Thursday, October 02, 2008

Senate passes $700 billion Wall Street bailout bill

This is from The Huffington Post:

WASHINGTON — After one spectacular failure, the $700 billion financial industry bailout found a second life Wednesday, winning lopsided passage in the Senate and gaining ground in the House, where Republicans opposition softened.

Senators loaded the economic rescue bill with tax breaks and other sweeteners before passing it by a wide margin, 74-25, a month before the presidential and congressional elections.

In the House, leaders were working feverishly to convert enough opponents of the bill to push it through by Friday, just days after lawmakers there stunningly rejected an earlier version and sent markets plunging around the globe.

The measure didn't cause the same uproar in the Senate, where both parties' presidential candidates, Republican John McCain and Democrat Barack Obama, made rare appearances to cast "aye" votes, as did Obama's running mate, Sen. Joe Biden of Delaware.

In the final vote, 39 Democrats, 34 Republicans and independent Sen. Joe Lieberman of Connecticut voted "yes." Nine Democrats, 15 Republicans and independent Sen. Bernie Sanders of Vermont voted "no."

President Bush issued a statement praising the Senate's move. With the revisions, Bush said, "I believe members of both parties in the House can support this legislation. The American people expect and our economy demands that the House pass this good bill this week and send it to my desk."

When the House took up the vote for the Paulson Wall Street bailout bill last Monday, September 29th, the House voted down the bill, 228-205, with 133 Republicans voting against the bill. The Dow plummeted 777 points as the House rejected the bailout plan. The Republicans blamed House Speaker Nancy Pelosi's "scathing speech near the close of the debate — which attacked Bush's economic policies and a "right-wing ideology of anything goes, no supervision, no discipline, no regulation" of financial markets — for the vote's failure." This was a cop-out. I'm thinking that the House Republicans looked at the $700 billion price tag, took a huge, collective gulp, and then voted against the bill.

So what does the Senate do? They tack on another $110 billion worth of tax breaks as a bribe to the House:

Even as the Senate voted, House leaders were hunting for the 12 votes they would need to turn around Monday's 228-205 defeat. They were especially targeting the 133 Republicans who voted "no."

Their opposition appeared to be easing after the Senate added $110 billion in tax breaks for businesses and the middle class, plus a provision to raise, from $100,000 to $250,000, the cap on federal deposit insurance.

They were also cheering a decision Tuesday by the Securities and Exchange Commission to ease rules that force companies to devalue assets on their balance sheets to reflect the price they can get on the market.

There were worries, though, that the tax breaks would cause some conservative-leaning "Blue Dog" Democrats who voted for the rescue Monday to abandon it. The bill doesn't designate a way to pay for many of the tax cuts, and Blue Dogs typically oppose any measure that swells the deficit.

Of course, this $110 billion Senate bribe is now causing concern among the Blue Dog Democrats who, while they voted for the $700 billion bailout plan, may reject the Senate's version of the bailout plan because of this extra government debt being tacked on by this bribe. So while the House leadership is trying to round up enough Republican support for the bailout bill, they are also alienating the Blue Dog Democrats who originally supported this bill, because of this bribe.

Talk about herding cats.

Some type of bailout plan will have to passed by the House. It may not have the $110 to $150 billion tax break bribe that the Senate is offering, but some type of government action will be needed to calm the credit markets here. This action could even be temporary, at least until after January, 2009, when a new president is sworn in, and improved legislation could be negotiated between Congress and the White House. Instead of shoving a $700-plus billion dollar bailout boondoggle down Congress' throat, why not send a $300 billion temporary bailout to cover the rest of this year? And then in January, have the new president, whether it is John McCain or Barack Obama, start working with Congress on new legislation to fix this credit crisis in the financial system. We are seeing just too much uncertainty in the markets now--both with the credit crisis and subprime mortgage mess roiling the financial markets, and the U.S. presidential election which is causing even more Wall Street jitters because the next president will have to deal with this mess.

I do not know how the House will vote on this latest Senate bailout bill. President Bush is placing intense pressure on the House to pass this bailout bill, however I wonder just how far the House will go with a 26 percent job approval rating, lame-duck, president. If the House is going to approve this bailout bill, it may be because of the latest economic news showing a serious downturn in the U.S. economy. U.S. jobless claims have already jumped due to the hurricanes slamming the Gulf Coast, with the "seasonally adjusted first-time claims for unemployment benefits rose 1,000 to stand at 497,000-- the highest since late September 2001." A second hit of bad economic news is that the demand for U.S. factory goods fell four percent, worst than the three percent drop expected by economist surveyed by Marketwatch. This is the fastest rate drop in two years in August. Factory orders has risen 0.7 percent in July, revised down from a 1.3 percent estimate given in June. Finally, economists are now saying that a U.S. recession is now certain:

The big economic forecasting firms are in the process of updating their forecasts following the release of key data on consumer spending. While the final numbers aren't available yet, forecasters say it doesn't look good.

The economy seems to be on the "edge of the abyss," said Joel Prakken, chairman of Macroeconomic Advisers, which will update its forecast on Friday.

"Anyone who's wondering if there's a recession should stop wondering," said Nigel Gault, U.S. economist for Global Insight, which will release its updated forecast on Monday. "The recent data were deteriorating sharply" even before factoring in the latest impact of the credit squeeze.

Global Insight doesn't think the recovery will be quick or powerful. The economy will likely contract for three quarters and then show weak growth in the second quarter next year.

If the recession lasts from December 2007 until April 2009, as Gault suspects it will, it would be the longest since the Great Depression. And the recovery, when it comes, won't feel anything like a boom.

"It's difficult to see a real rapid recovery, certainly at the beginning," Gault said. Typically, the economy recovers when the Federal Reserve lowers interest rates to stimulate credit-sensitive consumer purchases of housing and autos.

But with credit markets jammed and consumers already reeling from too much debt, lower rates won't have the usual impact on the economy. "The Fed won't have any ammo left," Gault said.

The Dow has already dropped 287 points today, with the S&P 500 falling 36 points and the Nasdaq Composite losing 71 points. And the trading day has yet to end.

What a mess.

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