WASHINGTON, DC – CNN reports that US Senate voted to pass the $700 billion bailout. The Senate roll call reveals that they decided to amend (or massively “earmark,” you decide) HR 1424 and approved by a vote of 74-25. HR 1424 is titled the “Paul Wellstone Mental Health and Addiction Equity Act of 2007” but do NOT let the name fool you, although the references to 'mental health' and 'addiction' are indeed so fitting! HR 1424 is just a rehash of the HR 3997 “Emergency Economic Stabilization Act of 2008” that was barely rejected by this House roll call 228-205 on Monday, amid reports that 85-95% contacted their Congressman that they were NOT in favor of the bill.

The text of the HR 3997 bill is here from the LA Times, but I warn you its 110 pages long, and if you think your Congressman and Senators fully understand it, I have some WaMu shares at $1 to sell you.

CNN notes several changes were made in HR 1424 to try to appeal to get House Republicans to defect, who were widely responsible for killing HR 3997. What is important is to realize that all of the below earmarks are completely irrelevant when compared to the scope and magnitude of the $700 billion bailout's effect on the economy – it is just typical DC drug dealing.

Increase the FDIC insured balance minimum from $100K to $250K, while authorizing the Treasury to compensate the FDIC for any losses. This is being done to generate confidence in a banking system that is in the beginning of a severe meltdown, but I opine it might have the opposite effect intended, which is to stem withdrawals. [You can read my conservative FDIC-banking tips in this article “WaMu Gets the FDIC WHAM-O!“] Extend a several renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels. [Solar panels should work out great after we have all lost our jobs, but then we won't have any income for the government to tax, so who cares?] Extends tax breaks for research and development credit for businesses and the IRS credit that allows individuals to deduct state and local sales taxes on their federal returns. Relief for one more year from the AMT Alternative Minimum Tax, which would have robbed millions of middle-class Americans from even more of their earned wages, which is confiscated on an annual basis by the IRS. CNNMoney notes the “debate over extending AMT relief is an annual political ritual.”

Senators Barack Obama and John McCain (of course) both voted in support of the bill. President Bush, Federal Reserve Chairman Ben Bernanke, and Secretary of Treasury Henry Paulson are all avid, some would even say panicked, supporters. I think its important to note that I think all of these people are trying to do what's best for the country, but they are all dinosaurs! They all live in a Keynesian world that after 37 years is finally wobbling crazily towards a true Austrian free market economy, which you can learn about by reading this series “The Money Matrix – Prelude (PART 1/15).” The central banks and governments are struggling to maintain continued command control of the world economy and increased regulations on the market – when actually the regulation that is necessary is needs to be slapped on THEM!

My general summary of this bailout for you is that some banks will bailed out as because the US Treasury will buy their bad, illiquid mortgage-related debt with taxpayer money (remember, no one ELSE wants to buy them!). Of course the European Union Central Bank and UK Prime Minister Gordon Brown and many other foreign investors are screaming for this relief, as it will help bail them out too.

Some Americans think this bill will help some Americans pay their mortgage. Although I disagree with this socialist idea, this is a outright lie. Read the bill! Or listen to both the bill's sponsor, Senator Christopher Dodd (D-CT) and Henry Paulson; they have agreed that “the proposal will not help a single family save their home.” (Photo link)

Some Americans think that a bailout will enable the banks to offer credit once again. This is also a lie, although it's possible this would improve perhaps until just after the presidential election! but do not take my word for it. There is a plethora of opinions out there, some even in favor. However, almost all of the pro-bailout faction claim this is a “necessary evil,” but in my humble opinion after reading all I could of both sides and having studied the economic history for the past 100 years intensively, this is the exact same behavior that launched us into the bloody Great Depression. Right now we have a choice between a probable 12-18 month recession or a momentary respite followed by a multi-year Great Depression Part Deux.

This is NOT to say that we should not take other actions, my stance is simply that the $700 billion Paulson Plan is the work of economic morons. Paulson should resign in disgrace immediately. Here's why.

To put the numbers in some perspective, $700 billion is $0.7 trillion. Our Gross National Product is about $15 trillion, so we are literally spending 5% of the entire economic output of the United States to buy and hold illiquid debt from banks and investment banks. [GNP is the annual total economic output of all American firms, regardless of their location in the world.]

In another way, the entire monetary supply of the United States (M3) is estimated at $14 trillion by the expert economist John Williams, and confirmed by many others. Again, $0.7 trillion is about 5% of the total value.

In another way, all of the United States cash and coin circulation in the entire world outside of banks is $777 billion per the Federal Reserve's M1 statistic, so we are literally bailing out the system with almost as many dollars that exist on the planet in Joe and Jane Public's pockets. [Dealing with such vast sums is tough even for experienced economists which I am not, by the way. I am just an engineer, what do we know?]

On that note, you don't have to trust me completely, here is an article from fellow Nolan Chart columnist Jim Quinn “On Board the USS Titanic.” Jim does strategic financial planning professionally.

Here is an article titled “The Big Bank Job – The Insanity of the $700 Billion Giveaway” from Michael Hudson, a former Wall Street economist that was formerly employed by Chase Manhattan Bank. He was the Dennis Kucinich's Chief Economic Advisor during Kucinich's recent presidential campaign. (So this means Kucinich is not a socialist after all? 🙂

Don't trust those guys? Here's what Ron Paul has to say on the House floor and after the Monday House vote. Don't trust Ron Paul either? Well then trust the former Secretary of Treasury that Bush fired in 2002 since he would not submit to the type of sinful behavior that Goldman Sachs investment bank CEO Henry Paulson (see my article “Henry Paulson – A Quick Look at the Man“) committed that LED to this whole mess.

This October 1 Bloomberg article quotes ex-Secretary of Treasury Paul O'Neill as saying: (photo link)

“None of [the Senators] are returning phone calls. I honestly don't think they really understand it and they're so much in a bubble that it's impossible to penetrate it. If they pass this thing, it's awful what the consequences are going to be in terms of an ongoing federal relationship that doesn't need to exist with the institutions. Are we going to insist on having a federal representative on boards of directors to protect our investment? “We have no capacity in the federal government and it's not possible to create a capacity to manage a $700 billion property portfolio,'' said O'Neill, who was chairman of Alcoa Inc., the largest U.S. aluminum producer, from 1987 to 2000. “It's crazy. It's like we've lost our moorings.'' “Doesn't this seem like lunacy to you?'' O'Neill asked his interviewer. “The consequences of it are unbelievably bad in terms of public intrusion into the private sector.''

“Is anybody thinking there?'' asked O'Neill, who also served as deputy budget director in the Ford administration. “It's too late, it's not going to make any difference and it's aggravating as hell when there's a better idea and you can't even get it in play,'' he said, recognizing little success so far in pitching his own proposal.

You can read about O'Neill's idea in the Bloomsberg article. O'Neill and free market economists like Vern McKinley [see update below] are also cranking on ideas to save our economy, but they need more time! This bailout will destroy all their efforts and bring a economic cyanide-sweettooth-suicide-type-doom upon us all!

[Although there is something you can do in my humble opinion, try this article “Save Ron Paul's Voice – A Money Matrix Addendum.” Also Mr. O'Neill wrote in his book, The Price of Loyalty , claims Bush's economic policies were irresponsible and the war in Iraq was planned from the very first National Security Council meeting, well before 9/11. I agree the real start date of the Global War of Terror was not 9/11, which is a subject of one of my upcoming articles.]

WHAT TO DO

Don't screw around, get this done or our country is toast! (That is, if you want to 🙂

Go to this campaign. DownsizeDC's mission is a limited government, which you can read about here. Login or start a new account and send both your Representative and Senators a letter from this campaign. It can all be done in one letter, which DownsizeDC has formatted to allow you to add your personalized comments. This service is free and should take about 5 minutes. Next, the same DownsizeDC page that sends the letter also has the phone numbers of your US Representative and both Senators. First priority is to call the Representative and make your opinion known. You can view how they voted the on the first Paulson Plan bailout by checking the roll call above. Second priority is to thank or criticize your Senators on their votes by calling them (see roll call above). I realize this step will take some of your personal time, and you have my personal thanks if you agree and care enough to do this. Third step is to join www.CampaignForLiberty.com if you like. This only takes 1 minute. In case you have not heard the news, we are going to change this nation with a Revolution. Here is a new short clip, “A Nation in Peril” that reviews the country's situation and our plans to fix it. The website mission page is here.

Please recognize this is just one (quite important!) battle, there are plenty more to be waged against the Federal Reserve's actions, which are outside of Congressional control. However, a victory here will help send the message to Congress and the indeed the world that the American people have had enough of their abuse. No matter what the result of the House vote is, we must fight on.

Normally I would wax philosophically about how the Senate is subverting the Constitutional process, but we do NOT have the time for that! I've interrupted my vacation to write this, I admit I did not expect that Senate vote, but as that is mostly consisting of reading and writing a few other articles, it's perfectly OK. This missive was important enough to me to drop everything and complete. You see, We the People Must….

FIGHT BACK!

Jake, the Champion of the Constitution

www.CampaignForLiberty.com

[Reach the Author Here!]

10/4/08 Of course this bailout did pass on Friday 10/3. Here is my article on that.

Fight the Gestapo Tactics of our Congress, McBama, and Bush with Ron Paul and I

Published: October 3, 2008

A plea to readers on the passing of the Paulson Plan, Ron Paul's Congressional statement today, my recommended actions to take, and in support of BJ Lawson for Congress. Just updated with a link to and discussion on the 442-page bailout!

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

I never noticed, until I focused

On everything you did, you said,

You lit the fuse inside my head!

Thank you for reminding me of why I'm sick inside!

Thank you for the venom, did you think it would paralyze?

These scars I scratch, I tear are there under my skin

Where you've always been

Thank you for reminding me to sin with a grin!

– from Shinedown, “Sin with a Grin” If seeking truth is treason in the empire of lies, I am one happy sinner. Spit the venom back out!

I don't need you to be by my side to tell me that everything's alright. I just wanted you to tell me the truth. You know I'd do that for you. So why are you running away? What is it i have to say to make you admit you're afraid? Why are you running away?

– from Hoobastank's “Running Away“



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The RTC Then and the FDIC and Fed Today by Vern McKinley

Now that the House has voted down the Paulson bailout, it is time to abandon the fear-mongering and imaginary cost estimates that accompanied it and fall back on the marketplace and existing government infrastructure to address the problems of the financial sector.

Over the past few weeks, those who held leadership positions in government during our last bout with financial turmoil in the 1980s and 1990s (Nicholas F. Brady, Eugene A. Ludwig, Paul A. Volcker, William Seidman and David C. Cooke) weighed in to endorse the Paulson bailout, or what they called a resurrection of the Resolution Trust Corporation (RTC).

It is ill-advised to make any analogies between the proposed Paulson bailout and the RTC. The Paulson plan is unprecedented in its pre-emptive approach and heavy focus on avoiding both bank failures and recession through direct taxpayer funding. As to bank failures, there should be a clear exit policy that takes poorly-managed banks out of the financial system. This was clearly demonstrated by the RTC which was created to transition the assets of 747 such institutions back to the open market. The Paulson bill tries to prevent failures before they happen at potentially extraordinary cost to taxpayers. As to recession, it is unlikely that we will avoid one through legislation as was the case with the 1990-91 recession that ensued shortly after the RTC’s creation in 1989.

The lesson to take away from the RTC is that government should not hold assets and gamble that they will someday go up in value as the Paulson bailout envisions, but should take a transitional role in leveraging the market by selling institutions and assets out of receivership as quickly as possible, as the RTC did. The Paulson approach will only put off the process of clarifying market prices for the overhang of toxic mortgage related assets.

There are two established government mechanisms already in place to address this crisis without rolling out a dramatic new effort: the Fed’s lender of last resort role and federal deposit insurance. One of the jobs of the FDIC, the Fed, and the other banking supervisors is to identify which banks are illiquid, but financially solvent and which banks are illiquid, but financially insolvent. The former are candidates for Fed lender of last resort loans, the latter should be closed and sent on to the FDIC to quickly transition their assets back to the market, just as the RTC once did. In extraordinary cases, illiquid and insolvent institutions can receive open bank assistance from the FDIC to keep them operating, as was done in the 1980s with Continental Illinois and recently with Wachovia.

When it comes to bank failures, the FDIC’s resources should be the first line of defense before taxpayer funds are put at risk. As of an announcement just a few weeks ago, the FDIC estimated that $10 billion of potential losses were in their portfolio of banks as of June 30. But half of that $10 billion of potential losses was tied to the failure of IndyMac, which failed in July. Since June 30 there have been two other very large resolutions. Washington Mutual was resolved through sale to JPMorgan Chase and Wachovia was acquired by Citigroup, both at zero estimated cost to the FDIC. So as of now approximately $45 billion still remains in the deposit insurance fund and under law increases in premiums can raise billions more to further bolster the fund. Of course the situation remains very fluid and there may be new failures on the horizon, but the FDIC deposit insurance fund absorbed stress as it flirted with insolvency in the early 1990s and so far it has absorbed the stress of this crisis.

This crisis had its genesis in government policy pushing people into mortgages through leveraging of Fannie Mae, Freddie Mac, the Community Reinvestment Act, HUD and FHA programs, as well as other distortions. The market needs to settle on prices for these mortgage-related assets and it will not do that until it takes over in its job of price clearing. Some short-term pain and gyrations may be necessary to unwind these distortions, but what we don’t need is layer upon layer of government interventions and distortions that will take five or ten years to fully unwind.

Vern McKinley worked at the RTC and its Oversight Board from 1990 to 1995 and the FDIC during the banking crisis of the 1980s. He currently advises central banks and deposit insurers worldwide on their operations. If you have any other ideas, you can email Vern at vern@mckinleyforcongress.com

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“You poor kid, there have been centuries of philosophers plotting to turn the world into just that – to destroy people's minds by making them believe that that's what they are seeing. But you don't have to accept it. You don't have to see through the eyes of others, hold on to yours, stand on your own judgment, you know what that is, IS – say it aloud, like the holiest of prayers, and don't let anyone tell you otherwise.” – Ayn Rand