Looks like the majority of the House agreed with me. The financial bailout in its current form is dead.

The usual way to fix this is for Congress to lard up to bill with pork so that more Congresscritters will vote for it. Watch for that approach to be forthcoming. Congress can be bought. It’s just a matter of the price, now.

OTOH, it is remotely possible that the Congressmen and Congresswomen that voted this bill down might vote for a new bill, with no bailouts for foreigners or mismanaged companies, no purchases of securities other than mortgages and strict controls on the Treasury Department.

Or, pigs will fly.

Fire Congress!

The bailout uses your money. From your pocket. Do you really want to spend your money? Do you really want the Federal Government to take your money and spend it however they wish? Here are some of the others opposing the financial bailout.

Michelle Malkin

Phone calls to congressional offices continue to show overwhelming public opposition to the massive, unprecedented government giveaway.

Nevertheless, GOP House Minority Leader John Boehner and the House Republican leadership have thrown in the towel. Make room for them on the couch with Gingrich and Pelosi. Boehner called the deal a “crap sandwich,” but told House Republicans he’ll vote for it.

Are you going to swallow this crap? Is your congressional representative?

No Wall Street Bailout

The $700 billion bailout figure is as much money as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. It amounts to $2,300 for every man, woman, and child in America.

Hold the Mayo

I’m neither a lawyer nor an expert at interpreting legislative language, but I see all that adding up to a continuation of the federal government using the banks and the mortgage industry as a massive welfare program.

This bill is designed to stabilize and perpetuate the current status quo.

Freedom Works-Dick Armey

The large government intervention that Congress is proposing would create changes whose effects will linger long into the future. The Treasury plan would fundamentally alter the workings of the market, rewarding poorly run investment firms at the disadvantage of prudent ones, and transferring the burden of risk to the taxpayer. At the same time, the $700 billion proposal does not offer fundamental reforms required to avoid a repeat of the current problem. Congress has been reluctant to reform the government sponsored enterprises that lie at the heart of today’s troubled markets, and there is little to suggest their resolve to pass the necessary reforms will increase in the wake of a bailout.

In addition to the moral hazard inherent in the proposal, the plan makes it difficult to move resources to more highly valued uses. Successful firms that may have been in a position to acquire troubled firms would no longer have a market advantage allowing them to do so; instead, entities that were struggling would now be shored up and competing on equal footing with their more efficient competitors.

The financial services sector is over-leveraged and too large. Winding this down will, indeed, impose painful costs. Congress is seeking to explicitly transfer these costs to taxpayers, who will underwrite a new government plan devised to correct the old government plans. Taxpayers are being called upon to make a significant sacrifice, with little evidence to suggest that the troubled markets will be settled. In fact, there is evidence to suggest that the latest intervention will delay the required adjustments in the financial services sector. The $700 billion intervention is just the largest, latest in a series of failed bailouts with no guarantee that the desired outcome will even be achieved.

As a Public Choice professor, I used to begin class each semester with Armey’s Axiom number one: “The market is rational and the government is dumb.” Those quick to call for more regulation forget the power of markets, and refuse to acknowledge government culpability in the current mess. Time and again, governments the world over have attempted to outsmart the market and the current legislation is no exception. And time after time, markets respond, toppling the best-laid government plans as they move to correctly price the underlying assets in exchange.

Fire Congress!

Here is a link to the Financial bailout agreement. It is in PDF form. It is a long and complex document but a very quick scan reveals some issues for the American taxpayer.

Emergency Economic Stabilization Act of 2008

Lots of bad options were taken out. Still:

1. The government would have the authority to buy troubled assets from foreign banks and governments.
2. The government, in certain circumstances, is authorized to pay more for the troubled asset than its current owner paid.
3. A substantial bureaucracy to administer and inspect these programs is authorized.
4. While the government is urged to mitigate foreclosures by interest rate changes and / or the forgiveness of principal, foreclosure is not ruled out.
5. The government is authorized to begin buys before creating any policies, procedures or regulations concerning such activities.

Fire Congress!

A lot of American homeowners have a mortgage. In this legal agreement, a lender provides funding for the purchase of a parcel of real estate and the borrower, the owner, agrees to pay that money back over a period of time plus interest.

Let’s set aside all the potential variations, adjustable rate mortgages, interest only mortgages, Islamic mortgages, etc. The bottom line is a parcel of real estate bought with a loan.

That mortgage has value. On day one, it’s value is the amount loaned plus all the interest that would be paid over the term of the loan. You would think you could sell that loan, that there would be a market for it.

Fast forward. Because of a variety of conditions at level of the borrower, the real estate which the mortgage is based upon has either lost value or is discovered to not be as valuable as when the loan was made. Picture mortgage brokers, bankers, appraisers and homeowners going to jail in some cases.

The business now holding this mortgage does not know how to value it. It is apparent that the original value is wrong.

But the mortgage still has a value. It is still secured by a parcel of real estate that has a to-be determined value.

The business holding the mortgage hopes, really hopes, that the actual value is close to the original value. The market for mortgages is far less certain.

The business wants to sell that mortgage, to recover as much of its original investment as possible. The market wants to buy that mortgage at as low a price as possible, to ensure that if there is a profit to be made, it can be.

No one sells or buys. The business holding the mortgage proclaims that there is no market. The government panics, spurred on by the phone calls from all the mortgage holder people who contribute to campaigns.

There is a market. The businesses holding the mortgages do not like the market because if they sell in that market they will not recover most of their original investment. That is not lack of market.

In fact, the businesses holding mortgages are wagering that a government bailout will pay more for these mortgages than the market. So much so that they are refusing to participate in an existing market.

I have $5.00 in my wallet. I will pay $5.00 for any $1,000,000 portfolio of American mortgages held by any entity. There, I have created a market for mortgages.

Let’s examine value a little more. The real value of a mortgage is the potential sale price of the real estate that secures the mortgage plus the value of payments yet to be received. A mortgage always has some value.

In a portfolio of 100 mortgages, there are 100 parcels of land as security. If any of the 100 borrowers is making payments, that adds value to the portfolio. That value is greater than zero but less than the original amount loaned.

It is up to buyers and sellers to agree on the value, or sales price, of that portfolio. It may be 5 cents on the dollar. It may be 30 cents on the dollar. It will be a discounted price but a price can be determined.

Unless sellers refuse to sell. Unless sellers believe that a third party, the Federal Government, will pay them more than the market will.

There is a market for mortgages. The sellers do not want to sell at market prices. The Federal Government has been convinced to intervene by these sellers.

We, American taxpayers, are being fed a steaming pile of bull by elected officials bought and paid for by the mortgage industry. This crisis was manufactured solely to ensure that mortgage holders receive a higher price for mortgages than a reasonable buyer would pay.

It think it’s time to fire Congress.