Bailout!

In principle, I'm decidedly against any bailout package for failing financial institutions. Why should taxpayers bear the cost of propping up banks that make risky, ultimately foolish decisions? Aside from that, do we really want to send the message to companies saying it's okay to take risks since failures will be buoyed by the government? Additionally, I firmly believe the individuals who took those adjustable-rate and negative amoritization mortgages without comprehending the potential repercussions should also be made to suffer their losses. Borrowing hundreds of thousands of dollars is no mean undertaking and it's a mutual failure of both lender and borrower should the risk overcome the reward.

The current situation is a little more complicated, however. The bad assets in question, in the form of mortgage backed securities (MBS), are ridiculously convoluted such that no one really knows how much money is tied up in a potential failure. While a mere 1% of homes nationwide have entered foreclosure, the rate of increase is significant and shows no signs of slowing down, which could result in a tightening of credit policy (despite the fact that the number of commercial and industrial loans has risen over the past year).

While we can debate the necessity of Paulson's bailout package, its structure leaves much to be desired (which is a politically correct way of saying "it sucks"). A $700 billion tax-payer funded lump of cash for the government to purchase bad assets, no oversight, no regard for who might succeed him as Treasury Secretary: all this so we can keep afloat firms in a market rife with blatant incompetence? No, thanks. On top of it all, there is the pressure to accomplish a bailout in one week, hardly enough time for Congress to deliberate the matter, much less consider decidedly superior alternatives.

Let's assume, for the moment, that a bailout package needs to happen ASAP (a big assumption since overt effects from these failures have yet to be really felt). Here is what I propose: instead of having the government purchase these bad assets, we should loan the money to solvent banks and private equity firms so they can purchase the MBS in question. This would be the most efficient way to pump liquidity into the market, I think. Much less oversight on the part of the government, and the financial institutions will redistribute the bad debt on their own via traditional market forces, thereby protecting the integrity of the larger financial institutions. It's not the government's place to own these securities; that's the function of our free market.

I'm interested in hearing what others have to say on the matter, in addition to any alternative bailout plans out there.

Pork Chopped

In one of my recent public tirades against Barack Obama (again in a bar on a Friday night; I know, I know, I really need to stop doing this), I came across a nice young man who, when asked why he was voting for the Democratic nominee, responded "Because he's fresh!" When I asked him to elaborate, he responded confidently that Obama was untained by Washington politics and wasn't knee-deep in things like pork barrel spending.

Um, what?

I shouldn't have been surprised by this for two reasons: a) while a pleasant sort, it was painfully obvious that this nice young man was not at all well-versed in the machinations of his candidate of choice, or politics in general (for which I don't really blame him any more than I would the vast majority of people), and b) the Obama campaign has done a splendid job of avoiding direct comparisons to the Republican candidate's record on earmarks (until the arrival of Sarah Palin on the scene). And since all the news these days is clearly biased in Obama's favor, it's not difficult to see why the press tended to gloss over this subject.

The term "earmarks" refers to requests by Senators and Representatives for federal funding of pet projects in that member of Congress' home state or district. These requests are usually tacked on to bills just prior to voting. Once the legislation is passed, the funding requests become part of the law and are appropriated. Here are the problems with earmarks:

• Transparency - as in there is none; members of Congress are not obligated to disclose how much federal money they request for their pet projects
• Procedure - the practice of tacking on a rider to a bill immediately prior to the vote is dubious at best; those rendering the decision are forced to approve spending bills they wouldn't necessarily agree with if they are in favor of the original legislation
• Causes - ostensibly, earmarks can go towards worthy projects like schools and hospitals, but politicians usually request funding for inane things that don't really warrant spending; even if the cause is worthy, many causes don't necessarily deserve federal money (i.e. your tax dollars), especially when they may have other sources of funding available

Barack Obama has a fairly poor record when it comes to earmarks. He's requested nearly a billion dollars in federal money between 2006 and 2008. In absolute terms, this is not nearly as much as others in the Senate (he's no Thad Cochran after all), but it's a fair sum considering he's been in office for only 3 years. His list of earmarks contain several shady and egregious requests, including $1 million for a new pavilion at the hospital where his wife is Vice President of Community and External Affairs, and military funding for General Dynamics, which is directed by James Crown, long-time Obama supporter and fundraiser.

Allow me to come to Obama's defense on this issue for just a moment. Earmarks are a decidedly small portion of the multi-trillion dollar budget passed by Congress. Obama has made his earmarks public record, which is certainly not the norm. Finally, Obama has finally stepped up and done the right thing by requesting no earmarks for the 2009 fiscal year, which is a lot more than we can say for certain other senators. I am giving credit where credit is due.

However, if we compare Obama's record on earmarks to Senator John McCain's, we find a stark disparity. In his 20+ years in the Senate, McCain has requested exactly zero dollars in earmarks. He eschews wasteful spending and has called on his fellow senators to do the same, unfortunately to little effect.

Why are the candidates' records on earmarks important? I believe it is one of the few ways we have of determining their fiscal responsibility based on their experiences. The deficit is about to reach an all-time high, which has the calamitous effect of raising the tax burden on our children and making it more difficult for individuals to accumulate wealth. (As an aside, there are many that argue that a moderate deficit is a good thing for the U.S. economy as it provides international collateral that promotes trade and liberates capital from inefficient markets. But is a deficit the only way to do that, and do we need such a monumental one?) While earmarks represent but a small portion of the national budget, it is one of the few indicators we have that allows us to gauge financial conservativeness. Cutting wasteful government spending eases the tax burden on all of us (and our children) and promotes individual and corporate prosperity.

Senator McCain clearly wins on this issue. I believe it is time we put a real fiscal conservative back in office, not the fake one we have now. The last thing we need is someone who plans on increasing federal spending on wasteful government projects. Obama's plan has undergone serious scrutiny and has been found wanting. While Obama plans to spend, McCain promises to cut back on expenditures and veto any bill containing profligacy in the form of earmarks.

It's comical how everyone's supposed "agent of change" is really the one mired in typical Washington lucre while the one derided as "Bush III" has been the model politician in this regard. Will the public ever learn? Even if they do, will they ever change their minds?