same maxine waters that said recently, “This liberal? THIS liberal would be for socializing… er, huh, taking over the oil industry.”

The mask has been off for a while now. Wish America would simply open their eyes and realize it. I actually think that’s happening, despite the open propaganda efforts of our media.

techno_barbarian on September 24, 2008 at 3:36 PM

Patrick: The thing that worries me, aside from what happened last week with the money market, is that it is fairly clear that “those who know” are…scared. Bernanke and Paulson look like deer in the headlights to me, and that translated last week when Reid and friends went to the media pale as ghosts.

It’s a sticky mess we’re in. I don’t know if we’re going to get out of it. IrishSamurai — I feel worse than ever after reading your dang article, though I can see that guy definitely has an angle (who doesn’t?).

k2aggie07 on September 24, 2008 at 3:41 PM

I admit I was toying with the notion that any bailout agreement should have repayment hooks such that our tax dollars earned a nice chunk of interest, the money then being redirected to phase out social security.

Then I realized I’d be happier with a nice bonfire and some swinging bodies.

LimeyGeek on September 24, 2008 at 3:55 PM

Interesting

LimeyGeek on September 24, 2008 at 4:00 PM

It’s a sticky mess we’re in. I don’t know if we’re going to get out of it. IrishSamurai — I feel worse than ever after reading your dang article, though I can see that guy definitely has an angle (who doesn’t?).

k2aggie07 on September 24, 2008 at 3:41 PM

That’s the other rub. Everyone’s got an agenda. Paulson. The author of that article. Everyone.

I just trust the author of the article more than I trust Paulson at this point cause he isn’t speaking generalities and spells out the problem in details.

IrishSamurai on September 24, 2008 at 4:10 PM

Who created this Ponzi scheme? Congress did. Who demanded lower qualifiers for home mortgages and then insisted on having Fannie/Freddie turn them into investments to support the lenders? Congress did. The lenders share the responsibility as well, but without Fannie/Freddie making their bad lending decisions profitable, they would never have jumped into the sub-prime market with the kind of enthusiasm they did. Now Congress wants to leave them holding the bag and all the blame — and that’s pretty convenient for Congress.

Yes, and who co-sponsored and championed the legislation? And who supported him in Senate for the quest for de-regulation? And who went on to be the other’s economic advisor and called Americans whiners? And who has a small army of lobbyists including a campaign manager with long standing ties to financial and mortgage loan institutions? And who is all hell bent to get back to D.C. in a last minute attempt to deflect the heat that’s coming his way?

Fletch54 on September 24, 2008 at 4:11 PM

Who created this Ponzi scheme? Congress did. Who demanded lower qualifiers for home mortgages and then insisted on having Fannie/Freddie turn them into investments to support the lenders? Congress did. The lenders share the responsibility as well, but without Fannie/Freddie making their bad lending decisions profitable, they would never have jumped into the sub-prime market with the kind of enthusiasm they did. Now Congress wants to leave them holding the bag and all the blame — and that’s pretty convenient for Congress.
Yes, and who co-sponsored and championed the legislation? And who supported him in Senate for the quest for de-regulation? And who went on to be the other’s economic advisor and called Americans whiners? And who has a small army of lobbyists including a campaign manager with long standing ties to financial and mortgage loan institutions? And who is all hell bent to get back to D.C. in a last minute attempt to deflect the heat that’s coming his way?

Fletch54 on September 24, 2008 at 4:11 PM

Permit me to clarify further….

Who created this Ponzi scheme? – Democrats
Who denied there was a problem when Bush pointed it out? – Democrats
Who voted down S.190? – Democrats
Who burdens our industry making them internationally uncompetitive? – Democrats
Who passes corporate tax laws sending business overseas? – Democrats
Who opposes oil exploration here? – Democrats
Who opposes drilling here? – Democrats
Who opposes nuclear here? – Democrats
Who opposes a strong military? – Democrats
Who insists we search 90 year old grandmothers instead of 25 year old Arab mulslims at airports? – Democrats
Who burdens small business with regulation? – Democrats
Who tries to use the courts as a legislative branch? – Democrats
Who wants to treat terrorists with full constitutional rights? – Democrats

Who appears to be making every honest effort to destroy the United States of America?

CC

CapedConservative on September 24, 2008 at 4:28 PM

…. yum… troll tastes like chicken.

CC

CapedConservative on September 24, 2008 at 4:53 PM

yum… troll tastes like chicken.

CapedConservative on September 24, 2008 at 4:53 PM

So does rattlesnake.

platypus on September 24, 2008 at 8:26 PM

Hmmmm– Wonder why Richard Shelby is wanting to lay the blame on Wall Street? Could it be because he is 9th on the list of lawmakers who received contributions from Fannie Mae? A total of $80,000– that’s more than even Harry Reid received. Pretty surprising to see his name on the list, but it explains a lot. Stick with DeMint on this. He is true blue.

gajaw999 on September 24, 2008 at 11:22 PM

Can anyone clearly articulate exactly what would happen if we don’t bail out these organizations? I keep hearing that it’s recession, its depression time, etc. How? Why? It’s not getting throug to me.

Help me understand exactly what happens if these banks fail.

cannonball on September 25, 2008 at 12:12 AM

We elected Congress. We elected the Presidents who appointed crooks to run the FM twins. We need to fire those in Congress who were responsible. Then we pretty much need to fire ourselves as being the people who were REALLY responsible for putting these ‘tards in office.
 
{^_^}

herself on September 25, 2008 at 2:32 AM

Yeah man, screw them. But what if Acme Corp stock gets taken out and shot along with the rest of the market? Is Acme going to lay off a bunch of people? You bet.

Goddamn fools asking for a depression. I do not understand you at all.

pc on September 25, 2008 at 6:45 AM

some of these comments border on insane. Why is it bad if Banks fail? How exactly does a bank fail, anyway? It’s investors run on it, that’s how. You people are loaning your money to the bank in the form or deposits. If everyone tries to save their own ass and get out, it will look like Argentina. The army defending the banks. Martial law will become a reality.

pc on September 25, 2008 at 6:49 AM

some of these comments border on insane. Why is it bad if Banks fail? How exactly does a bank fail, anyway? It’s investors run on it, that’s how. You people are loaning your money to the bank in the form or deposits. If everyone tries to save their own ass and get out, it will look like Argentina. The army defending the banks. Martial law will become a reality.

pc on September 25, 2008 at 6:49 AM

When a bank fails, it is arranged to be bought by another bank. The government could take that oppotunity to infuse capital by buying off bad debt from the failed institution only, instead of from everyone holding such paper whether the institution is solvent or not.

shuzilla on September 25, 2008 at 11:00 AM

I strongly object to the rationale of this article that this taxpayer bailout is justified because the taxpayer ” is responsible for congress” and didn’t complain when congress was doing its malfeasance. The idea of our democratic republic (as opposed to a direct people-vote-on-everything democracy) is that the elected representatives justify the trust of their constituency to watch out for them and not irresponsibly allow a housing mortgage bubble to develop out of political correctness or stupidity. Furthermore, any taxpayer who did complain exposed himself or herself to charges, – esp. by the Clinton democrats – of “racism” and insensitivity to the plight of the poor who deserve decent housing.

Congress and presidents Clinton & Bush deserve our outrage for this economic disaster even more than the greedy bastards who profited. They are elected not just to try to deal with crisis but more to avoid them occuring in the first place if they can and this one did not require a crystal ball to have been avoided – the bubble was seen and complained about but congress mostly looks out only for itself. Most of them deserve our spit.

Chessplayer on September 25, 2008 at 11:17 AM

Chessplayer on September 25, 2008 at 11:17 AM

How much spit do We The People deserve for our disgraceful, abject apathy?

LimeyGeek on September 25, 2008 at 12:28 PM