Tuesday, February 3, 2009

Senate Republicans Shoot Down Billions in Transit Stimulus

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

Senate Republicans used the cloture rule (60 votes needed to close debate and vote on a bill or amendment) to kill the Feinstein transit amendment:

Already unhappy over the size of the measure, Republicans insisted additional infrastructure projects be paid for with cuts elsewhere in the bill.

But the Democratic amendment garnered 58 votes, just shy of the supermajority needed under Senate budget rules, and many more efforts to increase the measure's size are sure to follow.

"We can't add to the size of this bill," said Sen. Jim Inhofe, R-Okla. "The amount is just inconceivable to most people."

This should come as no surprise to anyone. Congressional Republicans have made clear their absolute refusal to consider changing our national transportation priorities away from the failed highway-dependent sprawl model that dominated the 20th century but whose failure lies at the heart of the economic crisis. To wit:

"We need to fix housing first," he said. Republicans are expected to seek a vote on their proposals this week as part of the debate on the overall stimulus measure.

Officials said the GOP was uniting behind a proposal designed to give banks an incentive to make loans at rates currently estimated at 4 percent to 4.5 percent. Fannie Mae and Freddie Mac, which were seized by the federal government in September, would be required to purchase the mortgages once banks have made them to consumers.

To put this more succinctly, they're saying "let's refloat the housing bubble!" Banks have made it quite clear that they are in no mood to lend money to many people in this climate, and Americans have made it quite clear they are in no mood to acquire more household debt. Sure, there may be a few folks here and there who want to buy, but by no means are they numerous enough to provide an economic boost.

And even if they could - would it matter? The economic crash was the product of overreliance on housing to drive the economy. That failed - why on earth would we want to try it again? Sustainable mass transit provides near-term jobs and long-term economic value by offering affordable transportation options not dependent on the vagaries of oil prices.

Unfortunately the US Senate clings to arcane and deeply undemocratic rules that hand the minority the power to obstruct the majority. Rafael put it well in the comments to the last post:

Behold the glorious dictatorship of the minority. Let's see them actually reading phone books for a week in a vainglorious effort to oppose funding for the nation's crumbling infrastructure. It's time to call these clowns' bluff - they double the deficit in eight years and now they're choir boys on fiscal rectitude all of a sudden? Puhleeze.

Alternatively, give them the compensatory funding they are asking for. I'd start with imposing a retroactive 100% income tax on bonuses paid to employees of financial institutions that received TARP funds. That's $18 billion right there. Next, take the $5.5 billion currently "at the discretion of Ray LaHood" and allocate the whole $23.5 billion explicitly to water and mass transit, with 10% ($2.35 billion) added to the $2 billion already reserved for high speed rail in the Senate version of the bill.

The Obama Administration and Senate Democrats are showing a lack of seriousness about the economic crisis, the need for new transportation methods, and their own political futures by not moving more aggressively to roll back the filibuster. It's a simple threat - tell Republicans they can either stop blocking the stimulus or the Democratic majority will take way the filibuster (it only requires 51 votes to do that, ironically enough).

This all matters because we are VERY likely to see the same situation play itself out later this year when HSR funding comes back to the Senate. The sooner we win these battles the more likely it is that we will get our federal contribution.


Cas said...

I wish the Democrats would call their bluff and fund this the simple way, by eliminating an equal amount of tax cuts.

Rafael said...

@ robert cruickshank -

I think there may have been a miscommunication. The Senate can amend its own rules at one day's notice, but as far as I can tell such an amendment must clear the same hurdles as a regular bill.

In other words, three-fifths of the currently seated Senators (whether present or not, with fractions rounded up) would have to vote for cloture on a motion to change the majority needed for future cloture votes.

Only then could the motion be voted on. It would pass with a simple majority. Ergo, the threshold for deciding to end debate is currently the one that counts for practical purposes.

Right now, Dems only have 59 votes and no GOP turkey will vote for Christmas. However, even if Dems did have 60 Senators right now, it is far from clear that they would push through a motion to reduce the majority required for future cloture votes from 3/5 to 11/20 or even a simple majority. Sen. Lieberman and others wouldn't want to give the Senate Majority Leader a way to ignore them.

Therefore, the only way to break the impasse is to amend bills such as S.336 in ways that make them palatable to at least one Republican. This is why Obama is so assiduously courting the GOP. The only alternative is to force them to actually filibuster in the hope that public opinion will force the minority to relent. That can backfire, though. Voters generally want their leaders to seek consensus or at least compromise and avoid lengthy displays of unseemly confrontation. Bottom line: they'd rather live with the filibuster devil they know than straight majority rule.

However, most other countries don't require a supermajority for any part of the legislative procedure. Instead, the majority typically formulates and implements a multi-year legislative agenda and, is held to account for it by voters at the next election.

Rather than provide formal "checks and balances", the opposition's job there is to keep poking holes in the majority's policies and conduct and, to establish itself as a credible alternative via media coverage of its positions and personalities.

Rafael said...

@ Cas -

the tax cuts in the bill have been portrayed as a sop to the GOP but they were actually a major campaign promise of Obama's.

Besides, scaling back the tax cuts to pay for more spending is unlikely to attract any GOP votes. That's why I suggested clawing back some of the TARP money the general public feels was misspent by the banks that received it. The spirit of that bill was to get banks to lend again or at least, to shore up their capitalization.

When taxpayers have to bail out your employer, you don't get a bonus. Not just 40% less than last year but zero. Zip. Nada.

One complication is that the first $125 billion (perhaps more) of TARP money was doled out to four large and five small banks not because they all asked for it but because Paulson and Bernanke forced them to. You see, only one or two of these banks - whom I shall not name here - were actually at risk of collapsing at the time.

Had money been given only to them, there might well have been a run on them regardless. If not, it would have created a huge moral hazard by distorting the market in favor of the worst performers.

The healthier banks were "encouraged" to use the money foistered on them to buy up shakier institutions for a song, to avoid a cascade of failures and/or draining the FDIC fund. However, on closer examination, some of these supposedly sweet deals have turned out to be anything but. This is because the value of collateral debt obligations (CDOs) and credit default swaps (CDSs) at the heart of the problem are so complex no-one knows what they are worth.

Now, even the previously relatively healthy banks that didn't want or need the first slice of TARP money really do need more because the acquisitions have massively weakened their capitalizations.

That's not the employees' fault but rather, their employers'. It is the CEOs that spent the last 28 years pushing hard for deregulation and generous tax breaks for mortgages/inheritance to turbocharge lucrative mortgage or mortgage derivative portfolios.

Directly or indirectly, employees at all banks profited handsomely from the asset bubble this high-risk culture created during the fat years, so they must now take some personal responsibility in the lean years.

That is why I believe clawing back 2008 bonuses across the board for all TARP recipients would be appropriate, even if some organizations and individuals undoubtedly bear far more responsibility for the present systemic weakness than others.

Using the clawback for useful public works creates jobs in the construction industry, reduces mortgage arrears and defaults, which means all those CDOs and CDSs become less toxic and banks no longer need to shore up their capitalizations as much. That will ease the credit crunch and pave the way to recovery.

Ultimately, that will be more valuable even to Wall Street hotshots forced to fork over their entire 2008 bonuses to the IRS.

BruceMcF said...

In Australia, the Senate is a formal house of review for acts passed by the House of Representatives. There is no super-majority, but since there is proportional election, it is often the case that third parties or independents hold the balance of power in the Senate.

Indeed, it was gaining the balance of power in the Senate that was the undoing of the conservative Howard government, since it allowed them to press through the workplace relations reforms they wanted to make Australia more like the US, and when Ozzies experienced it, they didn't like it one bit.

Brandon in San Diego said...

I agree, the GOP is pandering to a portion of their base; home owners trying to avoid being foreclosed upon.

The problem in my mind is that foreclosures are a symptom of the collapse of the housing bubble and economic crisis; they are not the cause.

My sympathy goes out to home owners, whether they will be foreclosed on or not, but it does not make sense why $1 of my tax money should go to support them when I see nothing in return.

Additionally, if Federal funds are used to buy-down morgages from banks... that removes risk. Who is to say they will not exploit that risk knowing that WE will bail them out in the future if faced with the same dilemma again?

Additionally still, tax reductions for a 1-year period may provide me a wee bit more descretionary money, but what should I do with that knowing that a year from now my prior tax rate will kick back in? Is it wise for me, or others, to buy a larger car (with payments), buy a more expensive house (with higher morgage payments)... knowing that my descretionary capacity gets zapped a year from now? It seems to me that the GOP idea plants the seed for another catastrophe!

yeson1a said...

What is the status of the Kerry High speed rail bill? Is this not where our real long term funding will be coming from?

Brandon in San Diego said...

I am going to barrow something I heard come out of President Barack Obama's mouth on CNN this evening concerning the stimulus package being vetted, "...American people understand that something has to be done and they want to make sure that we're serious about this."

To this I point out the GOP tactic for a 1-year reduction in taxes and subsidizing morgages... is this a serious step? Is this something that helps the American economy in the long-run? Or, does it postpone the reckoning for another year?

I think the answer is the latter.

Rafael said...

@ Brandon -

the root cause of the problem is that a lot of people, egged on by generous tax breaks and rising house prices, were eager to own rather than rent their home. However, because house prices had already risen much faster than their salaries, they had to take on a mountain of debt just to get into their starter home.

Once they did, house prices kept rising, exacerbating the problem for the next lot that wanted to get in on this action.

Rather than turn them away, banks offered ever-more exotic loans with teaser rates for the first year or two - because deregulation and a secondary mortgage derivatives market made that possible. Loan officers get compensated on the closing the deal only, so they don't care all that much if one of their customers defaults years later.

Many of them figured they'd flip their starter home before the teaser rate expired and, use the capital gains to secure a more conventional mortgage on their next home.

The problem with this game of musical chairs is that at some point, the music stops. In this case, it was a run-up in other expenses like food and gasoline that forced a significant number of mortgage holders into arrears or default. At that point, banks foreclosed and sold the properties at distressed prices.

That burst the asset bubble, i.e. the expectation that houses could be flipped at any time. Increasingly, those who had joined the party late faced steep increases in their mortgage payments when the teaser rates expired. Unable to service their mortgage or flip their house at a profit, they too went into arrears or default, creating a second wave of foreclosures.

That meant even mortgages that were being serviced quickly ended up under water, prompting their owners to start cutting discretionary spending. That in turn forced healthy businesses to cut production, shelve expansion plans and start laying off workers.

Meanwhile, thanks to the abolition of the Glass-Steagall Act in 1999, investment banks could buy mortgages from retail banks. This allowed the latter to grow their mortgage portfolio without falling foul of minimum capitalization requirements. As a result, retail mortgage lending became a game of maintaining market share rather than managing risk.

Investment bankers began to repackage the mortgages as CDOs to redistribute the risk to an ever-larger number of new entrants into this lucrative market. The EU had forced more stringent capitalization rules on its retail banks, on the face of it a prudent precaution.

However, these banks worked around this profit damper by exploiting loopholes created by the discrepancy between intra-EU trade liberalization and banking oversight, which still happens at the national level (not the ECB in the Euro zone). The obscure investment subsidiaries they set up in other EU countries proceeded to buy up almost 50% of all CDOs created by the securitization.

However, all CDO customers were at least twice removed from the original mortgage transactions and quite aware that some fraction were subprime, either "liar loans" or featured aggressive teaser rates. They knew the stirling credit ratings attached to the wares were probably inflated. To manage their risk, they started buying credit default swaps, i.e. default insurance on their CDO portfolios.

The insurers, e.g. AIG's London branch, were at least thrice removed from the original transactions. Mortgage securitization had generated not just one game of musical chairs but a hierarchy multiple levels deep.

In short, mortgage securitization created not just a large primary asset bubble but even larger derivative bubbles that stretched far beyond US borders. When it burst, many OECD countries went into recession in quick succession.

The knock-on effects are now being felt in nations that export goods to these markets, e.g. Japan and China. This double whammy has in turn reduced demand for raw materials plus oil and gas, impacting the countries that export them. Voila, global recession in a matter of months.


Note that in spite of these dynamics, oil futures are actually trading much higher than spot prices right now.

It appears that banks, including TARP recipient Citigroup, are using the almost-free new money offered by a desperate Fed to prop up their share prices with risky speculation in the oil futures market. It is possible that the outgoing Bush administration had inadvertently - or perhaps explicitly - encouraged banks to focus on keeping their share prices up because Secr. Paulson decided to use the first tranche of TARP to recapitalize banks and insurance companies, rather than buy their dodgy CDOs and CDSs. In return, Paulson asked for relatively few shares because the GOP is ideologically opposed to extensive nationalizations.

To make matters worse, many adjustable rate mortgages in the US are linked to LIBOR, the interbank lending rate. Using the Fed money for interbank lending would push down LIBOR and hence, ARM interest rates. Result: loss of revenue for banks, which would have a negative impact on their share prices.

LIBOR has come down off its peak, but the rate was still sky-high just as teaser rates were expiring on a lot of exotic mortgages that had been sold in 2005 and 2006, before the midterm elections gave the Dems majorities in both houses. By then, the seeds of the foreclosure crisis had already been sown.

Let's hope Secr. Geithner obsesses less about the value of bank shares in the short term than Secr. Paulson did. Instead, he needs to get banks to stop speculating in oil and detach mortgage interest rates from LIBOR (easier to do now that it's back down).

More importantly, he needs to stabilize the housing market by stemming foreclosures that blight home values in many neighborhoods and depress discretionary spending. Simply subsidizing refinancing at lower rates for distressed exotic mortgages creates a moral hazard.

A better way is to offer homeowners in arrears or default that still have a job the option of refinancing at a rate they can afford, but with a longer run time. People who signed mortgage contracts they could not afford to service still need to pay a price for their actions.

Peter said...

The Kerry bill died at the end of the previous session of Congress.
S.3700 [110th]

Brandon in San Diego said...

I was looking for a counter point? I read through your whole 21 paragraph response waiting for one, but it appears we're on the same page; foreclosures are a symptom and not a cause of the economic implosion.

Myself, I've been watching the housing market for several years... watching and looking for a good time to get in. So, I am familiar with your points, especially what's in paragraghs 1-7, not so on 8, and would answer True if tested on 9-21. I'll still wait and not jump in... I feel no sense of urgency right now.

But, what do lower tax rates for a 1-year period, or buying down morgage rates (supporting banks) have to do with a longer term healing of our economy? I'll argue that lower taxes for a temporary period of time create more problems and solve nothing.

Granted, supporting the banking system makes sense; however, if the banks don't reprogram funds back into the market as they did not with the TARP funds... is that really something that the GOP should fight for in the stimulus bill? It sounds so short-sighted that it crosses the line into stupidity, imo.

My questions are more rhetorical than not.

yeson1a said...

Well..now that the Kerry bill is dead..lets hope he comes out with a new version..because as of 2012 CAHSR needs 2billion to start construction per there business plan.We have this year and next after that its all big money

political_i said...

The GOP and Democrats are being absolutely stubborn about this stimulus bill. Can we at least get the shovel ready projects going at least since we can agree on that?

Tax cuts for individuals I do not see as an investment. However, corporate tax cuts some people do not like due to the capitalist system we have. What happens if you increase business taxes? Could the reaction be more jobs go overseas and more layoffs? Corporate tax cuts I can somewhat agree with to see if businesses are willing to come back to these shores. If it fails, then we go back to the same tax rate.

We are also at the corner of taxes which was a huge topic in the election. Should we just make the rate 20-25% for everyone, no deductions and be done with it? Would it be good to put tax lawyers and H&R block out of business? If the government cannot account for TARP, then how can they account for a few pennies and tax refunds? Perhaps they should use those to pay down the national debt or fund these massive stimulus packages.

I think the best hope for a stimulus bill would be to split it up and start plans to reform taxes due to complexity. Issues have been held off, now it is time to face them. Senate Republicans should be willing to invest in America, the last consumer spending initiative miserably failed and roads do not provide sustainable growth, the longer we take to change our ways, the more it will cost.

Robert Cruickshank said...

By far the best solution to the housing crisis is to grow jobs and wages, and keep energy costs stable. The problem is that even as housing prices spiraled this decade, wages could not keep pace. And when gas prices went above $3/gal in 2006 and stayed there for extended periods of time, household budgets broke. The bursting of the housing bubble correlates very well to oil's voyage north of $3.

Most of the Republican housing proposals are basically rearranging the deck chairs. Democrats' "cramdown" provisions would help some existing homeowners but do nothing to resolve the underlying jobs/wages crisis. Until that is addressed, nothing will improve.

And that's why mass transit is so damn important. It alone offers the chance to address all of the above problems. Building the train systems creates jobs and wages, even beyond the actual construction workers. And once created they provide stable passenger costs, helping create more jobs. Oil can spike again or collapse and it wouldn't have as big an impact on the economy.

Robert Cruickshank said...

Kerry plans to offer the HSR bill again in this session, and has said it will resemble greatly the bill offered in the 110th Congress.