Before D.C. Gets Our Money, It Owes Us Some Answers (Newt on the bailout)

The Corner at National Review ^ | 21 September 2008 | Newt Gingrich

[SE Mom]

Watching Washington rush to throw taxpayer money at Wall Street has been sobering and a little frightening.

We are being told Treasury Secretary Henry Paulson has a plan which will shift $700 billion in obligations from private companies to the taxpayer.

We are being warned that this $700 billion bailout is the only answer to a crisis.

We are being reassured that we can trust Secretary Paulson "because he knows what he is doing".

Congress had better ask a lot of questions before it shifts this much burden to the taxpayer and shifts this much power to a Washington bureaucracy.

Imagine that the political balance of power in Washington were different.

If this were a Democratic administration the Republicans in the House and Senate would be demanding answers and would be organizing for a “no” vote.

If a Democratic administration were proposing this plan, Republicans would realize that having Connecticut Democratic Chris Dodd (the largest recipient of political funds from Fannie Mae and Freddie Mac) as Chairman of the Banking Committee guarantees that the Obama-Reid-Pelosi-Paulson plan that will emerge will be much worse as legislation than it started out as the Paulson proposal.

If this were a Democratic proposal, Republicans would remember that the Democrats wrote a grotesque housing bailout bill this summer that paid off their leftwing allies with taxpayer money, which despite its price tag of $300 billion has apparently failed as of last week, and could expect even more damage in this bill.

But because this gigantic power shift to Washington and this avalanche of taxpayer money is being proposed by a Republican administration, the normal conservative voices have been silent or confused.

It’s time to end the silence and clear up the confusion.

Congress has an obligation to protect the taxpayer.

Congress has an obligation to limit the executive branch to the rule of law.

Congress has an obligation to perform oversight.

Congress was designed by the Founding Fathers to move slowly, precisely to avoid the sudden panic of a one-week solution that becomes a 20-year mess.

There are four major questions that have to be answered before Congress adopts a new $700 billion burden for the American taxpayer. On each of these questions, I believe Congress’s answer will be “no” if it slows down long enough to examine the facts.

Question One: Is the current financial crisis the only crisis affecting the economy?

Answer: There are actually multiple crises hurting the economy.

There is an immediate crisis of liquidity on Wall Street.

There is a longer time crisis of a bad energy policy transferring $700 billion a year to foreign countries (so foreign sovereign capital funds are now using our energy payments to buy our companies).

There is a longer term crisis of Sarbanes-Oxley (the last "crisis"-inspired congressional disaster) crippling entrepreneurial start ups, driving public companies private, driving smart business people off public boards, and driving offerings from New York to London.

There is a long term crisis of a high corporate tax rate driving business out of the United States.

No solution to the immediate liquidity crisis should further cripple the American economy for the long run. Instead, the liquidity solution should be designed to strengthen the economy for competition in the world market.

Question Two: Is a big bureaucracy solution the only answer?

Answer: There is a non-bureaucratic solution that would stop the liquidity crisis almost overnight and do it using private capital rather than taxpayer money.

Four reform steps will have capital flowing with no government bureaucracy and no taxpayer burden.

First, suspend the mark-to-market rule which is insanely driving companies to unnecessary bankruptcy. If short selling can be suspended on 799 stocks (an arbitrary number and a warning of the rule by bureaucrats which is coming under the Paulson plan), the mark-to-market rule can be suspended for six months and then replaced with a more accurate three year rolling average mark-to-market.

Second, repeal Sarbanes-Oxley. It failed with Freddy Mac. It failed with Fannie Mae. It failed with Bear Stearns. It failed with Lehman Brothers. It failed with AIG. It is crippling our entrepreneurial economy. I spent three days this week in Silicon Valley. Everyone agreed Sarbanes-Oxley was crippling the economy. One firm told me they would bring more than 20 companies public in the next year if the law was repealed. Its Sarbanes-Oxley’s $3 million per startup annual accounting fee that is keeping these companies private.

Third, match our competitors in China and Singapore by going to a zero capital gains tax. Private capital will flood into Wall Street with zero capital gains and it will come at no cost to the taxpayer. Even if you believe in a static analytical model in which lower capital gains taxes mean lower revenues for the Treasury, a zero capital gains tax costs much less than the Paulson plan. And if you believe in a historic model (as I do), a zero capital gains tax would lead to a dramatic increase in federal revenue through a larger, more competitive and more prosperous economy.

Fourth, immediately pass an “all of the above” energy plan designed to bring home $500 billion of the $700 billion a year we are sending overseas. With that much energy income the American economy would boom and government revenues would grow.

Question Three: Will the Paulson plan be implemented with transparency and oversight?

Answer: Implementation of the Paulson plan is going to be a mess. It is going to be a great opportunity for lobbyists and lawyers to make a lot of money. Who are the financial magicians Paulson is going to hire? Are they from Wall Street? If they’re from Wall Street, aren't they the very people we are saving? And doesn’t that mean that we’re using the taxpayers’ money to hire people to save their friends with even more taxpayer money? Won't this inevitably lead to crony capitalism? Who is going to do oversight? How much transparency is there going to be? We still haven't seen the report which led to bailing out Fannie Mae and Freddie Mac. It is "secret". Is our $700 billion going to be spent in "secret" too? In practical terms, will a bill be written in public so people can analyze it? Or will it be written in a closed room by the very people who have been collecting money from the institutions they are now going to use our money to bail out?

Question Four: In two months we will have an election and then there will be a new administration. Is this plan something we want to trust to a post-Paulson Treasury?

Answer: We don’t know who will inherit this plan.

The balance of power on election day will shift to either McCain or Obama. Who will they pick for Treasury Secretary? What will their allies want done? We are about to give the next administration a level of detailed control over big companies on a scale even FDR did not exercise during the Great Depression. Is this really wise?

For these reasons I hope Congress will slow down and have an open debate.

And in the course of that debate, I hope someone will introduce an economic recovery act that makes America a better place to grow jobs. I hope the details will be made public before the vote.

For more details on my action plan for getting the American economy back on track and building long-term economic prosperity, you can read this message recorded yesterday to American Solutions members.

This is a very important week for the integrity of the Congress.

This is a very important week for the future of America.

If Washington wants our money, then it owes us some answers.

09/21 03:08 PM

[Brian S. Fitzgerald]

Q: HOW MANY DIVISIONS DOES THE AMERICAN TAXPAYER HAVE?

A: ALL OF THEM, IF WE ACT QUICKLY!

I have left phone messages for my two Senators and Congressman, and now am preparing faxes to send today in opposition to the ONE TRILLION DOLLAR BAILOUT!

[KoRn]

Wise words from Newt regarding this “crisis”.

Actually this is far from a “crisis”. Banks have failed before, and other banks pick up the pieces. Sure there is some pain, but life goes on.

We are about to turn this into a REAL crises by screwing up the market with the inevitable unintended consequences.

[SE Mom]

God in heaven Jim, I pray you’re right. The problem is how mis-informed the electorate has become about the nature of freedom, the rule of law and the duty of citizens.

Already- if you listen you can hear the MSM beating the drums with the liberal talking points “not enough regulation”...”what about the little guy facing foreclosure...”

[upchuck]

Newt has expressed all my thoughts on this and then some.

In addition, IMHO, the Feds should not do anything. Let the markets take care of this. When was the last time the Feds tried to influence something and the outcome was good? Their track record, frankly, sucks. Explain to me how this will be different?

[brityank]

Bump for reference.

Amen, Newt !!!

[SE Mom]

How will it be different? I don’t know. The electorate is at odds with itself as to the cause and desired outcome.

The blaming has started and it will color all attempts to solve and rebuild.

As yet- I’ve not heard one elected person stand up and say- we failed the country, we take responsibility for our part.

[ebiskit]

If they want the bailout, we want the FAIRTAX!!!

Quid Pro Quo...

It’s the only thing that will recover the economy with enough strength to rescue us from our pol’s profligate ways. Without the innate power of DC being seriously curtailed, we will only see more of the same ol, same ol. The Fairtax WILL be a game changer and recalibrate the balance of power back to the people. This a ‘populist’ issue and can be effectively manipulated as such.

the Deets

[ConservativeMind]

SOX is not a problem with anything to do with this. The purpose of SOX is not to prevent stupid decisions from being made. It is to assure there are controls in place to prevent fraud and assure people within the company are held accountable for fraud.

It is definitely an expense for companies, but it has also been a needed set of internal changes because a number of companies never bothered to put in place reliable controls, through policies and procedures made after simple analysis.

It is much harder for fraud or other internal issues to bring down a company in unexpected ways now, thanks for Sarbanes-Oxley.

[ConservativeMind]

SOX has nothing to do with preventing stupid decisions based on credit.

It does hold CEOs accountable for the accuracy of their financial information, and reduces opportunities for fraud.

Unfortunately, our current crisis has nothing to do with these.

[NVDave]

Then you’re not paying attention.

What are we to make of i-bank CEO’s who come out and tell us, only a couple of weeks before their collapse, that they have “adequate capital reserves” - and then earlier in the same week that they collapse that there is “no problem, they have sufficient reserves” — and within 10 days they’re busted?

When a CEO makes such pronouncements in public, they’re making a statement of financial condition.

For a great first example, just go back and review the statements of Chuck Prince (former CEO of Citi) from August to November, 2007.

When the company is taken out as a result of insolvency, that’s a lack of capital, right?

So the CEO was lying. Flat-out lying about the finances of the company.

And that is a violation of SarBox.

[NVDave]

Here’s another great example:

http://www.reuters.com/article/ousiv/idUSN2930358920080730

Thain’s flip-flops on capital. They didn’t need more — just before they needed more.

[Earthdweller]

Sounds great. Now if only Congress would do all that in a timely fashion. I’m not holding my breath.

[ConservativeMind]

There is no SOX violation withing what you've alluded to.

Financial investments with a value can quickly have that value changed. For instance, one could say they have $1 million in the bank today, but have that bank go insolvent tomorrow, leaving them with $100,000 from the FDIC as all they will see. Does that mean the individual was lying when they said they had $1 million? Not at all.

The same has basically happened with the banks, investment houses, and insurance companies around this recent collapse. Their quarterly reports, which would have been signed off on by their CEOs, could all have been in good order, but with extreme financial circumstances, fallout affects many. Their last statements were totally in order, and their upcoming ones can be in perfect order, even though their situations greatly changed.

SOX prevents problems, financial, and otherwise, but it doesn't stop people from making mistakes in judgment on investments.

[Texas Songwriter]

It seems Gingrich asks a very important question. The Repbulicans and dems are uncharacteristically silent in pointing to the culprit in this mess. Could it be they are all textbook cases of Congressional malfeasance and simply do not want those questions asked and answered. Is there no honest Patriot in all of Congress?

[Wilhelm Tell]

Mark Levin said that members on congress on both sides of the aisle will try to prevent any investigation because Congress will never take responsibility for anything.

We will have crooks bailing out crooks under cover of a national emergency. We are about to get a system of crony capitalism/fascism and the ironic thing is that these "progressive" Democrats are the chief ones who are leading us to fascism.

[Eva]

“Progressive” is just a euphemism for socialist. There used to be an essay on the Democratic Socialists of America web site that explained how the term “progressive” came to be used to connote socialist. The explanation was that the socialist party realized that they needed recruit “Negroes” (Black was not a term that was commonly used when the term progressive was invented, but it was used in the essay). Anyway, the socialists claimed that the Blacks didn’t understand socialism and that the word was enough to turn them off, so, they came up with the term, “progressive”. This essay was posted along with the names of all the members of the Progressive Caucus in Congress and the explanation that the members of the progressive caucus were also members of the DSA.

[Tolik]

Nailed It!

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Disclaimer: I am NOT an expert on finance beyond basic economics (as learned from Thomas Sowell and Walter Williams). What Newt proposes sounds very reasonable. Let me know if you can prove it he is full of it.

[Loud Mime]

In the historical context, “We the People” meant the writers of the Constitution; i.e.: politicians. It’s inclusion of the run-of-the-mill citizenry is questionable; look what they’ve done.

The preamble was written by Gouverneur Morris and was never debated; it was a last minute addition to the Constitution.

[stylin_geek]

Jim,

I agree Newt with the elimination of the cap gains tax.

I think eliminating cap gains would allow business to take care of itself without government deciding who wins or loses.

This would get government out of the way, reward businesses for being successful, give a break to struggling companies and punish failing businesses, because a failing business has no cap gains to report.

Paulson’s bailout strikes me as being Keynesian economics in the extreme, in that government would wind up deciding winners and losers.

[Jim Robinson]

I think Paulsen, et al, are in a panic. Cooler heads need to prevail.