Dark Star

Why should America attempt an expensive, controversial, and possibly ineffective bailout strategy for the current financial crisis when a virtually costless and simpler change could solve much of the problem?

We accountants don't like publicity. Fortunately, we don't get much. Most of the public remembers Enron, but fewer remember Arthur-Andersen, the big accounting firm that went down with them. Questionable accounting was a big part of the reason for Enron's failure. I think accountants may be behind the scenes again in the current financial crisis. Are there any of us bean counters in those meetings? If there are, my bet is that they are sitting on their hands and keeping their mouths shut even though they might know about a much better (and cheaper) solution. Accountants, after all, don't talk much; and they don't like to admit errors.

Pouring 700 billion of our money into failing financial institutions seems akin to throwing spaghetti against the wall. Keep throwing until something sticks. They tell us that credit will dry up if we don't inject cash. No credit would be disastrous for the economy, but they have not explained well enough why the banks have failed so suddenly and drastically that emergency room surgery is required. Knowing why would help us poor taxpayers feel better about how the problem should be solved. Ever wonder how many other bank failures are out there waiting behind the curtain to take their bows? Are we going to throw even more money at them too?

Should we consider a solution that requires no money, or at least a lot less? Here's one. Have the SEC suspend the accounting rule called mark-to-market. By a relatively simple accounting adjustment, troubled banks' assets and capital could be increased and credit kept available. Accounting purists, cover your ears. Eyes glaze and minds wander when I say balance sheet, so let's use the acronym BS, a more appropriate description. BS's have two sides: assets on the left, liabilities and capital on the right. Banks are required to maintain certain levels of capital (the difference between assets and liabilities) in order to make loans. When assets shrink, capital shrinks. When the ratio of capital to assets drops to a certain level, (think ten-to-one), banks are not allowed to make loans. And if it drops too low, they can be classified as insolvent. This can happen overnight, and it did.

Why? Wall Street is essentially driven by emotion and the news of the day, so when nobody wants a particular security, the price falls fast and hard. Do I believe in efficient markets? Yes, eventually, but markets are often wrong for periods of time ... think years. Therefore, we are marking assets down to near zero based on markets that fluctuate wildly from minute to minute. The media have hammered us with news about drops in home prices and increases in mortgage delinquencies to the point that nobody wants to own these assets. A few rotten apples have spoiled the whole barrel. Sub-prime loans and the securities they are bundled into have plummeted in value, sometimes to zero, because nobody wants to touch that barrel, even if most of the apples are still good. Banks marked them to their current value, billions in capital disappeared with the stroke of a pen (excuse me, stroke of a key.)

So why do we have mark-to-market? Accountants have always had a hard time figuring how best to state asset value on a balance sheet. We depreciated buildings in years when their value was skyrocketing and thus understated asset values and capital. When interest rates shot up in the Seventies, banks owned tax-free bonds yielding two to three percent and had long-term loans at 6%. You could buy identical bonds with yields double or triple that and make loans at 20%. The market value of these banks' loans and bonds dropped by more than half. If they had marked to market, regulations would have prohibited many of them from making future loans. Many would have been declared insolvent and taken over by the FDIC. Yet, these banks were essentially sound. They held their loans and bonds to maturity and only suffered temporary market losses that were never realized or reported.

CPA's continued to struggle with asset valuation. What is fair? What is conservative? Enter Enron. Inside accountants at Enron recognized correctly that valuing assets at cost was often invalid, so they started playing fast and loose with asset values, using something called mark-to-model. A sharp CPA could design a believable computer model that could make the value come out wherever his boss wanted it to be. He could also convince outside auditors and regulators of the soundness of his model. Embarrassed that they had been caught looking the other way, FASB (Financial Accounting Standards Board) passed rule 157 that requires assets to be marked to market. Asset valuation based on the optimism of its owner was replaced with the skepticism of a risk-averse buyer. Sounds nice and conservative.

Enter the law of unintended consequences.

Suspending the mark-to-market rule would allow banks and accountants to revalue their assets based on more sound criteria than the euphoria or panic that pervades the floor of the New York Stock Exchange minute-by-minute. Sub-prime mortgages will likely have much higher values if considered in a longer-term perspective -- such as hold-to-maturity. I believe that the vast majority of mortgages will perform in the long term.

Presto. Up goes assets; up goes capital; banks can make loans again. Cash infusions may still be required, but this will buy us enough time to seriously examine what steps need to be taken to get runaways like Fannie and Freddie under control, how to renegotiate rates with distressed borrowers who really can handle a mortgage, and how to keep this from happening again. Can this be done? If we can approve 700 billion, surely we can do this and keep our money.

Lost in the debate over "bailouts" and "rescue packages" and "infusions of liquidity" is any concern about the proper role of the federal government as delegated and enumerated by the law of the land, the Constitution.

One hesitates to bring it up, fearing the ridicule certain to come to someone who demurs over such a quaint notion. Surely only a spoilsport would place concerns about power grabs and usurpations above getting a deal done and upsetting the stability of financial markets. The economy is at risk! We must address the economy!

Perhaps the economy, whatever that may be, really is something that can be addressed by slick talking lawyers. Trillions of dollars engaging the time and efforts of almost every adult on the globe, initiatives and decisions by individuals and organizations based on knowledge, experience, and carefully considered judgments, a vast and complex organism continually adapting and conforming to new stimuli and ever changing circumstances.... Perhaps legislation and assurances of the political class will cure whatever ails it. But I doubt it.

The idea of federal (or any) politicians "fixing"or "leading" or "making" the economy "move forward" is nothing new, but it runs concurrent with the infantile idea that the federal government exists to fix "problems" of all kinds. Listening to presidential election talk would lead an honest observer, new to the experience, to consider that the election involved some supernatural deities, ready to bring about utopia, if only they get elected, rather than the mediocre executives we get in reality.

This year we have more of the same, only worse. Obama speaks proudly of how he will move "the economy" to a brighter tomorrow. McCain, with equal fatuousness, admits his one weakness is "the economy." Now amidst the breathless excitement of the election we have a massive "problem" that needs immediate and drastic action to fix. So forget constitutional limits, delegated authority, propriety and law, get it done now and work out the details later.

The fallacy that all things are permissible if they can be attached to defending a strong "economy" is something relatively new. Recessions and Depressions have a long history in our Republic and many times, it is true, the actions of our political rulers have been the traceable causes. Thomas Jefferson left office greatly unpopular due to the deep financial depression brought about by his embargo on American shipping. Andrew Jackson fought the Bank of the United States as an emblem of economic privilege and a long period of recession followed. Grover Cleveland returned to office in 1892 facing a severe depression and swiftly repealed the Sherman Silver Purchase Act, maintaining the Treasury's gold reserve. But he still remained the constitutionalist with regard to "bailouts", refusing to distribute seed to suffering farmers: "Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character."

Recent events only magnify the danger of federal missteps and miscalculation. The futurist Presidential claim to authority over the economy through supernatural powers and beneficent will, while simultaneously trumpeting the blessings of a free market, massaged and regulated by the powerful agents of the market, would be the source of derisive laughter were it not so dangerous. Consider the current situation:

Today we have the absurdity of former Goldman Sachs CEO, Treasury Secretary Hank Paulson, with the urging of former Goldman Sachs CEO, Clinton Administration Treasury Secretary Bob Rubin, and former Goldman Sachs CEO, former New Jersey Senator, now New Jersey Governor, John Corzine, former CEO of Goldman and head of the World Bank, Steve Friedman, former Goldman CEO John Whitehead, and former Goldman alum White House Chief of Staff, Josh Bolten, urging the Federal government to write a check for $700 billion in order to secure financial stability for Wall Street firms like Goldman Sachs.

So this week we witness theatre-of-the-absurd dramatics entertaining the political class, the cable viewing politico geeks, and the semi-conscience concerned masses. Ultra-important Senators (Senators? Of all things!) race to the capitol, putting on hold their seemingly endless campaign, to pose, to inspire, to lead, and to wrangle through the various negotiations supposedly so vital to our financial futures. The President, who only recently commented on the robust health of the national economy, addresses the nation to impress upon citizens the dire straights of the economy and nation. Advocates and opponents of the deal argue long and hard over the cost to taxpayers, the lack of oversight and accountability, whether the deal will work as planned or lead to future "crisis'". But no one raises the basic point. The federal government has no right to buy, to insure, or to invest in private property in order to stabilize the marketplace (or worse, reassure international markets) or for any other reason.

We are no longer a nation of laws, communities, States, towns and the "mystic chords of memory." Our citizens are no longer free men and women but consumers needing financial protection, health care, education, and above all, benevolent politicians. We are members of the "economy." And economic health trumps all things.

SEC Clarification May Help Markets - Live Coverage -

Some economists are attributing much of the current financial crisis to something as mundane-seeming as accounting.

The Securities and Exchange Commission and the Financial Accounting Standards Board have just made an announcement that, dry as it sounds, may mean a great deal: "When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable."

The SEC is not telling holders of hard-hit mortgage-backed securities that they can willy-nilly slap any value on them they want.

What the SEC is saying is: You can take other factors into account when valuing them.

There is no market right now for the worthless mortgage-backed securities -- that's one of the reasons we're in this crisis. That means financial institutions that are holding them must value them well below their former value, sometimes near zero. That makes the institutions themselves worth much less.

Accounting is not something that ordinary taxpayers think about much, but it could hardly be more important to businesses: It's the value they place on what they own, what they owe and what they can sell.

An odd-sounding accounting phrase at the heart of this is something called "mark-to-market" accounting. Many think that if this requirement were ended, the crises could be eased.

Simply put, mark-to-market accounting requires companies to set the value for the assets they own at the price they could fetch on the open market right now. The prices must be "marked to market;" hence the phrase.

What does that have to do with the current crisis? The root problem now is that financial institutions have been caught holding value-less, or "toxic," assets on their books, such as the mortgage-backed securities based on sub-prime mortgages that have defaulted.

The government believes that those assets will be worth something soon -- that's why they want to buy them in the $700 billion Wall Street rescue plan. But under mark-to-market rules currently required, they are worth almost nothing, threatening those who hold them with insolvency.

If the holders could place a value on the assets equal to the estimated value they should bring in the future, suddenly the balance sheets of these financial institutions would look a lot healthier.

Today's SEC rules clarifications do not end mark-to-market accounting. But they do let the holders of these low-value "toxic assets" to use other ways to value them, which probably will lead to an increase in their value, even though that is not the SEC's intention.

If all this sounds like voodoo accounting, well, all accounting can sound that way sometimes. But remember this: Even though homeowners have defaulted on sub-prime mortgages, there is a house at the bottom of it all and that has real value.

No doubt due to some leftwing rapid response, I'm getting deluged with this clip from some documentary called "Jesus Camp" in which kids appear to be praying to Bush. A few quick points:

1. Yes, that stuff ain't my cup of tea either.

2. But, the kids are not in fact worshiping Bush. They're praying for him.

3. And most important, the clip and the activity it shows wasn't part of any campaign effort. The Bush campaign didn't use glassy-eyed kids in a messianic P.R. stunt to promote their candidate, nor did any affiliated outreach group. Meanwhile, that is precisely what the Obama camp is doing — with the active support of the head of NBC, the parent company of MSNBC by the way. The analogy doesn't work at all. And, for those lefty-readers who think the analogy does work, they should be ashamed of the fact that their candidate is in fact doing the same thing. Again: objectively, it's not the same thing, but if you're going to email me the Jesus camp video as some sort of gotchya, that is in no way, shape or form a defense of the Obama Youth video. It is, on your own terms, an indictment of it. If you want to defend the Obama Youth video, defend it. I'd like to see you folks try.

Oh and for giggles: imagine the shrieks and howls if Rupert Murdoch had anything to do with a Children of the Corn for McCain project like this.

There’s only one way to make sure that there is some accountability in the current financial crisis. Americans need to insist on absolute transparency.

Now that Fannie Mae and Freddie Mac’s failures have forced the federal government to put both into conservatorship — costing taxpayers some $200 billion — Americans, who now own the two entities, are entitled to know what role the government-sponsored enterprises (GSEs) played in creating this mess.

The Treasury Department has told members of Congress that the U.S. faces an economic tsunami if a bill allowing the government to purchase up to $700 billion of toxic securities from financial firms is not passed this week.

Unfortunately, this solution of giving the U.S. Treasury almost unlimited power to buy distressed securities could be avoided if the government made some simple (and temporary) changes to mark-to-market accounting rules. So far, and for many unknown reasons, these changes have been considered off limits.

Why drawing such a hard line in the sand is so important is a real mystery. Certainly, firms that took excessive risk should be punished. And the U.S. should avoid creating moral hazard whenever it can. But saying "I told you that you would stay in your room for a whole week if you disobeyed, and I don't care if the house is burning down…You are going to spend an entire week in your room" is absurd. If we are really talking about the end of the world as we know it, who should really care about relaxing the rules for a short time to get us through?

Let's not take this the wrong way. Mark-to-market accounting is a good thing. It makes sense most of the time for most financial instruments that are traded frequently and openly. But there are special circumstances, and today's financial market problems would meet any definition of the word special.

It is true that home foreclosures have risen, but a vast majority of mortgages are still being paid on time. As a result, the market prices of subprime loan pools today have absolutely no relationship to the actual performance of the bonds. If every subprime loan went bad, and banks recovered just 40 cents on the dollar, the bonds would still be worth 40 cents. But the market has pushed bonds well below that level, taking down venerable firms and causing the government to consider draconian solutions.

In other words, mark-to-market accounting--not the reality of the economy or the actual credits--has created much of the financial turmoil that has shaken the world. Imagine if you had a $200,000 mortgage on a $300,000 house that you planned on living in for 20 years. But a neighbor, because of very special circumstances, had to sell his house for $150,000. Then, imagine if your banker said you had to mark to this "new market" and give the bank $80,000 in cash immediately (so you would have 20% down) or lose your home. Would this reflect reality? Not at all. Would this create chaos? Absolutely.

And it is happening all over Wall Street. Merrill Lynch (nyse: MER - news - people ) was forced to sell $30.6 billion of illiquid mortgage securities to Lone Star Funds for just $6.7 billion, or 22 cents on the dollar. If it did not sell, these bonds might have fallen to 18 cents and further eroded its capital on a mark-to-market basis. It couldn't take the chance.

But what if Merrill was allowed to hold those securities on its books, without marking them to an illiquid market? The company would not have had to take a $24 billion loss. And maybe investors in Merrill Lynch would not have had to settle for a $29/share buyout from Bank of America (nyse: BAC - news - people ), a 60% markdown from the share price less than a year ago.

After all, everyone knows those loans were worth more than 22 cents. The actual performance of the bonds was much better than the price, and Lone Star was able to take advantage of the fact that Merrill was over the proverbial knee of accounting rules.

All of this could be avoided if a system were put into place that allowed private companies to hold these distressed assets. Rather than a centralized holding place, why not use a decentralized one? Why not allow financial firms with structured (Tier 3) assets issued between December 2003 and August 2007 to suspend mark-to-market accounting for those assets, and receive government insurance as a backstop?

This would be a temporary solution--one that doesn't require any ultimate change in the Sarbanes-Oxley Act or mark-to-market accounting rules--and the government could even make money by selling insurance with less risk to the taxpayer than buying it outright.

In essence, a firm could sequester, or firewall off, these specific assets from the rest of its balance sheet. It could either finance this itself or bring in outside financing. The firm would promise to hold the securities to maturity or until government insurance was no longer needed when it liquidated the assets. All of these deals could be settled in the private sector, in multiple locations, with the government looking over the shoulder of each deal.

If the rules had been relaxed a little bit for these specific assets, Merrill Lynch could have created its own private equity investment fund inside its corporate structure instead of selling at a huge loss to Lone Star, which created its own holding vehicle.

This plan would leave mark-to-market accounting regulations intact. It would be a temporary change in the rules. Its most important attribute is that it leaves taxpayer powder dry for another day. It also allows the private sector to price assets in an environment that is not contrived and will help avoid the loss of--or government takeover of--more private firms.

Even if the Treasury initiates a Resolution Trust Corporation-type vehicle, the slight changes in the accounting rules for these specific assets should still be made. If a firm does not want to accept the government bid for its distressed assets, it would have an alternative. It would also create a level playing field because the Treasury does not have to mark to market. A competitive marketplace for these securities would ensure the current holders get a price that is not based on a fire sale.

This plan stops the mark-to-market meltdown without undoing the good that mark-to-market accounting has done, protects the taxpayer, stops the losses at financial firms at a crucial time and, therefore, helps end the shorting of stocks and bonds that has kept the financial system on the rocks without making it illegal. Best of all, it keeps the government from taking a massive and draconian step toward financial socialism.

Brian S. Wesbury is chief economist, and Bob Stein is senior economist, at First Trust Advisors in Lisle, Ill. They write a weekly column for Forbes.com.

The Bush administration must take two steps immediately to quickly halt the unending, enervating credit crisis: shore up the anemic dollar and, for the time being, suspend "marking to market" those new financial instruments, such as packages of subprime mortgages.

The weak dollar is pummeling equities, disrupting the economy, distorting global trade and giving hundreds of billions of dollars in windfall revenues--through skyrocketing commodity prices--to our adversaries such as Iran and Venezuela. Not since Jimmy Carter has the U.S. had a President so oblivious to the damage done by an increasingly feeble greenback.

The Federal Reserve can rally the markets for a day or two by finding some new mechanism through which to lend more money to banks and other financial institutions. But this is the proverbial Band-Aid for a patient who is beginning to hemorrhage.

The Administration acts as if the dollar were like the sun, its rising and falling beyond any control. Countless times experience has shown that notion to be false. The U.S. Treasury Department could buy dollars in the currency exchange markets. Our allies would gladly cooperate with such an operation; their exports are being hurt more and more. The Fed could mop up some of the excess liquidity it has created since 2004, even as it makes targeted loans to beleaguered banks and financial houses.

The other measure: The Treasury Department and the Fed should get together with the SEC, the Comptroller of the Currency and other bank regulators and announce that financial institutions for the next 12 months will no longer write down the value of exotic financial instruments (primarily packages of subprime mortgages). Instead, writedowns will occur only when there have been actual losses on those assets. If a mortgage defaults, a bank will then--and only then--recognize the loss.

It's preposterous to try to guess what these new instruments are worth in a time of panic. Such assets are being marked down to increasingly arbitrary low levels. But when a bank books such a loss, it must replenish depleted capital, even though cash flows for most financial firms are still positive. Worse, when forced by panicky regulators and lawsuit-fearing accountants to write down the value of these securities, institutions will dump assets in a market where there are temporarily few or no buyers. The result is a spiraling disaster. So let's have a time-out on markdowns until we actually have real experience in what kind of losses are actually going to occur.

These two steps would quickly end the panic. Until that happens, expect more trouble.

Fallout from yesterday's bailout vote in the House continues. As Paul wrote yesterday, the issue is one on which reasonable conservatives can differ. Conservative cases can be made both for and against the package, as improved by House Republican negotiators, that came to the floor yesterday. This is well illustrated by the divergent views of two Minnesota Representatives, John Kline and Michele Bachmann.

Kline and Bachmann are both friends of mine; they are both great people, smart legislators and solid conservatives. John voted for the bill, Michele voted against it. Both released statements explaining their votes; they sum up as well as anything I've seen the conservative cases pro and con.

John Kline writes:

Today, members of Congress were asked to make a difficult decision. As it became increasingly clear that the financial crisis facing America was extending beyond Wall Street and threatening the jobs, homes, and retirement security of the men and women reporting for work on Main Streets throughout Minnesota and across America, we were asked to cast our vote for an imperfect, but important, solution. Unfortunately, this bill did not pass, and the crisis continues.

In recent weeks, I have heard from thousands of men and women in Minnesota’s 2nd district. To a person, they voiced concern about the liabilities they would face under the bailout plan proposed by President Bush and Treasury Secretary Henry Paulson. Many also expressed worries about how the current financial instability would threaten them personally – their bank accounts, retirement savings, and jobs. Throughout negotiations, I represented the voices of these men and women and worked with my colleagues to address both concerns, insisting that any effective solution must protect taxpayers and ensure accountability while returning stability to our financial markets.

The result was imperfect, but it was a bipartisan solution that I believed was in the best interest of Americans. Supported by such diverse groups as AARP, Citizens Against Government Waste and the U.S. Chamber of Commerce, it provided increased protection for the American taxpayer by instituting greater oversight and transparency. My Republican colleagues and I stood firm against the original, seriously flawed plan, as well as irresponsible provisions supported by my Democratic colleagues – including slush funds for left-leaning political organizations. We demanded that Wall Street finance its recovery through a federal insurance program. We also fought to ensure no golden parachutes would be available to corporate executives who made reckless decisions. But the bill failed, and we must, once again, return to negotiations.

As we can see from the precipitous decline in the markets, this crisis has not dissipated. I urge my colleagues not to allow discussions to devolve into partisan bickering. We must not act in a way that exacerbates the problem. As we now resume negotiations, I am hopeful that we can put aside our differences and work together to shield Americans from further harm caused by Wall Street and Washington.

Michele Bachmann writes:

Today marks an historic moment for America as a solid bipartisan majority of Congress rejected the fatally flawed Paulson Plan. Standing shoulder to shoulder with taxpayers, we declared that we can do better.

As I’ve stated previously, this plan was rushed, unworkable, and short-sighted. A majority of House Republicans have parted ways with President Bush on this plan and we demand that alternative proposals be put on the table. There is universal agreement that this plan was bad, but its supporters claimed it was the only option. There were alternatives available, but Speaker Pelosi and the Administration chose to ignore them and used every parliamentary trick in the book to stifle debate. Now, they will have to listen to the voices of American taxpayers who refuse to open their checkbooks to Wall Street to write a $700 billion check with no strings attached.

I support a plan that would have Wall Street bail itself out, not hardworking taxpayers, by requiring institutions to insure troublesome assets that are causing today’s credit crunch. It would suspend mark-to-market accounting, which forces companies to take losses on artificially devalued assets on an artificial timetable, to give investors more confidence.

The plan I support would break up Fannie Mae and Freddie Mac -- government sponsored enterprises that are at the heart of this crisis -- so that the encumbered taxpayer no longer backs them -- implicitly or explicitly -- and so that they do not artificially grow larger than the market will allow. We cannot pass legislation that sets America up for a Groundhog Day reprise of this mess and that means changing the problem at its core - the GSEs.

Furthermore, the plan I support suspends capital-punishing tax rates to bring more capital into the U.S. markets rather than our foreign competitors. And, the plan ensures the Federal Reserve’s attention is focused on long-term price stability rather than short term economic growth. Finally, it requires the US Treasury to write rules keeping executives who made the risky decisions from personally profiting from them with excessive compensation or golden parachutes all at the expense of taxpayers. We can't have a market that only condones risky behavior. The balance between risk and reward is an important part of the free market.

My colleagues and I stand ready and willing to negotiate with any parties on a plan that will help stabilize our financial markets and relieve the liquidity crisis without exposing taxpayers to a $700 billion bailout debacle.

To a considerable extent, the choice turns on risk assessment. If a little time goes by and the financial sky doesn't fall--at the moment, the Dow is up 247 points today--and a significantly better, more market-oriented deal is negotiated, the "No" votes will look very good. On the other hand, if further negotiations are unproductive and in the meantime the damage spreads beyond the financial sector, "Yes" votes will look prudent with hindsight.

It may well be that John Kline and Michele Bachmann differ in their assessments of these risks. There is, too, another obvious difference: Kline is a three-term Congressman with no serious opposition this year. Bachmann is a first-term Congresswoman who is very much in the Democrats' sights. For now, at least, her vote insulates her against the political trap that Nancy Pelosi and the Democrats tried to lay yesterday.

Quite a few conservatives are exultant this morning about yesterday's vote. That reaction strikes me as premature. It's hard to believe that the Democrats will agree to legislation that takes the markedly more free enterprise-oriented approach argued for by Republicans. If that is the case, we likely will see either the passage of a bill that differs only modestly from the one that failed yesterday, or a widening economic collapse that panics the House into reversing yesterday's vote. So, while the "Nos" are triumphant today, it's far from clear that this will continue in the long run.

I believe it was Ronald Reagan who noted that the question was not whether his policies were popular; the question was whether the effects of his policies were popular. He was proved right when the media stopped talking about "Reaganomics" once it became clear that his administration's economic policies had been spectacularly successful.

Members of the House of Representatives report that phone calls and emails coming in to their offices have run as much as 1,000 to 1 against the financial bailout proposal. In both parties, it was essentially the members who face tough re-election campaigns who voted "No" today. That vote was popular; whether its effects will be popular remains to be seen.

A great many knowledgeable people have warned that unless something like the proposed bailout is done, the result will be disastrous for the broader economy. For the first time in my lifetime, serious people are talking about the possibility of a depression. The credit problem is world-wide. If there is a competing school of thought, a view that the credit crisis isn't so bad or will take care of itself without great damage being done, I haven't seen it articulated.

Many of those who voted against the compromise proposal today acknowledge that something needs to be done. No doubt politicians are huddling all across Washington, trying to come up with new proposals. Mike Pence spoke against the bill today, saying "there are alternatives to massive federal spending." He argued that the House should adopt the Republican plan that included an insurance program, "fast-acting tax strategies," and temporary reduction of the repatriation tax.

But the Republicans are a minority in the House. They were able to get an insurance program included in the bill that was voted down today, even though Pence said that it "falls far short of the substitute that Republicans desired." But the Republican negotiators no doubt did the best that they could. Does anyone seriously believe that the Democratic House will now turn around and adopt the Republican proposal?

Given the extent to which the bill was modified over the weekend, it is hard to believe that many of those who voted "No" are holding out for a few more tweaks. Presumably they are opposed to any sort of bailout on principle.

Today, that is a popular policy. Whether its effects will be popular is not so clear. Today's nosedive in the stock market was not reassuring. It may be that by November, Congressmen will not be so eager to remind voters of their "No" vote today.

PAUL adds: Among the House conservatives who voted "Yes" were Blunt, Boehner, Cantor, Kline, Lungren, Ryan, Tancredo, and Weldon. So there's a conservative case for voting in favor of this legislation -- basically the one that John and Bill Otis have made on this blog. There's also a conservative case for voting "No," and I respect those conservatives who did so. But under the circumstances -- including the prospect that the Dems will pass significantly worse bailout legislation down the road -- I think the conservative vote today should have been "Yes."

Joseph Robinette Biden – known to all as "Joe" – was once the most talked about American politician in Britain. Unfortunately for the senior Delaware Senator, all the talk was accompanied by incredulous laughter. As part of his Presidential campaign 20 years ago, he lifted verbatim and without attribution Neil Kinnock's celebrated remarks: "Why am I the first Kinnock in a thousand generations to be able to get to a University ... was it because all our predecessors were thick, those people who could work eight hours underground and then come up to play football?"

Biden told an audience at an Iowa fairground: "I started thinking as I was coming over here, why is it that Joe Biden's the first in his family ever to go to University ... is it because our fathers and mothers were not bright... who worked in the coal mines of Northeast Pennsylvania and would come up after 12 hours and play football?"

Note the overt claim to spontaneity at the outset of the plagiarism; but it wasn't just that which left his run for the Presidency buried under an avalanche of ridicule. It rapidly emerged that Biden was not the first member of his family to go to university, and that the closest any ancestral Bidens came to working underground was a grandfather who was a mining engineer – and during the campaign Biden also told a number of gratuitous untruths about his own academic record.

It would be very difficult for a politician in this country to be taken seriously ever again, after such a humiliation; but Americans are a more forgiving people, and so Biden was able to entertain them once again during the current race for the White House. Thus last year he declared that his then rival, Barack Obama, was "not yet ready for the Presidency", which was not a post suitable for "on-the-job training", but graciously acknowledged: " I mean, you got the first mainstream African-American who is articulate and bright and clean and a nice-looking guy, I mean, that's a storybook, man."

Other African-American politicians were hardly amused by the imputation that they were not "clean", and I don't suppose Obama himself was grateful. Still, the Illinois Senator was happy to choose Biden as his vice-presidential running-mate, for several reasons. He is not married to Bill Clinton; he has a strong following among white blue-collar voters, which Obama desperately needs; above all, he is said to have the experience which Obama lacks – he has been a Senator for 36 years and is Chairman of the Senate Foreign Relations Committee.

For all the longevity of his tenure, Biden does not deserve the description lavished on him last month by the Los Angeles Times (among others) as "an acknowledged foreign policy sage". He voted against using American military force to remove Saddam Hussein's army from occupied Kuwait, but voted for the American invasion of sovereign Iraq in 2003. Later, he voted against the "surge" which has brought a degree of stability to that benighted country, proposing instead that it be allowed to break up along ethnic lines – the now discredited "Biden Plan". Experience is a wonderful thing, of course – but only if you learn the right lessons from it.

Doubtless, however, Joe Biden will stress the immense superiority of his acquired wisdom over Sarah Palin's much briefer curriculum vitae, when their one-off vice-presidential debate takes place on Thursday in St Louis, Missouri. Indeed, the Democrats and their camp-followers in the press have been chortling in anticipation of a massacre, especially after Mrs Palin's performance when interviewed last week by CBS's Katie Couric.

The Republican vice-presidential candidate had been unable to elaborate on the way in which John McCain had attempted to enforce greater regulation on the finance industry, beyond his demand for more supervision of the biggest mortgage lenders; and she struggled to justify her claim that being Governor of Alaska gave her a special insight into the threats from Russia.

Neither of her responses was articulate. But they weren't factually incorrect. She didn't make anything up. That's Biden territory. When he faced the deceptively easy-going Ms Couric, he told the CBS anchorwoman, a propos deals to rescue Wall Street: "When the stock market crashed, Franklin D Roosevelt got on the television and didn't just talk about the, you know, princes of greed. He said, 'Look, here's what happened'." As others, but not Ms Couric, have since observed, the US President at the time of the 1929 stock market crash was not Roosevelt, but Herbert Hoover; and Roosevelt didn't go on television, probably because no-one in America owned one at the time.

Such dedicated and inarticulate imprecision with the facts of history should not disqualify Joe Biden from being taken seriously as the next-in-line for the Presidency; he got away with his goof, as easy-going and genial men tend to do. But imagine what hysteria would have ensued if it was Mrs Palin who had constructed a fictitious account of the circumstances surrounding the great Wall Street Crash.

It is true – at least on actuarial grounds – that John McCain is more likely to die in a first term of office than a President Obama; and ahead of Thursday's debate between Biden and Palin, Democracy for America (the group started by former Democratic Presidential candidate Howard Dean) has run a television ad showing grotesquely enlarged photos of McCain's scarred face immediately following his most recent operation for melanoma, with the punch-line: "John McCain is 72 years old and had cancer four times. Why won't he release his medical records?"

As a tasteless way of terrifying the American public about the possibility of a President Palin, that certainly scores high on the sick-meter. But if Barack Obama does become US President, we should be very grateful that he is in such splendid physical condition. Nothing in Joe Biden's record, long as it is, suggests that he has the attributes one would wish for in a head of state. There would be plenty of laughs, though.

(Hat tip: Michelle Malkin)

What now? If nothing passes and a crash comes, Republicans risk getting tagged for the blame for a long time to come. The vote is a blow to John McCain, who had so dramatically “suspended” his campaign to return to DC and broker a deal. His campaign had explained his role as bringing to the table and coaxing along House Republicans, whose revolt now makes him look ineffectual.

Yet the bill will likely be revived — and deserves to be.

The phrase the “real” economy has become a hallmark of this debate, implicitly contrasted with the “fake” economy of the financial world. McCain talks of the honest laboring man as the strength of America. No doubt he is, but he wants to buy a house (which requires a mortgage), not pay for everything with cash (which requires credit cards), have a job (which requires a business that is very likely dependent on loans) and buy big-ticket consumer items he can’t pay for upfront (which requires car loans, etc.). Freeze up all those sources of credit, and economic life as we know it ends.

Already, the panic has sent investors to the safety of Treasury bills, leaving less capital for consumers and businesses. Few realize how much businesses rely on short-term loans for routine operations like meeting payroll, and how that most characteristic American entrepreneurial figure — the guy with a bright idea he works out in his garage — depends on investment and loans.

Conservatives who make so much of their knowledge of the markets would ordinarily be the ones to point this out, but they have a blind spot for the market’s failures. The financial system is subject to periodic panics that, if left to work their course, will wreak economic havoc out of all proportion to reason. They take down good institutions along with the bad.

If it works, the Paulson plan’s most worthy accomplishment will be saving innocent bystanders from the wildly swinging tail of the blind and panicked financial beast.

The financial crisis is so disturbing exactly because finance is so centrally important. Our sophisticated financial system has been one of the glories of Anglo-American capitalism. “The Bankers, accountants, investors, traders, and corporate officers whose joint efforts brought this system forth have changed the world far more profoundly than virtually any of their contemporaries,” writes Walter Russell Mead in his book God and Gold: Britain, America, and the Making of the Modern World.

Without this system, Britain and America wouldn’t have risen to global pre-eminence, and consumer capitalism as we know it — dependent on credit — wouldn’t exist. We may be about to find out what happens when it is rocked to its foundations.

Lowery is a Conservative and regular contributor to NRO. I have a lot of respect for him. His advocacy for this bailout is a great example of he argument that most Conservatives who are in favor of the bailout are using.

The problem I have with this argument - and the bailout in general - is that nothing at all is done to prevent it from happening again and again. Is the answer to saving "our sophisticated financial system," to change it so fundamentally by nationalizing huge swaths of it and doing noting to counter the underlying problems -- which are disastrous government interventions in the market?

The answer to socialist footholds in our free market economy is - more socialism? Does that sound right? These are Conservatives saying this?

Something needs to be done -- maybe even a $700 Billion bailout... but attached to that bill should be at least a dissolving of the two GSEs that got us here. Or at least an acknowledgement by Conservative advocates that that would be desirable.

After all, what's "rocking us to the core," isn't the fact that the bailout didn't pass, it's that the government decided long ago to nationalize the risk found in Fannie Mae and Freddie Mac and then forced banks to use them via CRA.

Bailout Politics by Thomas Sowell on National Review Online

Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis.

Among the Congressional “leaders” invited to the White House to devise a bailout “solution” are the very people who have for years created the risks that have now come home to roost.

Five years ago, Barney Frank vouched for the “soundness” of Fannie Mae and Freddie Mac, and said “I do not see” any “possibility of serious financial losses to the treasury.”


Moreover, he said that the federal government has “probably done too little rather than too much to push them to meet the goals of affordable housing.”

Earlier this year, Senator Christopher Dodd praised Fannie Mae and Freddie Mac for “riding to the rescue” when other financial institutions were cutting back on mortgage loans. He too said that they “need to do more” to help subprime borrowers get better loans.

In other words, Congressman Frank and Senator Dodd wanted the government to push financial institutions to lend to people they would not lend to otherwise, because of the risk of default.

The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously.

But the magic words “affordable housing” and the ugly word “redlining” led to politicians directing where loans and investments should go, with such things as the Community Reinvestment Act and various other coercions and threats.

The roots of this problem go back many years, but since the crisis to which all this led happened on George W. Bush’s watch, that is enough for those who think in terms of talking points, without wanting to be confused by the facts.

In reality, President Bush tried unsuccessfully, years ago, to get Congress to create some regulatory agency to oversee Fannie Mae and Freddie Mac.

N. Gregory Mankiw, his Chairman of the Council of Economic Advisers, warned in February 2004 that expecting a government bailout if things go wrong “creates an incentive for a company to take on risk and enjoy the associated increase in return.”

Since risky investments usually pay more than safer investments, the incentive is for a government-supported enterprise to take bigger risks, since they get more profit if the risks pay off and the taxpayers get stuck with the losses if not.

The government does not guarantee Fannie Mae or Freddie Mac, but the widespread assumption has been that the government would step in with a bailout to prevent chaos in financial markets.

Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: “The Federal Reserve is concerned” that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to “multiply the profitability of subsidized debt.”

Chairman Greenspan added his voice to those urging Congress to create a “regulator with authority on a par with that of banking regulators” to reduce the riskiness of Fannie Mae and Freddie Mac, a riskiness ultimately borne by the taxpayers.

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers.

As he says, "This bailout creates the expectation of future bailouts."

Bad. Wrong. Immoral.

NOTE: I highly recommend Dr. Sowell's books. He has a knack for making extremely complex ideas very understandable. If you want to get a better understanding of economics, try Basic Economics, Applied Economics, or Economic Facts & Fallacies. I've read them all and they are excellent.

... Cantor also spoke about the causes of the current crisis. He brought up the Community Reinvestment Act, a bill that was well-intentioned — meant to prevent discrimination in lending — but whose long-term effect has been to bring less creditworthy borrowers into the housing market through sub-prime mortgages. He also mentioned the role of Fannie Mae and Freddie Mac in encouraging risky lending by purchasing and securitizing sub-prime loans from mortgage banks and depository institutions.

Would you say it is a positive thing that this bill failed?

We have a pending economic crisis that is before us, and we have to do something to calm the markets and make sure that taxpayers are protected. What we were trying to do all week was provide some improvements to Paulson’s plan that would lessen the burden on taxpayers and at the same time make sure that Wall Street would share the pain in cleaning up the mess that we’re in.

It seems that when the Democrats decided to bring the vote to the floor, they just didn’t have their votes together. Hopefully we’ll be able to reboot, and bring a plan back that meets the needs of the American people, and that will hopefully help us avoid falling into further economic decline... I think what you saw today was the will of the American people having a real impact, as it should, on the legislative body. People couldn’t quite understand why it was that we were asking them to fund a $700 billion bailout... What we need is to put more taxpayer protections and more market reforms in the bill. Hopefully we’ll be able to come together and work in a bipartisan way and pass a plan that will have lasting impact.

Was it a mistake to begin with the blueprint that Paulson provided, and do you think it would be a mistake to do that as you go on and try to develop a new bill?

I really think the emphasis has to be that we don’t want to leave taxpayers holding the bag. A lot of people got sticker shock when they saw $700 billion. And so one of the things we’ve got to recognize is that Wall Street has to pay its fair share.

And this is where your insurance plan comes in?

Exactly. We’ve been working all week to craft a government-guaranteed insurance plan that would substitute premiums paid by Wall Street investors for taxpayer dollars. It’s a plan that can be found that will meet the needs of the liquidity crisis and the crisis of confidence on Wall Street, and at the same time protect the taxpayers.

Do you think that there’s a way to make that the backbone of the recovery package, instead of merely an option?

The insurance plan will work for a certain class of assets — the assets that have mortgages underneath them that are actually performing, but have now been tainted and are distressed due to the presence of so many toxic assets in the marketplace. The toxic assets are the collateralized debt obligations and the other fly-by-night securities — there’s frankly very little way you could figure those out, to insure those. So you’d have to have some kind of purchasing program, the way Mr. Paulson is thinking, although we don’t think you’d need as much as the $700 billion he was talking about.

Have the bankers in your district expressed any concerns about credit in the current market?

Absolutely. I hear from community bankers who talk about being very concerned about the ability to access credit markets — the ability for the (Federal) Home Loan Bank board in Atlanta to access the credit it needs, in order to be there for our community banks. There’s no question that there’s great concern about small businesses being able to access credit, about families being able to access credit. We really still have a very grave situation on our hands, something we have to act on.

The bill that failed on the floor of the House today did not reflect the leadership we need in terms of resolving the crisis we’re in now.

Barney Frank, Barack Obama, and other Democrats have suggested that this problem resulted from a philosophy of deregulation. Is that explanation fair, or what’s really at the heart of this?

A basic explanation of how we are where we are is the devalued state of the real estate market. We’ve had monetary policies that have allowed free credit to flow. We’ve had oversight regulators that have not done an adequate job in certain instances. But let’s see where we first started going off course. That was during the Carter administration, when Congress began this process of pushing lending institutions into extending credit to uncreditworthy borrowers.

This is the Community Reinvestment Act that you’re talking about?

Yes. And in fact, as the regulations developed, banks would be punished if they couldn’t demonstrate a certain number of loans on their books that were extended to those who were not worthy of that type of credit. It started a very bad trend. And then we had Fannie and Freddie, who continued this cycle and really ramped up that kind of lending in an exponential way with a very ineffective oversight regime, a fault of both Congress and the administration.

If there were one or two changes you could make to get more Republicans on board, what would you do in order to have the bill pass in an improved version?

First of all, an insurance program that would apply to certain classes of assets would help reduce the amount of money flowing out of the Treasury. Also, I think if you put in language about the mark-to-market rule — repealing that instead of just asking for a study about it. There’s not unanimity, but there’s a growing consensus about the impact of the implementation of that rule by the regulators as well as the accounting firms.

I also think that folks are very concerned about the short-selling situation at the FEC. We absolutely have to reinstate the uptick rule, and from what I’m told there’s runaway naked short-selling (the short-selling of stocks one does not actually possess) that tends to imperil the market. We need much stricter enforcement on the naked short-selling.

Tennessee Republican Marsha Blackburn was among the conservative Republicans who bucked both parties’ leaders to kill the Emergency Economic Stabilization Act of 2008 on Monday. She explained her reasoning to National Review Online editor Kathryn Lopez.

Kathryn Jean Lopez: Monday morning on Bill Bennett’s radio show, you said you were leaning “no.” What solidified that no?

Marsha Blackburn: Hearing from my constituents in the district solidified the “no” vote. We had phone calls and e-mails by the thousands. They did not want a bill that would favor Wall Street over the taxpayer.


Lopez: Are you concerned by your vote you might have played a role in a pending market collapse?

Blackburn: The markets like certainty. We know that. We also know that the bill before us today did not solve the underlying problems. Some provisions that could have immediately addressed the liquidity issue, such as mark-to-market, uptick rule, increases in FDIC insurance could be done with immediate rule changes should be done.


Lopez: Are you worried you might have just helped hand the election to Obama?

Blackburn: I don’t think this is handing the election to Obama. A more solid solution, crafted this week, will restore confidence in the market and in Congress. I do think it is important to get this done right so that we preserve free markets for the future.


Lopez: Some on the Right are arguing “no” votes were irresponsible. Why do you think they’re wrong?

Blackburn: The responsible action is to pass the most effective legislation in as short a time frame as possible. The bill before us didn’t do that. It leveraged too many federal assets and too few Wall Street assets. It also ignored some market-oriented solutions that could be carried out immediately. Again, I’d look to options like mark-to-market reform, increases in FDIC insurance, etc.

There are two American election campaigns currently running. The first, in the mainstream media, accepts Barack Obama at face value, no questions asked, while it viciously turns over Sarah Palin and her family whom it subjects to lies, smears and character assassination. The second, being conducted in the blogosphere and (with one or two notable exceptions such as the Wall Street Journal) not alluded to at all by the mainstream media, is the site of verbal warfare between Camp Obama and bloggers who are practicing journalism as it used to be practiced – going behind the propaganda to dig out information and asking questions about it. The blogosphere is not only rebutting the Palin lies but also piling up the most disturbing revelations about Obama’s background and associations -- compounded by the troubling manner in which Camp Obama responds to these discoveries.

A few months ago, a claim was made by former Manhattan Borough president Percy Sutton that Obama had been funded through Harvard law school by Khalid Al-Mansour, a ‘mentor’ to the founders of the Black Panther party and advisor to ‘one of the world’s richest men,’ Saudi prince Alwaleed bin Talal. It was Prince Alwaleed whose $10 million check to help rebuild Manhattan after 9/11 was refused by New York mayor Rudy Guiliani because the Saudi prince hinted publicly that America’s pro-Israel policies were to blame for the attacks.
According to this story by Kenneth Timmerman, Camp Obama denied this claim -- and referred to a story on Politico.com in which reporter Ben Smith wrote that ‘a spokesman for Sutton’s family, Kevin Wardally’ said that Sutton had been mistaken when he made those comments. But when contacted, Sutton’s family not only denied that Sutton had misspoken but also said they had never even heard of Kevin Wardally – who appears to work for a Harlem political consulting firm.

So the claim that Obama was funded through Harvard by a radical Black Muslim activist with ties to the Saudis remains on the table.

Some of the most troubling questions, however, arise from Obama’s relationship with the unreprentant former Weather Underground terrorist William Ayers. Obama has been at pains to play down this relationship, dismissing Ayers as just ‘a guy who lives in my neighborhood,’ and ‘not somebody who I exchange ideas with on a regular basis.’ But thanks to the exemplary and important journalism of Stanley Kurtz, it is becoming ever clearer that such claims are deeply disingenuous and conceal a significant and long-lasting working relationship with a man who has never renounced his terrorist past. This relationship centred upon a fund called the Chicago Annenberg Challenge (CAC), which although founded by former ambassador Walter Annenberg to improve Chicago’s schools, funnelled some $100 million into the hands of radical activists. The CAC was the brainchild of Ayers – and for four years in the 1990s, Obama was chairman of the board.

In the Wall Street Journal, Kurtz writes that documents in the CAC archives make it clear that William Ayers and Barack Obama were partners in the CAC.

In early 1995, Mr. Obama was appointed the first chairman of the board, which handled fiscal matters. Mr. Ayers co-chaired the foundation's other key body, the ‘Collaborative,’ which shaped education policy... The Daley archives show that Mr. Obama and Mr. Ayers worked as a team to advance the CAC agenda...

The CAC's agenda flowed from Mr. Ayers's educational philosophy, which called for infusing students and their parents with a radical political commitment, and which downplayed achievement tests in favor of activism. In the mid-1960s, Mr. Ayers taught at a radical alternative school, and served as a community organizer in Cleveland's ghetto. In works like ‘City Kids, City Teachers’ and ‘Teaching the Personal and the Political,’ Mr. Ayers wrote that teachers should be community organizers dedicated to provoking resistance to American racism and oppression. ..

The Daley documents show that Mr. Ayers sat as an ex-officio member of the board Mr. Obama chaired through CAC's first year. He also served on the board's governance committee with Mr. Obama, and worked with him to craft CAC bylaws. Mr. Ayers made presentations to board meetings chaired by Mr. Obama. Mr. Ayers spoke for the Collaborative before the board. Likewise, Mr. Obama periodically spoke for the board at meetings of the Collaborative.

Kurtz has also been trying to discover just who appointed Obama to the CAC board.

One unsettled question is how Mr. Obama, a former community organizer fresh out of law school, could vault to the top of a new foundation? In response to my questions, the Obama campaign issued a statement saying that Mr. Ayers had nothing to do with Obama's ‘recruitment’ to the board. The statement says Deborah Leff and Patricia Albjerg Graham (presidents of other foundations) recruited him. Yet the archives show that, along with Ms. Leff and Ms. Graham, Mr. Ayers was one of a working group of five who assembled the initial board in 1994. Mr. Ayers founded CAC and was its guiding spirit. No one would have been appointed the CAC chairman without his approval.

Here, Kurtz adds that Obama has sought to obscure the role Ayers played in choosing Obama to lead the CAC -- and also details how the CAC tried to obstruct Kurtz’s inquiries by blocking his access to the records. And here Camp Obama responds to these claims, along with Kurtz’s demolition of that response.

Nor is the relationship with Ayers the only radical question-mark over Obama’s associations. Indeed, Obama appears to be the front-man for a vast network of the most subversive radicals in the USA – an alphabet soup from the FBI menu, a veritable Rolodex of the American counter-culture. WorldNetDaily reveals:

The official campaign website of Sen. Barack Obama has completely scrubbed a series of user-generated blog postings on the candidate's site by a former top communist activist who is an associate of former Weathermen terrorist leader William Ayers. The move has raised questions regarding Obama's relationship with the deleted blogger, Mike Klonsky, who runs an education organization that was founded by Ayers and that received a substantial grant from a group directed by Obama.

Small wonder Camp Obama is sensitive to the association. Klonsky, a professor of education and leader of the New Communist movement, was national secretary of the radical group Students for a Democratic Society. In 1969, he was one of five SDS members arrested at the organization’s Chicago national headquarters for assaulting a police officer, interfering with a firefighter, and inciting mob action. As Global Labor and Politics has reported, Klonsky went on to form

a pro-Chinese sect called the October League that later became the Beijing-recognized Communist Party (Marxist-Leninist). As chairman of the party, Klonsky traveled to Beijing itself in 1977 and, literally, toasted the Chinese Stalinist leadership who, in turn, ‘hailed the formation of the CP(ML) as “reflecting the aspirations of the proletariat and working people,” effectively recognizing the group as the all-but-official US Maoist party.’ (Elbaum, Revolution in the Air, 228).

In 1991, Klonsky co-founded the Small Schools Workshop in Chicago – and his co-founder was one William Ayers.

As Trevor Loudon continues to document, Klonsky and his Weather Underground friends Ayers and Bernardine Dohrn are part of a far more extensive -- and organized – network of Subversives for Obama. In his latest post, Loudon concludes:

Bill Ayers and Bernardine Dohrn are involved in an organization uniting three Marxist parties, a host of ‘60s radicals and terrorists and a new generation of militant activists. That organization has spawned a spin-off organization specifically designed to put Barack Obama in the White House and to bring about massive social change across the US.

Barack Obama appears to sit on a nexus between Marxist revolutionary activists, unrepentant former terrorists, Black Power racists, Chicago mobsters – oh, and a Saudi who is trying to buy up America. If you were to turn up at US immigration control with a background of such associates, it’s a fair bet they wouldn’t let you off the air-bridge. Yet this man may well become President of the US! If any other candidate had had merely a fleeting relationship with William Ayers, his candidacy would have been terminated before it was even articulated -- let alone what we now know about Obama’s key role in Ayers’s CAC and its funding of radical groups; let alone the fact that Obama had been mentored during his formative years by a Communist Party plant; let alone his work for organizations modeled on the seditious philosophy of Saul Alinsky; let alone his two-decade membership of a Black Power church; let alone his relationship with fraudster Tony Rezko.

And yet despite all of this, virtually no-one in the mainstream media is asking any questions. Has there ever been a more staggering, surreal and scary race to the White House?

John McCain isn’t dead in the water. But he sure is dying. He lost the debate and the polls are dismal. Gallup has him down 50-42. Rasmussen has Obama ahead 50-44. And both polls are only partially after the debate. Obama won the debate. When the polls come in fully after the debate, the picture won’t get any prettier for those of us who favor McCain.

His gambit of suspending his campaign and going to Washington has failed because he did not think it through adequately or correlate it with what was happening in Congress. The Republicans teed up a perfect shot for him. He took the bat but went back to the dugout without even swinging. McCain should have gone into the debate challenging Obama on his $700 billion taxpayer bailout of financial institutions. He should have pushed the Republican alternative. He could have said, plain and simple, that Obama wants to make Americans pay for $700 billion in bad mortgages and McCain wants to make businesses pay for their own bailout through loans and insurance premiums. It would have been a straight shot. But McCain copped out and mumbled something about the deal being the “end of the beginning” and said he hoped to vote for the bailout. It was a failure that may have cost him his best shot at the presidency.

But not his only shot. McCain can still win.

When the history of the Great Economic Meltdown of 2008 is written, in-your-face shakedown groups like the Greenlining Institute will be held to account.

Greenlining, headquartered in Berkeley, California (where else?), is a left-wing pressure group that threatens nasty public relations campaigns against lenders that refuse to kneel before its radical economic agenda. Its principal goal is to push politicians and the business community to facilitate "community reinvestment" in low-income and minority neighborhoods.

The Greenlining name is a play on the unlawful practice of "redlining." That's when financial institutions designate areas, typically those with a high concentration of racial minorities, as bad risks for home and commercial loans. The Institute wants banks to give a green light to loans in these areas instead.

Recently profiled by John Gizzi, Greenlining uses carrot-and-stick tactics to blackmail public agencies, banks, and philanthropists to achieve its objectives. The Institute brags it has threatened banks into making more than $2.4 trillion in loans in low-income communities.

Was this a good idea?

Not according to University of Texas economist Stanley Liebowitz. He wrote that the current mortgage market debacle is "a direct result of an intentional loosening of underwriting standards -- done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults."

Liebowitz isn't alone is pointing out that U.S. financial markets are now being asphyxiated by a terrible credit crunch that might have been avoided if lenders had refrained from doling out loans they ought to have known were doomed to default.

Activist groups were encouraged to agitate by the Carter-era Community Reinvestment Act, which enshrined in law a kind of lending protection racket. Banking regulators were given the power to make trouble for banks that failed to lend enough money to so-called underserved communities. Banks that paid enough -- whatever that means -- got left alone, but banks that didn't, got their legs broken.

How much money is enough to satisfy the law? Even the Federal Reserve Board can't say for sure. From the Fed's online summary of the Act:

The CRA requires that each depository institution's record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution's application for deposit facilities.

Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution's individual circumstances.


One can almost imagine a CRA commissar saying, "It'd be a real shame if something happened to that nice bank of yours." When in doubt about potential CRA liability, don't risk committing a crime against diversity: make the loan. Or else.

After CRA came into effect, Saul Alinsky-inspired "community organizer" groups such as Greenlining, ACORN, and National Council of La Raza got into the shakedown business. They preach the hateful class-warfare rhetoric of their fellow community organizers Jeremiah Wright, Jesse Jackson, Al Sharpton, and Michael Pfleger.

They rage against capitalism and demand crushing taxes and aggressive wealth-redistribution programs. They demand more government spending on social programs, a higher minimum wage, and gun control. Depending which way the economic wind is blowing, they demand more subprime lending, or curbs on subprime lending, which through the magic of dysphemism, is linguistically transformed into "predatory lending."

La Raza ("The Race," in Spanish), which has lobbied to strengthen CRA, performed an amazing sleight of hand last year. After decades of demanding more loans for racial minorities, the group performed a dramatic about-face, suddenly warning that lenders, realtors, and investors who bought up subprime loans could be sued under a federal law that forbids housing discrimination.

It was the lenders' responsibility to "match families to the sustainable loans that they should have gotten in the first place," said Janet Murguia, La Raza's president. Pointing to 2005 data that show subprime loans with high interest rates comprised more than 50% of all mortgages taken by African-Americans and 40% of Latino borrowers, compared to 19% of white borrowers, she raised the specter of racism. Murguia failed to mention that without a subprime market many members of racial minority groups would have remained renters, unable to buy a home.

And the Greenlining Institute played rough with Rabobank, an international Netherlands-based "megabank" (assets: $740 billion) that was expanding its U.S. operations.

Even though Rabobank had received an "Outstanding" rating in its most recent CRA performance evaluation by the Federal Reserve Bank of San Francisco, that wasn't enough for Greenlining.

The group targeted Rabobank, demanding that it shell out $7.5 billion for loan programs to help farmworkers buy their own farms. When the bank balked, Greenlining launched a campaign last year against its proposed acquisition of another bank.

Activists noisily picketed Rabobank until it caved.

"Congratulations to everyone," "Rabobank is totally afraid of you," Greenlining's top legal dude Robert Gnaizda yelled in offering congratulations to at demonstrators through a bullhorn. "Rabobank is totally afraid of you." Earlier this year, Greenlining proudly unveiled what it called a "unique agreement" with Rabobank "to turn San Joaquin farmworkers into farmowners."

This is the kind of political activism that drove banks to make irresponsible decisions, and that now threatens to put taxpayers on the hook for bank bailout packages costing potentially trillions of dollars.

Even though the left's pathological preoccupation with economic egalitarianism never takes a vacation, the left isn't entirely to blame for Wall Street's current troubles.

The Federal Reserve Board encouraged bad behavior by keeping interest rates artificially low for far too long after the 9/11 attacks. Since money was cheap, bankers went overboard with exotic mortgage products, and investors kept inflating the housing bubble, sending home prices into the stratosphere.

But no one can deny the fateful role that these liberal financial activist groups played in making a bad situation much worse.

"The government has to do something to keep markets from falling and the economy from getting worse." How many times have you heard that mantra this past week from President Bush, Treasury Secretary Hank Paulson, Democrat leaders, the news media, and even some ostensibly conservative periodicals?

But what if the bailout, as originally proposed and in its latest incarnation, would spend $700 billion of taxpayers' money and actually make the economy worse? Believe it or not, there is good evidence this may happen. The inflationary prospects of the bailout price tag may lead to spikes in oil and crop prices that could hit ordinary Americans in their cars and on their kitchen tables. And government purchases of financial assets could ironically further constrain credit through causing write-downs on even the balance sheets of financial firms not participating in the bailout by worsening the effects of mark-to-market accounting rules.

All last week, the stock market's plunging downward was pointed to as a sign that Washington must step up to the plate -- as quickly as possible. Yet ironically last Friday -- the day after the bailout talks broke down at the wild White House meeting with the presidential candidates -- the Dow Jones industrial average actually went up by 120 points! This doesn't mean that the market is opposed to the bailout, but it does show that the market volatility is probably as much due to the potential effects of a bailout as it is to a lack of one.

One of the things the market seems to fear about a bailout is inflation due to the staggering price tag. Even if the government recoups some of its purchases when the market stabilizes, as bailout proponents argue, the spending outlays will be done immediately, requiring a huge increase in the debt limit that's in the current plan. The market expects (probably rightly) that the government will monetize much of the new debt through a looser monetary policy.

So a substantial indirect effect of the bailout will be higher prices for food and gasoline, and this will probably hit ordinary households sooner than many politicians expect. When speculators expect the dollar to fall or be volatile, they immediately try to hedge an unstable currency through buying commodity futures. Thus, last week saw a big spike in oil prices, which had been steadily declining over the last few months. Other commodities, notably gold, also shot up. Corn and wheat prices, already boosted because of ethanol mandates, will also likely shoot up in response to a falling dollar. An article in Stocks, Futures and Options Magazine entitled "New Rules in the Commodity Game" notes that the dollar is now a stronger day-to-day factor in corn futures trading than even weather conditions.

On top of this inflation, the bill might even worsen the very credit contraction it is trying to stop. This is because of its effects on financial firms that have to follow mark-to-market accounting rules. As I wrote earlier this month in the Wall Street Journal, the credit "contagion" has been spread in large part by these rules, adopted by the Securities and Exchange Commission and bank regulators in the last few years, and subject to a big expansion last November with Financial Accounting Standard 157.

Because the mark-to-market rules require writedowns of even performing loans based on the last sale of similar assets, good banks holding mortgages that haven't been impaired often have to adjust their books based on another bank's sale -- even if they plan to hold their loans to maturity. And because the rules are tied to solvency requirements from the government's bank regulators, banks lose "regulatory capital," even if the loss is only on paper. Thus, in the scramble to conserve capital, financial firms have less money to lend.

But the bailout -- in addition to putting taxpayers on the hook and massively increasing government's role in the economy -- would likely make mark-to-market and hence the credit crisis worse, according to experts who have reviewed Paulson's plan. Paulson proposes a "reverse auction" approach by which government would choose a selling price to buy a financial firm's mortgage-backed securities. But unless mark-to-market rules were changed, this sale would force other firms to write down their assets to this price, which could further constrain the amount of money they can lend.

An Associated Press story paraphrases American Enterprise Institute scholar Vincent Reinhart, a former Federal Reserve monetary affairs director, as saying that "if the auctions set too low a price for mortgage-related assets, other institutions with bad debt may be forced to take the distressed valuation onto their books under mark-to-market accounting rules." Similarly a Washington Post story by financial reporter Neil Irwin says that the purchase could force more regional banks to write their assets down. Thus, regional banks as well as big banks will be subject to credit constraints.

As of today, some accounts say the bills will include authority for the SEC to suspend mark-to-market. But the SEC and the banking agencies already have the authority to suspend it and use any accounting rules they wish. Since they have been resistant to doing so thus far, even in the midst of this crisis, putting in what amounts to at best Congressional "wishes" will likely not move these agencies. The only way Congress could make a meaningful change would be to require this suspension of rules, and lawmakers do not seem willing to do that yet.

The stock and credit markets go up and down for a variety of reasons. Right now, much of the paralysis is due to the uncertainty about what Washington will do. Several people have told me that no one wants to sell mortgages for 10 cents on the dollar, if Washington is about to pay 50 cents. If Congress were to say no action until next year, we may very well see the Dow go up the next day and the credit market slightly improve. Markets may move to resolve bad assets knowing that for at least three months, Washington won't bail them out. If mark-to-market rules aren't repealed, the best strategy for the economy would be to just "hurry up and wait."

"How can you vote Republican when they so messed up the economy?" a liberal friend screams at me with such vehemence that I had to put the phone a full arms length from my ear. Of course, my friend never heard of the Community Reinvestment Act. He is one of those mindless liberals who thinks that George Bush and the Republicans are responsible for everything from Global Warming to Hurricane Katrina to the attempted genocide of the entire black population of New Orleans.

He claims to be informed but he doesn't remember those dire warnings going back nine years ago that the Community Reinvestment Act would eventually cause a major financial and banking crisis in this country.

The Community Reinvestment Act was pushed hard by Bill Clinton, although it originated under Jimmy Carter. Asked about it the other day on one of the morning TV talk shows, Clinton said times back then were different. Fannie and Freddie had lots of money and he (in his infinite wisdom) decided that the money should not go to share holders or to executive compensation, but should be used to put the poor into homes.

As you can imagine, wonderful things happen when the government strong arms corporations as to how they should spend their money and, better yet, how they should assess the qualifications of home buyers. So the country's biggest buyers of mortgages were pressured into lowering the qualifications of applicants, in order to increase the percentage of poor that got mortgages. By 2006, 30% of all mortgages went to people who in any other circumstances wouldn't qualify.

Now the political left would like you to know that the CRA-controlled institutions did not lend the largest percentage of sub-prime mortgages. But that's information by deception, because the mortgage business is a competitive business. If the government strong arms one part of the business, the other part will respond. And strong arm was what the Clinton administration did, even using the Office of the Comptroller of the Currency to pressure banks to lend more money to the disadvantaged. Caught in the act, a spokesman for the office noted that its abuse of power was "for the best of intentions:" the same inclination used to pave the road to hell.

In the short run, all sorts of money was to be made by lowering standards and processing sub-prime loans for the poor. The Wall Street Journal raised concerns about Fannie's and Freddie's capital requirements. Senator Phil Gramm (R, TX) raised issues about community pressure groups, such as Barack Obama's ACORN, extorting money from banks by holding their feet to the CRA fire, and threatening to militate against mergers and acquisitions unless the banks entered into preferential agreements with community groups.

The Gramm-Leach-Bliley Act cut down on CRA reporting requirements and upped the ante for groups such as ACORN, forcing them to disclose their relationships with local banks.

Fannie and Freddie became big contributors to the Democratic Party. The sub-prime business paid off-at least while the bubble was growing. And the Kerry, Hillary and Obama campaigns have numbered among the leading recipients of the largess of the two mortgage lenders.

Franklin Raines, the Fannie Mae C.E.O. from 1999 to 2004, had been budget director in the Clinton administration. The left would not like you to be reminded that Raines has been a consultant to the Obama campaign, according to the Washington Post, and that Freddie and Fannie number among the top 5 contributors to Obama's run for the presidency. Raines is being sued for the recovery of 50 million in compensation acquired by the alleged manipulation of Fannie's books. Now, that's not change we can believe in. That's Washington as we have come to know and "love" it.

The Bush administration in 2003 tried to change the system, to no avail. Congressman Barney Frank, (D, MA ) was in the forefront of stopping the Bush proposal to take control out of Fannie and Freddie and put it into a third overseeing organization. Frank too has emerged in the current crisis as one of the major critics of the administration.

Former Federal Reserve Chairman Alan Greenspan continued to raise the alarm over Fannie's and Freddie's weak capitalization. His concerns were ignored.

Former Congressman Michael Oxley (R,OH), then chairman of the House Financial Services Committee and co-author of the Sarbanes-Oxley Act, introduced a bill in 2005 in response to the growing problem, but Fannie and Freddie put their lobbyists to work and the bill died.

Democratic Senator Chris Dodd, who is now Chairman of the Banking Committee and who appears along side Majority Leader Harry Reid on television to discuss the current bailout negotiations, has had harsh words for the Bush administration for its alleged role in the crisis.

But the rest of us should have some harsh words for Senator Dodd. After all, the Bush administration in 2003 and Senator Phil Gramm even earlier, in 1999, had been working to change the system. Dodd, like Obama, has been a big recipient of campaign funds from Fannie and Freddie, organizations that Dodd oversees. Dodd has apparently been more consumed with campaign contributions from the mortgage giants than the responsibilities of oversight.

When I point out the long trail of Obama's corruption stretching back to his days in the Illinois legislature, my liberal friends invoke moral equivalence, "They're all corrupt."

There is no shame among the left. When they think Bush is responsible for the collapse of the banking system, they scream at you. When you point out that the Community Reinvestment Act created a pattern of abuse that now threatens the entire financial system, without hesitation liberals say, "They're all corrupt."

The Federal Deposit Insurance Corporation even has a web site so you could see how well your bank is meeting its obligations under the CRA. Those of you who had money in Washington Mutual, which just went belly up, will be happy to know that WaMu, over the five individual reporting periods, had almost exemplary ratings on its commitment to CRA. That should give WaMu depositors great joy, to compensate for the financial mess they may be in. If WaMu had been less responsive to the CRA and more responsive to the market, maybe it wouldn't be insolvent.

I am not suggesting that the CRA by itself led to the current crisis, but the CRA was the first and most important part of the food chain. The CRA caused the expansion in the number of questionable loans that lending institutions made, but Wall Street and insurance underwriters were all to willing to package these loans, enhance their ratings through convenient exercises in fantasy, sell them, and insure them with reserves that were more inadequate than the incomes of the people who got the loans in the first place..

The best thing that can emerge from the current financial crisis is the realization that the government needs to stop directing economic decision making. In a sense, the government is putting out a fire it started when it both created the CRA and assessed lending institutions by how well they were doing in response to the program. When Clinton decided, in his usual arrogance, that he knew better than the market how banks should lend money, the seeds were sown for the current financial disaster.

If you want to blame Bush for the current crisis, it might make you feel good, reinforce your sense of how the world works, enable you to find a meeting of the minds when you next engage your liberal friends over wine and quiche, but like so many things you believe and which make you feel good, it has no correspondence to reality.

This is a big vote, one likely to be studied and second-guessed for decades to come. But government’s first responsibility is to protect the freedoms and individual liberty of every American. As a free-market economist I unequivocally oppose this legislation because it violates the basic working tenets of free-market capitalism and individual responsibility.

Granting the Treasury broad authority to buy troubled assets from private entities poses a significant threat to taxpayers and fundamentally alters the relationship between the private economy and the federal government. Despite the sweeping breadth of the proposed bailout, there is virtually nothing in the bill that addresses the underlying problems that created the housing bubble and the oversized and over-leveraged financial services sector that grew with it [emphasis added -ed.]. Taxpayers have become Wall Street’s newest financier, with little more than a promise — and a report to Congress on “regulatory modernization” — that Congress will not let this happen again.

Indeed, many proponents of the bailout have tried to put the blame for this massive government intervention squarely on the market, asserting that free market capitalism has somehow failed and the only solution is more government intervention. Yet markets do not operate in a vacuum. In fact, government institutions can have a strong — and too often corrupting — influence on markets. In the specific predicament financial markets face today, there is a long history of government actions that have led to what is most accurately described as a government, not market, failure.