The Constitution is the Battlefront in this election

The major parties have not talked about restoring the Bill of Rights and returning to the Constitution. With suspension of habeas corpus, surveillance of the public, secret prisons, and secret laws, exceeding the limits imposed upon the government by the Constitution is becoming a daily occurrence. 

Just this week, the Senate used a parliamentary trick to introduce a financial bill that should have been introduced by the House of Representatives. The Constitution is clear on that point:

Article 1 Section 7:   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.

The Bail Out Bill was defeated in the House on the first time around so the Senate added it to an existing bill in order to circumvent the Constitution. Was this necesssary?

This week, we heard vice presidential candidate Sarah Palin say that she would seek to expand the power of the Vice President to include some oversight of the Legislative and Judicial branches of government. The Constitution is very clear that the VP cannot do this. The Constitution gives but one responsiblity to the VP: a vote to break ties in the Senate. That is it. There is no “flexibility” as Gov. Palin describes it.

Neither major party candidate wants to give power to the people, they seek more for themselves.

We must make an effort to elect people who will reject powers already usurped and we must prevent more powers from accreting to politicians. 

Vote Responsibly and Save America. Your children’s freedom depends upon it.

Best Explanation of Bail Out Bill

I like Kimberley Amadeo’s clear explanations of the economy. Here she talks about the Bank Bail Out Bill.

The guts of the bill is the same as the three page document submitted on September 21 by Treasury Secretary Henry Paulson. Paulson had asked Congress to approve a $700 billion bailout to buy mortgage-backed securities that are in danger of defaulting. By doing so, Paulson wants to take these debts off the books of banks, hedge funds and pension funds that hold them.

Why did this become a crisis instead of a serious problem?

The bailout was triggered by a record $140 billion being pulled out of money-market accounts, usually considered the safest of investments. That’s because investors were moving the funds to U.S. Treasuries, causing yields to drop to zero. To stem the panic, the Treasury agreed to insure these funds for a year. In addition the SEC banned short-selling of financial stocks until October 2 to reduce volatility in the stock market. (Source: WSJ, Shock Forces Paulson’s Hand, September 20, 2008)

And what does the bill contain?

-Bailout installments of $250 billion each.
-An oversight committee that will review Treasury’s purchase and sale of mortgages. The committee is comprised of Federal Reserve Chair Ben Bernanke, and the leaders of the SEC, the Federal Home Finance Agency and HUD.
-The ability for Treasury to negotiate a government equity stake in companies that receive bailout assistance,if it is the government’s best interest.
-Limits on executive compensation of rescued firms. Specifically, companies will not be able to deduct the expense of executive compensation above $500,000.
-Government-sponsored insurance of mortgage-backed securities,and other assets, purchased before March 14, 2008.
-A requirement that the president propose legislation to recoup losses from the financial industry if any still exist after five years. (Source: CNNMoney, Rescue Bill Released, September 28, 2008.)

Were there other things in the bail out bill?

The bill contains an additional $149 billion in tax breaks and allows regulators to suspend the mark-to-market rule. This law forced banks to continually write down the value of their mortgages to present-day levels. This meant that bad loans, which could not be resold in the current panic-sticken climate, had to be valued at less than their probably true worth. (Source: Bloomberg, Bank-Rescue Plan Wins Approval as House Reverses Vote, October 3, 2008)

Was there any fear about the future solvency of banks?

Most in Congress recognize the need to act swiftly to avoid further meltdown. It has become a case of fear feeding on fear, with banks afraid to disclose their bad debt, which will lead to a downgrade in their debt rating, which will lead to a decline in their stock price, which will lead to their inability to raise capital, which will lead to bankruptcy. This fear of disclosure has led to an overall panic, fed by rumor, which has locked up the credit markets.

There is more in Kimberley’s explanation. Take some time to read it.

Best explanation of the financial crisis origin

Here is the best explanation of the financial crisis. 

First, banks were not as worried about the credit-worthiness of borrowers because they could sell the mortgages on the secondary market. Second, unregulated mortgage brokers made loans to people who weren’t qualified. Third, many homeowners took out interest-only loans to get lower monthly payments. As home prices declined and mortgage rates reset at a higher level, these homeowners could neither pay the mortgage nor sell their homes for a profit, and so they defaulted.

Fourth, and probably most importantly, mortgages were repackaged as mortgage-backed securities (MBS). Banks had hired sophisticated “quant jocks” who wrote computer programs that could repackage these MBS into high risk and low risk product bundles. The computer programs were so complicated that no one really understood what exactly was in each product bundle or how much of the bundle had subprime mortgages. When times were good, it didn’t matter, and everyone bought the high risk bundles because they gave a higher return. As the housing market declined, however, everyone knew that these products were losing value but, since no one other than the computer programs understood them, the resale value of the products was unclear.

Last but not least, many of the purchasers of these MBS were not just other banks, but individual investors, pension funds and hedge funds. This meant that the risk was spread throughout the economy. Furthermore, since hedge funds are not regulated by the SEC, they could use derivatives to borrow money to make investments. This created higher returns in a good market, and greater losses in a bad one, thus magnifying the impact of any downturn.

 One type of derivative is the Credit Default Swap (CDS). Here is how the Credit Default Swaps caused AIG to fail:

In addition, AIG was a major seller of “credit-default swaps.” These swaps insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would force the banks that bought these swaps to take write-downs.

How Did AIG Almost Fail?:

In fact, it was the swaps against subprime mortgages that pushed the otherwise profitable company to the brink of bankruptcy. As the mortgages ties to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even more difficult for AIG to cover the swaps. AIG could has more than enough assets to cover the swaps, but couldn’t sell them before the swaps came due. (Source: WSJ, U.S. to take over AIG, September 17, 2008)

To summarize all of this:

Financial services companies bought mortgage-backed  securities from Fannie Mae and Freddie Mac. The worthiness of those securities were impacted by bad loans to people and a rise in interest rates that people could not afford. When people could not afford their mortgage payments they defaulted. The mortgage-backed securities began to lose value and the derivatives failed big time. When the derivatives failed, those financial services companies had to raise cash to pay them off. When they ran out of cash, they failed. 

When the financial companies fail, business cannot find enough cash fast enough to keep their business going. When business cannot find cash for their needs, they fail, too.

Economic collapse or Recession? With a Bail Out Bill, we have a recession and that is why Congress had to act. HOWEVER, was the purchasing of bad debt the right approach to bail out the economy? We may never know that answer.