On Monday afternoon, the proposed $700 billion bailous bill was defeated in the House of Representatives 207-226. Not surprisingly, it was quickly tried again, this time on Wednesday night in the Senate. There, a modified version passed by nearly 50 votes. The House will be voting on the new version later this week, probably on Friday after they’ve had a chance to look over it.
Here’s an overview of how what the Senate passed is similar to and different from what the House rejected. I’m basing my information on Money’s coverage of the bailout
Similarities Between Senate Bailout and House Bailout
It’s still based on the Treasury’s proposal to buy troubled assets from financial institutions. Most of these assets would be mortgages, mortgage-backed securities, etc. $250 billion would be immediately made available for purchasing assets, leading up to $700 billion total.
[One pauses to ask “Where are they getting this $250 billion?”]
Apparently the president would be required to propose a bill which would require the financial industry to reimburse taxpayers for the program’s net losses after 5 years. And in return for buying their assets, the Treasury would get “ownership stakes” in the companies.
[So is that where the money is coming from? Will this cause another crisis in 5 years?]
The Treasury will set up an insurance program which will guarantee the companies’ troubled assets purchased before March 14, 2008. It will be funded with risk-based premiums which the industry will pay.
[Wondering how an industry pays premiums. Does that mean the companies whose assets are being guaranteed? I’m also curious about the March 14th cutoff…I’ll have to look into that. It seems like this is the alternative to selling to the Treasury, you can buy Treasury insurance.]
Companies selling assets to or buying insurance from the Treasury will have curbs placed on executive pay. In particular, bonuses or incentives paid to senior executive officer based on meeting targets would have to be repaid if the earnings/profit statements were falsified or otherwise inaccurate.
[I think shareholders should have been doing this for a long time. Executives should have high salaries, but not if they crash and burn the company. If I completely screwed up at a job, you can bet that I wouldn’t get to leave with a multi-million $$ bonus.]
This bill will also set up two oversight committies. There will be a Financial Stability Board with the chairpeople, directors, and secretaries (the appointed kind) of the Federal Reserve, the SEC, the Federal Home Finance Agency [hadn’t heard of that], HUD and the Treasury. It’ll report to a congressional oversight panel with 5 members appointed by House and Senate leadership.
[Oversight is better than no oversight. If there weren’t some sort of oversight provision, I’d be concerned. As it is, I’m not greatly reassured by its existence either.]
Differences Between the Senate Bailout and House Bailout
The Senate version will temporarily raise the FDIC insurance cap from $100,000 to $250,000. The agency will borrow money from the Treasury to cover any losses. This would mean that, temporarily, you could have up to $250,000 per person with a single bank. But I wouldn’t bank on it (if you even have $250,000 in cash to put in a bank) because it’s only temporary. Probably.
[Wouldn’t it be great if the Treasury had a surplus instead of a deficit? Then borrowing money from the Treasury would mean something.]
The bill would also extend renewable energy tax breaks for individuals and businesses and continue other expiring tax breaks including R&D development for businesses and deducting state and local taxes from our federal returns. Also, this will mean another year without the Alternative Minimum Tax, which was a hot topic in the blogosphere earlier this year.
[I guess this is meant to get more people behind the bill because people want relief anywhere they (we) can get it. As always, this comes down to the question of whether higher or lower taxes are better for the country and the economy. Not even going to touch this with a snide remark…it’s more than I want to get into right now.]
What Does This Mean?
Nothing is set in stone yet. If you’ve watched Schoolhouse Rock, you know that bills get bumped around for a while. But it’s possible that this one will go through pretty quickly. To paraphrase Senator Obama, they could probably figure out a much better bill if given time, but the fear is that the economy won’t last that long.
If it passes, I can’t tell you what the result will be. I’m not an economist and I’m not even convinced that most economists know. One of my closest friends in college majored in economics and he said it was no more a science than sociology or psychology. Some things they’ve got right, a lot of it is informed guessing.
What I Can Tell You
What I can tell you is that whether or not it passes, whether or not the economy collapses, the groundwork of personal finance will essentially be the same. Spend less than you earn if at all possible. Earn more than you spend if at all possible. Put something away for the future. Get rid of debt, particularly debt that carries high interest.
These principles held true in the Great Depression, they held true in the tech bubble and in the housing bubble and in decent-but-not-spectacular periods. Part of what brings us to today is people NOT following these—people buying more house than they could afford, people borrowing against their equity, people generally spending more than they earned. And businesses and “experts” who had no concern for the welfare of their customers or the overall health of the economy but encouraged these people and used their status as bankers and loan trustees and the like to encourage peoples’ improper financial habits.
Good financial habits, even in bad times, will still lead to relative financial health. But bad financial habits, even in prosperous times, will ultimately bring about personal and societal poverty.