Welcome to the Campaign Blog at lawsonforcongress.com. (In case you’re as new to blogs as I was earlier this year, the word “blog” is a contraction for “Web log”.) My campaign blog exists to discuss important issues with my fellow Americans, and chronicle the adventures of a non-politician running for political office.

I’ve watched many politicians create “blogs” that are just a place for pasting press releases. Press releases tend to ignore the deeper context around issues, and generally do not spark discussion. Right now we desperately need to engage in thoughtful dialog. I take this discussion seriously, and hope you will too.

Thanks, Congress. Well done.

To add insult to this obvious injury, our Senate and then House just passed a juiced-up bailout package that includes an additional $150 billion of random acts of fiscal irresponsibility beyond the $700 billion revolving credit line to be used by our Treasury to buy questionable assets from troubled banks.

The vast majority of Americans were against this bailout, and for good reason — it is not going to work. Economists and those who understand the banking system understand that the administration’s plan will not fix the underlying problems of trust and solvency. Instead, it simply allows our Treasury secretary to pay above-market prices for troubled assets to bailout out foreign and domestic banks. It creates no jobs, gives no significant relief to struggling homeowners, and severely threatens our sovereign credit rating.

Why, then, did Congress commit this act of gross negligence? Why did our incumbent vote twice to support a measure that is ineffective, unconstitutional, and overwhelmingly despised?

He, and they, just followed orders.

I happened to be in Washington this past Wedensday, and was attending a breakfast with a number of other “conservatives” (whatever that means). Among the people at this breakfast were fresh-faced twentysomething staffers playing the power game, including staffers from the White House as well as various political campaigns and think tanks. These staffers know nothing about economics or banking, yet they are sent on a mission to amplify the administration’s message. In particular, they each stood up to address the group and said that the bailout plan was “as good as it was going to get,” and that everyone needed to get behind it for the “good of the country.”

Of course, attempts to engage in discussion were futile — the staffers don’t know the topic, they’re just carrying a message.

Keep in mind that our twenty-year incumbent also voted for this bailout — twice. Yet despite his expressed disagreements with this administration, he continually takes orders from them on critical issues like the bailout and our declining civil liberties.

What conclusion can we draw from these troubling events? We do not live in a Constitutional Republic. At this point, we do not even live in a totalitarian democracy, as the overwhelming majority of constituents were vehemently opposed to this trillion-dollar boondoggle. At best, we are living in a mild form of corporate socialism with a ruling oligarchy that is completely unresponsive to the people.

So where does this leave us?

We’re in a tough spot, and Friday’s economic data left little to the imagination. We had our ninth straight month of job losses, and further corporate consolidations and layoff announcements show further challenges ahead.

Our challenges don’t end in Washington, either. States like California and New York are approaching insolvency, to the point that California is asking for a $7 billion rescue package from the federal government so they can make payroll. More locally, I had the opportunity to interview our North Carolina auditor, Les Merritt, to discuss our state’s situation:

If you live in North Carolina, pay attention to this interview — especially Auditor Merritt’s warnings about so-called “COPs”, or Certificates of Participation. It seems that our state legislators have figured out how to violate our state Constitution by using a means of debt financing for pet projects that avoids the hassle of getting voter approval.

COPs are troubling, as our state Constitution in North Carolina requires that all debt (such as general obligation bonds) be specifically approved by voter referendum. How have they done this? Like our federal representatives, they apparently just don’t care. Unfortunately, things are about to get rough as we continue to live beyond our means in North Carolina, as well as the United States. It’s up to us to remind our representatives at every level how important it is that they follow the rules.

Finally, I’d like to make one more observation about this “new and improved” bailout that was railroaded through the Senate and then passed back through the House. Not only were there $150 billion in new enticements, but CNET is reporting that the bailout bill expands and makes permanent IRS surveillance capabilities, as well:

IRS undercover operations: Privacy invasion?
The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on. (Think IRS agents posing as accountants or tax preparers and saying, “I’m not sure if that deduction is entirely legal, but it’ll save you $1,000. Want to take it?”) That section had expired as of January 1, 2008, and would now be renewed.

Starting with the so-called Anti-Drug Abuse Act in 1988, the IRS has possessed this authority temporarily, with occasional multiple-year lapses. A 1999 internal report said the IRS had 126 “trained undercover agents” working in field offices at the time. This is the first time that such undercover authority would be made permanent.

Sens. Max Baucus (D) and Chuck Grassley (R) have been pushing to make it permanent for a while, claiming (PDF) in April that: “Undercover operations are an integral part of IRS efforts to detect and prove noncompliance. The temporary status of this provision creates uncertainty, as the IRS plans its undercover efforts from year to year.”

There’s another section of the bailout bill worth noting. It lets the IRS give information from individual tax returns to any federal law enforcement agency investigating suspected “terrorist” activity, which can, in turn, share it with local and state police. Intelligence agencies such as the CIA and the National Security Agency can also receive that information.

The information that can be shared includes “a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer’s return was, is being, or will be examined or subject to other investigation or processing, or any other data received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return.”

That provision had already existed in federal law and automatically expired on January 1, 2008.

What’s a little odd is that there’s been little to no discussion of the IRS sections of the bailout bill, even though they raise privacy concerns. Treasury Secretary Henry Paulson said this week: “I will continue to work with congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy.” He never mentioned the necessity of additional IRS undercover operations.

Last week was a historic, but bad, week for our nation. It’s time to Be the Change, vote Lawson for Congress, and insist on principled representation in Washington.

Those folks who are just interested in rising asset prices (CNBC talking heads and stock newsletter writers) generally like the plan, which those who are concerned with the foundation of the banking and economic system don’t like it.

The Paulson plan might deal with “liquidity”, but liquidity *isn’t* the problem. The problems are trust and solvency. There are a number of feasible options to deal with the fundamental issues — trust (among banking institutions) and solvency (of banking institutions).

Responsible plans focus specifically on recapitalizing viable banks instead of just allowing banks to offload questionable assets. But before you can even recapitalize a viable bank, you need to “drain the swamp” and figure out exactly what’s on the balance sheet — that’s key to restoring trust.

I’ve detailed/summarized these points, and more responsible approaches, here:

http://blog.lawsonforcongress.com/2008/09/27/the-height-of-arrogance/

What should also be concerning is the *way* in which this legislation was put forth — complete subversion of the typical legislative process, although they wasted over a week from initial proposal to vote:

http://blog.lawsonforcongress.com/2008/09/28/a-bipartisan-drama-resuscitating-a-dying-republic/

Also, the conflicts of interest present in the current administration are staggering:

http://www.nakedcapitalism.com/2008/09/mussolini-style-corporatism-in-action.html

The media chorus in favor of the bailout continues to grow. Interestingly enough, much of the chorus is international. This makes sense when you understand that Paulson’s legislation encourages us to bail out foreign investors, and foreign banks as well:

European Central Bank President Jean- Claude Trichet said U.S. lawmakers must pass a $700 billion rescue package for banks to shore up confidence in the global financial system.

“It has to go, for the sake of the U.S. and for the sake of global finance,” Trichet said in an interview in Frankfurt with Bloomberg Television late yesterday. “I am confident, but of course it is the decision of the U.S. Congress.”

Trichet said a pan-European approach to the banking crisis was unlikely, saying “we are not a fully-fledged federation with a federal budget.”

“Each country has to mobilize its own efforts,” said Trichet. “But of course there is a European spirit and that is the spirit of the single market.”

This point was hammered home by California Rep. Brad Sherman in an interview with Larry Kudlow, as documented by Mike Shedlock:

Rep. Brad Sherman, D California:

Larry I am glad you have a few seconds to talk to someone who voted against this bill. I am not changing my mind. I want to thank my colleagues who stood up to the purveyors of panic and voted against a very bad bill and voted with 400 eminent economists including three Nobel laureates who wrote to us and said don’t panic, don’t act hastily, hold hearings, work carefully. The fact is Larry if you read this bill, even you would have voted against it.

It provides hundreds of billions of dollars of bailouts to foreign investors. It provides no real control of Paulson’s power. There is a critique board but not really a board that can step in and change what he does. It’s a $700 billion program run by a part-time temporary employee and there is no limit on million dollar a month salaries.

Larry Kudlow:

Let me just ask you one question. I think you are referring to foreign banks headquartered in the United States. I do not see how foreign investors get bailed out.

Rep. Brad Sherman:

Larry you have to read the bill. It’s very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn’t owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can’t buy it. It was rejected.

The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can’t be sold to the Treasury.

Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure that can happen.

We don’t just need to “do something” here, folks. We need to do something that will work.

BILL MOYERS: It’s been a long time since I’ve read a book in which I highlighted practically every third sentence. So, it took me a while to read, what is in fact, a rather short book. You began with a quote from the Bible, the Book of Second Kings, chapter 20, verse one. “Set thine house in order.” How come that admonition?

ANDREW BACEVICH: Well, I’ve been troubled by the course of U.S. foreign policy for a long, long time. And I wrote the book in order to sort out my own thinking about where our basic problems lay. And I really reached the conclusion that our biggest problems are within.

I think there’s a tendency on the part of policy makers and probably a tendency on the part of many Americans to think that the problems we face are problems that are out there somewhere, beyond our borders. And that if we can fix those problems, then we’ll be able to continue the American way of life as it has long existed. I think it’s fundamentally wrong. Our major problems are at home.

BILL MOYERS: So, this is a version of “Physician, heal thyself?”

ANDREW BACEVICH: Well, yes, “Physician, heal thyself,” and you begin healing yourself by looking at yourself in the mirror and seeing yourself as you really are.

BILL MOYERS: Here is one of those neon sentences. Quote, “The pursuit of freedom, as defined in an age of consumerism, has induced a condition of dependence on imported goods, on imported oil, and on credit. The chief desire of the American people,” you write, “is that nothing should disrupt their access to these goods, that oil, and that credit. The chief aim of the U.S. government is to satisfy that desire, which it does in part of through the distribution of largesse here at home, and in part through the pursuit of imperial ambitions abroad.” In other words, you’re saying that our foreign policy is the result of a dependence on consumer goods and credit.

ANDREW BACEVICH: Our foreign policy is not something simply concocted by people in Washington D.C. and imposed on us. Our foreign policy is something that is concocted in Washington D.C., but it reflects the perceptions of our political elite about what we want, we the people want. And what we want, by and large - I mean, one could point to many individual exceptions - but, what we want, by and large is, we want this continuing flow of very cheap consumer goods.

We want to be able to pump gas into our cars regardless of how big they may happen to be, in order to be able to drive wherever we want to be able to drive. And we want to be able to do these things without having to think about whether or not the book’s balanced at the end of the month, or the end of the fiscal year. And therefore, we want this unending line of credit.

The video and transcript of the entire interview are available here. Are we ready to be the change we wish to see in the world?

Next, Rep. Michael Burgess, Republican from Texas:

The rule of law and process of good government are taking a beating this weekend.

I’ve reviewed the “Discussion Draft” of bailout legislation, available here.

Any Representatives or Senators feeling pressured to accept this power grab by our Treasury and Federal Reserve need to understand that they are negotiating with terrorists. It was my recollection that we do not negotiate with terrorists.

Again, what should we do?

First, we should embrace every effort to restore transparency, trust, and the rule of law to our capital markets.

But we must also remember that we are at a critical inflection point, and the banking institutions hold all the cards. Bernanke and Paulson are predicting terrible things if we do not bail out the banks at our expense. Their predictions are well on their way to becoming self-fulfilling prophecy, since the banks ultimately control access to credit.

Many have documented why the bailout plan is unlikely to work as proposed. It is time for principled leaders in Congress to go on offense. So Paulson wants $700 billion to buy toxic assets, “restore confidence”, and get banks lending again?

Why not just round up to $1 trillion, but issue it in United States Notes directly from the Treasury, instead of Federal Reserve Notes?

What’s a United States Note? That’s debt-free currency printed by our Treasury that carries the same legal tender status as the private debt money issued by the Federal Reserve. Except our government doesn’t need to borrow from foreign lenders or the Federal Reserve to put it into circulation. We’d just create it, and exchange this debt-free paper money for the banks’ toxic assets.

Sound odd? It’s not unprecedented — check out how Lincoln funded the Civil War when foreign lenders were only offering financing at usurious interest rates. That’s how U.S. Notes were born, at which time they were given the popular name “greenbacks”. They circulated alongside Federal Reserve Notes from 1913 until 1971.

It’s basically a way to be “helpful” and go along with what the Fed and Treasury are suggesting, but make them play by our rules. In other words, “Sure, we’ll give you the money you’re asking for, but we’re absolutely not going to pay you interest for the privilege of bailing you out.”

Put it this way — having Congress empower the Treasury to issue our nation’s own fiat currency is more Constitutional than delegating the issuance of our currency to a private central bank where all money is created through the people and our government(s) taking on debt.

We’ve used public money to preserve the union before, maybe it’s time to try again.

I think Dennis Kucinich (D-OH) would agree:

Key quote:

“Why aren’t we helping homeowners directly with their debt burden? Why aren’t we helping American families faced with bankruptcy. Why aren’t we reducing debt for Main Street instead of Wall Street? Isn’t it time for fundamental change in our debt-based monetary system, so we can free ourselves from the manipulation of the Federal Reserve and the banks?“

It only attempts to protect favored banks, and ignores the reality that trillions of dollars in bad debt must be liquidated before we can recover from this crisis. For every lender there is a borrower, and our borrowers have simply assumed too much debt relative to their income.

Objections from a variety of perspectives are expressed by others:

• Dallas Federal Reserve Governor Richard Fisher - Bank Rescue Plan Would Worsen Fiscal Chasm
• Former Treasury Secretary Paul O’Neill - Bush Doesn’t Get Financial Crisis
• Former FDIC Chair William Isaac - A Better Way to Aid Banks
• BB&T CEO John Allison - Paulson Plan Aimed at Helping “Poorly Run” Banks
• NYU economist Nouriel Roubini - Why the Treasury TARP Bailout is flawed
• New IMF Study Contradicts Bailout Bill Premise and Details
• Over 150 economists - Hundreds of Economists Urge Congress Not to Rush on Rescue Plan

Of particular interest are comments in the last article about the game theory implications of vastly increased central bank lending as well as expectations of a bailout. In short, we’re making the problem worse:

Advocates for a rescue plan this week point to a seizing up of credit markets, reflected in elevated inter-bank lending rates, as reason for action. Some economists are unconvinced.

“I suspect that part of what we’re seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,” said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory.

Makes sense, doesn’t it? As also stated by Yves Smith:

Now consider the bailout version of this problem. Yes, the market for bad bank assets wasn’t so hot, but the big reason is not lack of buyers, but unwillingness of banks to accept the lousy realistic prices on offer.

But the government is now moving towards a plan to buy that paper for something closer, maybe a heck of a lot closer, to your price. You now have no incentive to try to unload those assets, so what little trading there was in them has probably gone into a deep freeze.

In other words, “We need a bailout, or else lending is going to freeze up and the financial system is going to collapse” becomes “We expect a bailout, so we’re going to just sit here until we get one.” It’s a self-fulfilling prophecy. Depending on your level of cynicism, one might also consider it a hostage crisis with our economy as the hostage.

Most importantly, also at stake is trust in our nation’s financial system and capital markets. Karl Denninger eloquently makes that point here:

The government cannot simply keep changing the rules to benefit a privileged few.

Focusing on the banks, the current crisis has four related ingredients: liquidity, solvency, capital, and trust. There is plenty of central bank liquidity available for threatened institutions, and due to lack of trust and transparency, banks will not lend to each other — each prefers to go to the central bank for relief. This tendency to look to the central bank for relief appears to be finally threatening the balance sheet at the Fed itself, according to Brad Setser:

In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:

Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);

Increased its “other assets” by about $80b (from $98.67b to $183.89b);

Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);

That works out to the provision of something like $370b of credit to the financial system in a two week period. That may be a bit too high: the outstanding stock of repos felll by $40b (from $126b to $ 86b), leaving a $330b net change in these line items. But that is still enormous.

The most that the IMF ever lent out to cash strapped emerging economies in a year?

$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).

The most the IMF ever lend out over two years?

$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)

This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lend out these kinds of sums over such a short-period.

For another look at the Fed’s balance sheet, see this visual map provided by Cumberland Advisers.

Solvency is a problem as threatened institutions are finding it difficult to access additional financing and service their debt. Capital is a problem because creative accounting and assets of unknown value have led to balance sheets (and off-balance-sheet vehicles) that encouraged wishful thinking and reduced trust.

The administration’s proposal to buy toxic assets doesn’t address all of these problems, may make solvency issues worse, and most importantly, it does not address the lack of trust between market participants:

Non-financial private debt is $32.4 trillion dollars as of 2Q 2008. Household debt is $14.0 trillion. Households lost 400 billion dollars last quarter. You wish to add $700 billion more in losses (via government obligations that taxpayers must cover) this quarter; this package is insignificant against the total bad credit outstanding. Federal capacity to “bail the system out” is insufficient.

It will not and cannot work because the issue is trust, not money. There is lots of money (and credit) but it is being hoarded throughout the system. Consumer savings have gone from nothing to the highest rate ever in American history – in the space of a few months. Money is flying into Treasuries because of lack of trust, not lack of money. You must fix the cause of the problem, not apply band-aids.

Despite all this evidence to the contrary, this evening’s New York Times article shows to what lengths our elected representatives will go to do the wrong thing. Allow me to translate:

Officials said there were still more than a dozen points of disagreement, though the centerpiece of the rescue effort remained intact: a plan for the government to purchase up to $700 billion in troubled assets from financial firms as a way to free their balance sheets of bad debts and to help restore a healthy flow of credit through the economy. It could become the largest government bailout in the nation’s history.

We’ve been pretending to object to the administration’s plan, and we’re making a lot of noise, but we’re not really changing anything. We’re still going to pistol-whip the American taxpayer to bail out poorly-run banks, and we hope credit starts flowing again even though this bailout does nothing to support property markets, improve the ability of borrowers to service their debt, or increase trust in the integrity of the capital markets. But hey, we’re all about hope.

Republicans, under pressure from Democrats to deliver 70 to 100 votes from their side, were scouring the ranks and focusing on the two dozen Republicans who were retiring this year.

Both parties were also scouring the political map to identify lawmakers who face little or no opposition for re-election in November, knowing they would be more willing to vote yes.

We’re looking for representatives who can afford to blow off their constituents.

Democratic officials said that despite having control of both chambers in Congress, they were far from having a majority sufficient to pass the measure just from their ranks. And they also warned that Democrats in potentially tough races could not be counted on to provide the votes to put the package over the top when, and if, it reaches the floor.

If David Price ends up voting against this bailout, it will be because he’s getting the message that 4th District voters are ready for principled representation that serves the people instead of corporate interests.

The ultimate cost of the rescue plan to taxpayers is virtually impossible to know. Because the government would be buying assets of value — potentially worth much more than the government will pay for them — there is even a chance the rescue effort would eventually return a profit.

We’re calling it a “rescue plan” because folks don’t like the word “bailout”. There’s no chance this rescue will return a profit, since banks are only going to dump the most toxic of their assets — they’ll hold on to the good stuff. Furthermore, if there was a reasonable chance of a profitable investment, Warren Buffett would be all over the deal himself.

The administration had initially requested nearly unfettered authority to run the rescue program. But in negotiations over the last week, the White House agreed to accept strict oversight of the program by an independent board, as well as a requirement that the government increase its efforts to prevent home foreclosures.

We’ll give the impression of resisting tyranny with empty gestures of “oversight” and some empty pandering about bailing out borrowers. But we allocated the big money to bail out lenders.

I should mention that I tried to visit David Price’s Chapel Hill office on Thursday to express my sentiments as a constituent, not even as a candidate. But when I arrived, the office was closed:

I received word from folks calling his Durham office that there was no one available to answer the phone, and no way to leave a message.

The behavior of so-called Congressional leaders, our deeply-conflicted administration, and my opponent demonstrate supreme arrogance and disrespect for the rule of law.

Washington, you’re fired.

Practically speaking, what should we do? As unpleasant as deflation sounds, collapsing our currency is worse. We must not collapse our currency to bail out corrupt institutions who benefited from unsound practices. A bailout attempt must not tip us over into a run on the currency. With an existing $9.7 trillion debt and $53 trillion in long-term entitlement liabilities, we are not the world’s best credit risk to abruptly increase our borrowing.

If pain is inevitable, how can we temper the economic turbulence to come?

Here is a plan that I would support:

1. Eliminate capital gains taxes on real estate transactions to encourage existing private capital to buy underlying real assets.
2. Affirm that all voluntary barter transactions between two individuals (human individuals, not “corporate persons” or legal entities) are tax-free, regardless of the medium of exchange.

The first step will help stem the fall in real estate prices without increasing debt or bailing out irresponsible borrowers or lenders.

The second step will restore a more reasonable balance of power between individual Americans who have been pistol-whipped in this economic mess, and the corporations who benefit from an unsustainable system.

Together, they will reduce near-term economic dislocations, while providing a platform for sustainable community-based growth over the long term.

This moment in American history calls for principled leadership by an irate minority in Congress who is willing to stand up for the American people. The human people, the individuals — not corporations who already run Washington through their lobbying machines.

Now for the rest of the story:

Nouriel Roubini has an excellent summary of reasons that the Paulson/Bernanke bailout plan is a bad idea. Key quote:

Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.

It’s also important to note how bailing out poorly-run banks and financial institutions negatively impacts well-run banks, such as BB&T. I’ve banked at BB&T ever since CEO John Allison took a principled stand against financing development projects resulting from land seizures like Kelo v. New London. Based upon the values demonstrated at BB&T, I was not surprised when I read the thoughtful letter (available here as a .pdf) that Mr. Allison sent to Congress. While everyone in this debate has their own perspective and interests to protect, the letter makes some excellent points:

We think it is important that Congress hear from the well-run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.

There is no panic on Main Street and in sound financial institutions. The problems are in high risk institutions and on Wall Street.

While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly-run financial institutions. It is extremely important that the bailout not damage well run companies.

Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well-run companies.

This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.

The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk of the total financial system.

Mr. Allison presents a balanced perspective, although his statement “The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction” can be read as his asking for government support for BB&T’s residential and construction loans.

The bottom line is that Paulson’s proposed plan, and the bailouts done to date, have been for the benefit of well-connected corporations and the individuals who profit from them. That’s corporate socialism. But as BB&T illustrates, there are well-run institutions whose values and business practices are built to last. We must not rescue institutions whose irresponsible behavior has left then vulnerable to this correction. Any  attempts to “save the system” should eliminate the institutions that failed in the process, and allow good institutions to prosper.

Given the strength of the interests involved, I believe we will see a bailout plan out of Congress. Time will tell if any “bailout” allows owners and managers of failed institutions to suffer the consequences of their actions. Regardless of the final plan, however, no bailout will be able to prevent further economic suffering.

Why? We are truly between a rock and a hard place. This crisis resulted from way too much lending, which created way too much money out of nothing, and resulted in irresponsible people, governments, and businesses accumulating way too much debt.

How can we cure too much borrowing with yet more government borrowing, the proceeds of which are given to banks to allow them to lend more, when we’ve already borrowed TOO MUCH and can’t service the debt we have?

For a graphical illustration, check out this blog post:
http://ukhousebubble.blogspot.com/2008/09/crushing-truth-about-us-household-debt.html

For another graphical illustration, consider this image:

Debt on this chart is defined as all U.S. debt (sum debt of federal and state & local governments, international, and private debt, including households, business and financial sector debts, and federal debt to trust funds).

We cannot borrow our way out of debt.

We cannot borrow our way to prosperity.

Collectively, we have borrowed so much that by 2016, the interest on our debts at 6% interest will be greater than the total consumer income. Those who think we can bail out the lenders without considering the collective balance sheet of our nation are ignoring reality.

Where are we going to get the money for a trillion dollar bailout? Will foreign investors recycle another trillion dollars into new bonds issued by our Treasury to pay for it?

As evidenced by the chatter from abroad, Europeans and Asians are not willing to fund our continued largess. Attempting to “monetize debt” by having the Federal Reserve print the money required for a bailout would lead to loss of confidence in the dollar, and potentially catastrophic collapse of our currency.

So we have two choices — collapse of corrupt financial institutions with deflation, or preserving the dominance of corrupt institutions while collapsing our currency  with inflation or hyperinflation.

Practically speaking, what should we do? As unpleasant as deflation sounds, collapsing our currency is worse. We must not collapse our currency to bail out corrupt institutions who benefited from unsound practices. A bailout attempt must not tip us over into a run on the currency. With an existing $9.7 trillion debt and $53 trillion in long-term entitlement liabilities, we are not the world’s best credit risk to abruptly increase our borrowing.

So if pain is inevitable, how can we temper the economic turbulence to come?

Here is a plan that I would support:

1. Eliminate capital gains taxes on real estate transactions to encourage existing private capital to buy underlying real assets.
2. Affirm that all voluntary barter transactions between two individuals (human individuals, not “corporate persons” or legal entities) are tax-free, regardless of the medium of exchange.

The first step will help stem the fall in real estate prices without increasing debt or bailing out irresponsible borrowers or lenders.

The second step will restore a more reasonable balance of power between individual Americans who have been pistol-whipped in this economic mess, and the corporations who benefit from an unsustainable system.

Together, they will reduce near-term economic dislocations, while providing a platform for sustainable community-based growth over the long term.

This moment in American history calls for principled leadership by an irate minority in Congress who is willing to stand up for the American people. The human people, the individuals — not corporations who already run Washington through their lobbying machines.

Our country’s ultimate source of strength and resilience is a self-sufficient community that can feed itself, clothe itself, house itself, educate itself, and trade its surplus production with its neighbors. Today, our communities and individuals have never been more dependent — as evidenced by consumer sentiment, unemployment, foreclosures, and even tent cities in hard-hit areas.

In this moment of crisis, individuals need to be free to help each other, and themselves. We need to level the playing field between corporations (who enjoy “legal personhood” and limited liability) and individual Americans.

People must again have the ability to serve each other as individuals to recreate the wealth that is being destroyed all around us.

But the cognitive dissonance required to maintain that respect is rapidly eroding.

Yesterday, my opponent was interviewed by Bill LuMaye, a popular talk show host on AM 680 WPTF. You can tell my opponent is running for re-election — he has been on Mr. LuMaye’s show about four times in the past two months. My opponent was asked to talk about the financial crisis, and the Paulson/Bernanke bailout plan.

Here’s where I have a problem: all my opponent was able to accomplish in thirty minutes was wringing his hands in sober tones about how terrible the current crisis is, stating how we need to do some kind of bailout, and then blaming The Administration for putting this questionable bailout plan in front of him.

I have one question for my opponent: Are you a Lawmaker, or a Lawpasser?

Do we hire you to watch out for our interests by authoring legislation, or to complain about the quality of legislation that you are provided by the Executive branch?

Why do you wring your hands and bloviate about legislation WRITTEN BY THE EXECUTIVE BRANCH, when the Constitution clearly states that Congress should be writing legislation?

If you don’t know enough to actually write legislation yourself concerning this topic, why should we value your opinions, and what gives you the right to complain?

Why are we paying you anything just so you can sit up in Washington and collect over $40,000 (since 2000) in PAC donations from banks and the American Banker Association?

Why are you echoing The Administration’s Sense of Panic and Urgency, when it is now being reported that this bailout plan has been in the works for a long time?

The White House today is drumming up extraordinary pressure on Congress to approve its plan to enact a $700 billion mortgage bailout fund, suggesting the markets cannot wait much longer and dispatching Vice President Cheney and other top officials up Pennsylvania Avenue to jawbone lawmakers.

But Bush himself continues to do little to explain his plan, and he has refused to be questioned about it.

Asked during a telephone briefing for reporters today whether Bush was speaking with lawmakers, White House Deputy Press Secretary Tony Fratto said the president is aware of their concerns but that Paulson is the salesman.

“It shouldn’t take much analysis to remember what happened last week, which was a very serious freeze-up in our credit markets,” Fratto said. “Our financial markets right now do not need uncertainty, they need increased certainty as to how this rescue plan is going to go forward — and that they can be sure that there is a plan to go forward — and that will begin the correction in our financial markets.”

Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.

In October of 2001, in an environment of fear and coercion by the Executive Branch, you voted for The Administration’s last-minute substitute version of the PATRIOT Act and shredded our Bill of Rights.

Now, as a consequence of your fear and ignorance, you are threatening to vote for The Administration’s bailout bill, known as “Cash for Trash” or “No Banker Left Behind” — thus shredding working Americans, feet first.

David, you’re fired.

Friends and former colleagues,

I went on the Triangle Farm Tour this weekend and visited the Piedmont Biofuels Coop, a sustainable farm in Moncure, NC, linked to the local biodiesel pioneers at biofuels.coop.  Then today by happy synchronicity, I got an email from BJ Lawson, one of my former Duke med students who is running for Congress in the 4th District, featuring an interview he did with Lyle Estill, VP of Stuff at Piedmont Biofuels and author of Small is Possible: Life in a Local Economy.

Both Lyle and BJ emphasize the need for a vital and sustainable local economy that will provide “Hometown Security” for all of us during these times of turmoil on the national level.  That would be the opposite of the National Bio and Agro Defense Facility that his opponent David Price is advocating bringing to Butner as Chairman of the Appropriations Subcommittee for the Department of Homeland Security.

So, progressives wake up and vote your conscience, not your party this November.  Yes, it is possible to split your ticket and vote for both Obama and Lawson.  I made the radical move of switching my registration from Democratic to Republican to vote for him in the NC Primary where he won 70% of the vote against a hardcore neocon opponent.  BJ bases his platform strictly on the Constitution, and he is more of a peace candidate than most Democrats in Congress now.

Liberty is Priceless,
Larry