The House reversed itself today by approving the $700 Billion bailout bill it rejected resoundingly on Monday. Treasury Secretary Henry Paulson had warned that the roof was about to fall in but the House declined to approve the Administration backed, bipartisan bill. The House was responding to a lot of angry constituents who felt that the little guy shouldn't be taxed to save the fat-cats on Wall Street who got us into this mess with their gambling on mortgage backed securities where the mortgage brokers were lending to homeowners who couldn't repay the loan, especially when housing values fell. The value of these collateralized debt obligations (CDOs) became so large, and were sold so world-wide, that their value amounted to the TRILLIONS of dollars. If they went bad, and they were looking pretty sick, then not only the U.S. economy but the world economy was headed for the toilet.
It took a week for the taxpayers to realize that when the ship sinks, even though the first class passengers caused the ship to sink, the taxpayers in steerage are going down with the ship, as well, through no apparent fault of their own, apart from allowing their elected representatives to sleep at the switch by approving more financial deregulation and encouraging a complete lack of oversight as to the new financial products that ultimately overwhelmed the system.
The last time we had a major overhaul of the financial system was the result of the Market Crash of 1929 followed by the Great Depression of the 1930s.
The last time before that was the result of the Panic of 1907 when J.P. Morgan practically single-handedly saved the system (because we had no central bank, then), in the sense that he rounded up the usual suspects on Wall Street (investment bankers), locked them in a room, and refused to let them out until they ponied up all that they were worth to save the system. It took years of hearings into the causes of the debacle, and the possible cures, before Congress established, in 1914, the Federal Reserve System we know and love today.
Why did we not have a central banking system? Because Pres. Andrew Jackson, a backwoods debtor (and plantation owner, the Hermitage, outside Nashville) hated banks and bankers, as did many of his ordinary-citizen supporters who were getting killed by fluctuations in the economy and especially the dear cost of money, i.e. credit. He killed the Second Bank of the United States, headquartered in Philadelphia. He was at war with the president of the bank who was trying to defeat him. Jackson won, but the nation lost, in the sense that it had no financial flywheel to keep the economy in balance and to level out the peaks and valleys. The result was a series of panics (depressions) every few years. With a central bank, we've only had one major depression (the 1930s) until what we may be about to experience now.
Alexander Hamilton, a hard-headed, far-seeing businessman and economics expert (he'd studied Adam Smith, whose Wealth of Nations was published in 1776, just as we were declaring independence and fighting a war and setting up a country (which went into business in 1789 in New York on Wall Street, as a matter of fact) recommended establishing a central bank. Congress, under George Washington as president, accordingly established the First Bank of the United States, with a twenty year charter.
It was immediately controversial because nowhere in the Constitution did the States (or the People) give to the central government the power to establish a central bank which might threaten to overwhelm the states (and the People) with its potential power to regulate the money supply, credit, etc.
Nevertheless, the bank was rechartered and called the Second Bank of the United States, with another twenty year charter. This one was challenged in a Supreme Court case that has become famous, McCullach v. Maryland (1819). The Thomas Jefferson supporters, by now a political party (the Democrat-Republicans) opposed the bank and thus took the position that Congress had not been granted the power to establish a bank.
Daniel Webster, arguing for the bank (he'd been supported by the bank and its president, Nicholas Biddle, secretly, for years, and for years to come) argued that Congress had been given the power to regulate commerce, coin money, and thus to regulate the economy, and run the government. Thus it was reasonable, then, for Congress to be deemed to have the power, by implication, to set up a bank if it thought this necessary for the successful operation of the government and the country. He pointed to Article I, Sec. 8, Clause 18, which gives the Congress the power to do all that is "necessary and proper" to carry out all of its other powers, listed above that clause and elsewhere in the Constitution. This is thus the "elastic clause," which gives Congress broad powers. It represents a broad, not a narrow or strict interpretation of the Constitution. The South seized on the need to insist on a strict interpretation in order to protect its peculiar institution of slavery. But Thomas Jefferson, one of the original strict constructionists when it came to the Bank, disregarded the lack of power to acquire new territory when he was president by purchasing Lousiana Territory from Napoleon, who needed the money to continue invading all over Europe. The deal was too good to pass up, so the Constitution took a back seat and no one made a fuss, certainly not one that would result in a case that would come before the Supreme Court. Can you imagine the Court ordering that the purchase be rescinded and the Louisiana Territory given back? Neither can I.
In the Court's opinion in McCullach, authored by Chief Justice John Marshall, he adopted Webster's argument giving Congress expansive authority to do all that it deems necessary and proper to carry out its other powers, such
The Wall Street Journal article reporting the House action (the Senate approved on Wednesday) and the President's signing of the bill, which is hoped to reassure Wall Street, which more and more means Main Street, is below.
Good luck.
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Bush Signs Bailout After House Passage
By MICHAEL R. CRITTENDEN and COREY BOLES
WASHINGTON -- President George W. Bush signed the biggest government intervention in the financial markets since the Great Depression after U.S. House of Representatives lawmakers wary of growing signs of the nation's economic distress voted Friday in favor of a $700 billion Wall Street rescue package.
![[President Bush is greeted by Treasury Secretary Henry Paulson at the Treasury Department after the House passed the $700 billion financial bailout bill at the White House in Washington, Friday, Oct. 3, 2008. (AP Photo/Charles Dharapak)]](http://s.wsj.net/public/resources/images/OB-CL479_bailou_D_20081003144056.jpg)
Associated PressPresident Bush is greeted by Treasury Secretary Henry Paulson after the House passed the bailout bill.
Mr. Bush welcomed the passage of a rescue plan, saying it will help the nation's economy withstand the financial turmoil. The legislation is "essential to helping America's economy weather the financial crisis," said the president, giving a brief statement outside the White House.
Mr. Bush acknowledged widespread concern about using taxpayer money to bail out wealthy bankers, but said the ultimate cost will be "far less" than the initial government outlay, since the plan is to sell the toxic assets back into the market once it recovers.
But he warned that "Americans should also expect that it will take some time for this legislation to have its full impact on our economy."
House Passes Bailout Bill
0:33The U.S. House of Representatives passed a revised version $700 billion financial system bailout bill Friday. Watch the calling out of the final tally of 263 to 171 in this video from Fox News. (Oct 3)
The 263-171 vote was a reversal from Monday, when House lawmakers shocked investors and their own leaders by voting against a more narrow version of the plan to buy up distressed assets from financial institutions. That vote sent financial markets tumbling and forced the Bush administration and congressional leadership to scramble and salvage the rescue plan.
The result: a $700 billion bailout for financial firms combined with $152 billion in unrelated tax breaks and broader tools for federal regulators to deal with the growing economic crisis. The Senate passed the bill with a strong, bipartisan tally of 74-25 Wednesday evening.
The vote in the House was closer, in part a reflection that lawmakers are less than five weeks away from federal elections and voters are increasingly focused on the economy. Supporters of the rescue plan in recent days made a concerted effort to draw a line between Wall Street's woes and the concerns of everyday taxpayers.
"We must pass this legislation to stop the hemorrhaging," Majority Whip James Clyburn (D., S.C.) said in a floor speech, calling the legislation not about Wall Street but about the grocery stores, community banks and other local businesses facing economic hardship.
"We're in the midst of a recession. It's going to be a rough ride, but it's going to be a whole lot rougher ride if we don't pass this bill today," House Minority Leader John Boehner (R., Ohio) said on the House floor.
The credit crisis has continued to worsen since Monday's vote. Since Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asked Congress to create the loan purchase plan on Sept. 18., the banking system showed continued stress. Washington Mutual Inc. failed and its deposits were acquired by J.P. Morgan Chase & Co., while Wachovia Corp. agreed to be acquired by Wells Fargo & Co.
The latest evidence came in California, where Gov. Arnold Schwarzenegger warned Secretary Paulson the state might need an emergency federal loan of up to $7 billion within weeks. California is among several states frozen out of the bond market by the credit crunch and is running out of cash to fund day-to-day government operations.
Those concerns were enough for lawmakers such as Rep. John Lewis (D., Ga.), who said on the floor that he was switching his vote and favoring the bill. Lewis is a key member of the Congressional Black Caucus, which had expressed extreme discomfort with the bill earlier in the week.
He was joined by the likes of Rep. Hilda Solis (D., Calif.), who voted "no" on Monday on the rescue plan but said Friday she would support the bill "with a heavy heart."
"I am now looking and supporting the rule [for floor debate] and the bill," she said on the House floor. She said Congress needs to "restore trust" in the financial markets and cap executive compensation.
A number of lawmakers said phone calls from constituents over the last few days have shown a dramatic shift toward broader support of the rescue plan. Specifically, lawmakers cited Monday's 778-point drop in the Dow Jones Industrial Average as having highlighted the risk to retirement accounts and other consumer investments if Congress failed to act.
"The costs of inaction are greater than the costs of this bill," Rep. Zach Wamp, (R., Tenn.) said Friday in announcing he would switch his "no" vote to support the measure.
Still, not everyone was happy. Some conservative Democrats expressed concern that the tax breaks in the Senate-authored bill weren't offset, while their GOP counterparts balked at the dramatic federal intervention in the private markets.
"How can we have capitalism on the way up and socialism on the way down?," Rep. Jeb Hensarling (R., Texas) said during a floor speech in opposition to the legislation.
In the end, 172 Democrats and 91 Republicans voted for the legislation. On Monday, 140 Democrats and 65 Republicans voted in favor of the bill.
In addition to the rescue plan and tax provisions, other provisions include long-sought language compelling insurers to offer coverage for most mental illnesses at comparable rates to physical illnesses.
—Fawn Johnson and Mark Anderson contributed to this article.Write to Michael R. Crittenden at michael.crittenden@dowjones.com and Corey Boles at corey.boles@dowjones.com
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