In These New Times

State reps. flooded with bailout protest calls
BY TODD SPANGLER • FREE PRESS WASHINGTON STAFF • SEPTEMBER 26, 2008
Freep
WASHINGTON – Some Michigan representatives in Congress are being swamped with calls and e-mails on the $700 billion bailout proposal being debated on Capitol Hill – with a lot of constituents clearly against taxpayers being on the hook for propping up failing financial institutions.

A spokeswoman for Rep. Mike Rogers, a Brighton Republican, said his office had received upward of 2,000 calls and e-mails in the last three days on the subject, with almost all against the bailout. And at the offices of Rep. Joe Knollenberg, R-Bloomfield Township, there have been more than 1,000 contacts – largely against the bailout as proposed by the White House and Treasury Secretary Henry Paulson.

Knollenberg, in a statement, said he could not support the administration proposal because of worries “that too much risk is being placed on taxpayers who did not cause this problem and too much faith is being paced in government ownership and control of the private sector.”

He said he was working with colleagues to develop “a better alternative” that would provide reforms and restore confidence in the markets “without putting the taxpayer on the hook.”

Rogers, meanwhile, said the level of concern among constituents is high – consistent with other “major issues” with which Congress must deal– and the proposal being floated now “has to come a long way from where it is” to protect taxpayers before he gives his support.

“I think there’s a way to do it without the federal government rewarding these fancy Wall Street cowboys,” he said, though he declined to discuss specific points that are part of negotiations.

Said Rep. Thad McCotter, a Livonia Republican who was an earlier opponent of the Paulson plan – believing there is too much government involvement and too much risk for the taxpayers – said it’s a matter of principle for House Republicans.

“When you’re going to run as a Republican,” he said, “this is what you’re supposed to oppose.”

He wants to build incentives into the market to lure investors back.

He said anyone who expected House Republicans to do whatever the president ordered was wrong – but noted that Democrats have enough votes to ram through a bill if they want to. That’s not likely to happen, however, since the Democrats know the Republicans would use the plan against them with voters.

President George W. Bush and administration officials have been calling for quick action, and economists seem generally in agreement that credit markets have slowed to a point where, unless something is done, the American economy could fall into a deep spiral. Bad mortgage debts have led to many institutions having a very difficult time raising capital – that, in turn, has led to failures, bankrupticies and government takeovers of some of those institutions.

Those actions, however, have not raised confidence in the markets and freed up money to lend. And if financial institutions aren’t swapping money, cash for loans to individuals and business dries up – eventually impacting spending, and, in turn, jobs.

“The outcomes are so horrible you just have to stave those outcomes off,” said Dana Johnson, Comerica’s chief economist. “I don’t think there is any way of exaggerating the precarious nature of what’s going on right now.”

But there is no doubt an argument about what should be done about it.

David Littmann, senior economist with the libertarian Mackinac Center for Public Policy, said unless reforms are made – such as lowering taxes to allow that money to be used for investing – Congress might “kick the can down the road” but it won’t stave off a recession forever.

Asking for real reform of the kind he says would be helpful – like cutting the capital gains tax – in the middle of a presidential election “is like asking for divine intervention,” Littman acknowledged.

What shouldn’t be lost in the debate is the threat posed by doing nothing, said Douglas Elmendorf of the Washington-based Brookings Institution, an economist who has worked for the Federal Reserve, Treasury and the Congressional Budget Office. Unless some fluidity is pumped into the credit martkes “the financial system will melt down further,” increasing the likelihood of a long and painful recession.

Financial markets have gotten so complicated, he said, that many taxpayers may see this as a Wall Street problem that doesn’t affect them – but it does, or can, and in direct ways.

A often-hidden part of the markets (unlike the stock market and the ubiquitous Dow Industrial average, for instance), the money markets are what allow financial institutions to borrow and loan money to each other. Businesses and individuals with money make interest by lending it; businesses and individuals needing money to expand or pay for current operations or fund a child’s college education or buy a home, borrow.

When millions of homes went into foreclousre, financial institutions (and other operations, like AIG, an insurance company which backed financial institutions’ investments) heavily invested in housing needed money to continue their business, but found few willing lenders – because of worries their bad debts might force them to close or be taken over by the government, as happened to Washington Mutual, the nation’s largest savings and loan, this week.

In such cases, investors stand to lose everything – and therefore, aren’t willing to lend.

But without that money in the system – Elmendorf compares it to blood circulating through a human body – business dries up. It becomes harder to get a college loan or a mortgage. It also means, for instance, if a business must borrow to make payroll as it waits for an expected profit next month, it may not be able to do so. Or if a business has to purchase raw materials to make its finished product but needs ot borrow to do so – it may not get the cash it needs up front. In cases such as that, companies will scale back and layoffs can occur – further reducing the amount of money being spent and breaking even more financial institutions.

“The money your bank lends to you doesn’t just come from depositors in your area,” said Elmendorf. “It comes from people with more than they need at the moment anywhere in the country, anywhere in the world.”

What the money markets are suffering is a crisis of confidence, he said, with investors sitting on the sidelines – the potential reward of buying low not worth the risk that a financial institution could go out of business in this climate.

And no one wants to be the first investor to take that risk, so, said Elmendorf, the White House proposal is for the federal government to be that first investor – making the markets more attractive then to individual and corporate investors again.

The worry is that the message of how dire the situation is may not be getting out to taxpayers who think it’s more about Wall Street financiers than them.

“It’s very, very complicated,” he said. “I understand people’s desires to let Wall Street suffer, just as Wall Street has thrived other years.”

“It’s not about saving Wall Street,” he added, “it’s about saving Main Street.”