Not too long ago I posted a rant entitled Primum Non Noncere which challenged Congress not to bulk up the financial markets bailout bill with a plethora of special interest and party agenda items. I mentioned that when a heart surgeon is operating on a heart attack victim, he doesn’t request his OR techs to do a manicure.

Sadly, it seems they can’t help themselves. The bailout bill has passed, and quite a manicure it is — over $3 BB in non-associated spending. Non-associated in any conceivable way to the financial crises. 451 pages. Quite a change from the 10-12 pages of the original request from Secretary Paulson. The Emergency Economic Stabilization Act of 200 (H.R. 1424) is a masterpiece.

Division A is the section providing for emergency economic stabilization. The purpose is to enable the Treasury to restore liquidity in the financial system insuring that any action (A) protects home values, college funds, retirement accounts, and life savings; (B) preserves homeownership and promotes jobs and economic growth; (C) maximizes overall returns to the taxpayers of the United States; and (D) provides public accountability for the exercise of such authority. Good luck with that.

So to do this we are creating the Financial Stability Oversight Board. Who is on this board? The usual suspects: the Chairman of the Fed and the board of governors (FOMC), the Secretary of the Treasury, the Head of the SEC, the head of the FHA, and the Head of HUD. Basically the same organizations which were responsible for getting us into the mess in the first place.

At least section 132 provides statutory authority to suspend FASB 157 “mark-to-market” rules.

Division B implements the “Energy Improvement and Extension Act of 2008”. Here we have a list of energy related provisions essential to stabilizing our financial markets .

Sec. 101. Renewable energy credit.
Sec. 102. Production credit for electricity produced from marine renewables.
Sec. 103. Energy credit.
Sec. 104. Energy credit for small wind property.
Sec. 105. Energy credit for geothermal heat pump systems.
Sec. 106. Credit for residential energy efficient property.
Sec. 107. New clean renewable energy bonds.
Sec. 108. Credit for steel industry fuel.
Sec. 109. Special rule to implement FERC and State electric restructuring policy.
Sec. 111. Expansion and modification of advanced coal project investment credit.
Sec. 112. Expansion and modification of coal gasification investment credit.
Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability Trust Fund.
Sec. 114. Special rules for refund of the coal excise tax to certain coal producers and exporters.
Sec. 115. Tax credit for carbon dioxide sequestration.
Sec. 116. Certain income and gains relating to industrial source carbon dioxide treated as qualifying income for publicly traded partnerships.
Sec. 117. Carbon audit of the tax code
Sec. 201. Inclusion of cellulosic biofuel in bonus depreciation for biomass ethanol plant property.
Sec. 202. Credits for biodiesel and renewable diesel.
Sec. 203. Clarification that credits for fuel are designed to provide an incentive for United States production.
Sec. 204. Extension and modification of alternative fuel credit.
Sec. 205. Credit for new qualified plug-in electric drive motor vehicles.
Sec. 206. Exclusion from heavy truck tax for idling reduction units and advanced insulation.
Sec. 207. Alternative fuel vehicle refueling property credit.
Sec. 208. Certain income and gains relating to alcohol fuels and mixtures, biodiesel fuels and mixtures, and alternative fuels and mixtures treated as qualifying income for publicly traded partnerships.
Sec. 209. Extension and modification of election to expense certain refineries.
Sec. 210. Extension of suspension of taxable income limit on percentage depletion for oil and natural gas produced from marginal properties.
Sec. 211. Transportation fringe benefit to bicycle commuters.
Sec. 301. Qualified energy conservation bonds.
Sec. 302. Credit for nonbusiness energy property.
Sec. 303. Energy efficient commercial buildings deduction.
Sec. 304. New energy efficient home credit.
Sec. 305. Modifications of energy efficient appliance credit for appliances produced after 2007.
Sec. 306. Accelerated recovery period for depreciation of smart meters and smart grid systems.
Sec. 307. Qualified green building and sustainable design projects.
Sec. 308. Special depreciation allowance for certain reuse and recycling property.
Sec. 401. Limitation of deduction for income attributable to domestic production of oil, gas, or primary products thereof.
Sec. 402. Elimination of the different treatment of foreign oil and gas extraction income and foreign oil related income for purposes of the foreign tax credit.
Sec. 403. Broker reporting of customer’s basis in securities transactions.
Sec. 404. 0.2 percent FUTA surtax.
Sec. 405. Increase and extension of Oil Spill Liability Trust Fund tax.

And then there’s Division C titled “Tax Extenders and Alternative Minimum Tax Relief Act of 2008” which include:

Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits.
Sec. 102. Extension of increased alternative minimum tax exemption amount.
Sec. 103. Increase of AMT refundable credit amount for individuals with longterm unused credits for prior year minimum tax liability, etc. Or we could just kill the AMT act.
Sec. 201. Deduction for State and local sales taxes.
Sec. 202. Deduction of qualified tuition and related expenses.
Sec. 203. Deduction for certain expenses of elementary and secondary school teachers.
Sec. 204. Additional standard deduction for real property taxes for nonitemizers.
Sec. 205. Tax-free distributions from individual retirement plans for charitable purposes.
Sec. 206. Treatment of certain dividends of regulated investment companies.
Sec. 207. Stock in RIC for purposes of determining estates of nonresidents not citizens.
Sec. 208. Qualified investment entities.
Sec. 301. Extension and modification of research credit.
Sec. 302. New markets tax credit.
Sec. 303. Subpart F exception for active financing income.
Sec. 304. Extension of look-thru rule for related controlled foreign corporations.
Sec. 305. Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space.
Sec. 306. Modification of tax treatment of certain payments to controlling exempt organizations.
Sec. 307. Basis adjustment to stock of S corporations making charitable contributions of property.
Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands. Congress likes its rum, the pirates.
Sec. 309. Extension of economic development credit for American Samoa.
Sec. 310. Extension of mine rescue team training credit. Huh?
Sec. 311. Extension of election to expense advanced mine safety equipment. Oh! Pennsylvania is a contested state.
Sec. 312. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. Gotta get them Hillary votes also.
Sec. 313. Qualified zone academy bonds.
Sec. 314. Indian employment credit.
Sec. 315. Accelerated depreciation for business property on Indian reservations. Casinos contribute heavily.
Sec. 316. Railroad track maintenance.
Sec. 317. Seven-year cost recovery period for motorsports racing track facility. ?
Sec. 318. Expensing of environmental remediation costs.
Sec. 319. Extension of work opportunity tax credit for Hurricane Katrina employees.
Sec. 320. Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone.
Sec. 321. Enhanced deduction for qualified computer contributions.
Sec. 322. Tax incentives for investment in the District of Columbia.
Sec. 323. Enhanced charitable deductions for contributions of food inventory.
Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory.
Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds. This is just wierd.
Sec. 401. Permanent authority for undercover operations. I think we need to look close at what’s going on under the covers here.
Sec. 402. Permanent authority for disclosure of information relating to terrorist activities.
Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit.
Sec. 502. Provisions related to film and television productions. Hollywood contributes.
Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children. WTF?
Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation.
Sec. 505. Certain farming business machinery and equipment treated as 5-year property.
Sec. 506. Modification of penalty on understatement of taxpayer’s liability by tax return preparer.
Sec. 601. Secure rural schools and community self-determination program.
Sec. 602. Transfer to abandoned mine reclamation fund.
Sec. 702. Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding.
Sec. 703. Reporting requirements relating to disaster relief contributions.
Sec. 704. Temporary tax-exempt bond financing and low-income housing tax relief for areas damaged by Hurricane Ike.
Sec. 706. Losses attributable to federally declared disasters.
Sec. 707. Expensing of Qualified Disaster Expenses.
Sec. 708. Net operating losses attributable to federally declared disasters.
Sec. 709. Waiver of certain mortgage revenue bond requirements following federally declared disasters.
Sec. 710. Special depreciation allowance for qualified disaster property.
Sec. 711. Increased expensing for qualified disaster assistance property.
Sec. 712. Coordination with Heartland disaster relief.
Sec. 801. Nonqualified deferred compensation from certain tax indifferent parties.

In addition, this bill implements the “Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008” which mandates health insurers provide parity for mental health claims at the same rate as other health claims. This particular bill was 12 years in the making. Clearly a critical piece of legislation for the survival of our financial system.

Once there was a group, established by a society, which was endowed with a high level of respect. Members of this group were fragmented in their beliefs and practiced their craft in accordance with their beliefs. Some, enamored with righteousness and a belief in the primacy of the Church, believed that society’s ills were the work of demons and established laws and rituals to expunge them. Men of high status were called evil and their works questioned. Others, no less righteous, insisted that there were fundamental humours that were required to remain in balance for good health, and periodically vented and tapped these to release them from the body. As may be expected all this venting and tapping had some unintended consequences — the patient died. At some point, around the 1850s, some members of this group stepped back and performed a little critical analysis noting that the patients untreated had as much change of survival as patients treated. This observation led to a complete philosophical paradigm shift. A phrase was taught to all who entered this profession: “Primum non nocere —First, do no harm.” Physicians use this expression to note that human acts with good intentions may have unwanted consequences.

In the last few weeks, various treatments to the illness of the financial markets have been tried. These included federal takeover of Fannie Mae and Freddy Mac (Why are there two of them anyway?), the fire-sale manipulation of Bear Sterns, the abandonment and bleeding of Lehman Brothers, what amounts to the acquisition of AIG, and most recently the promise of some new and radically untried set of procedures. These include the suspension of short sales, the acquisition of asset backed securities by the government, the FDIC like insurance of money market mutual funds, and the opening of FED credit lines to cover corporate paper and short term liquidity needs.

In order to implement many of these policies, the regulatory bodies — the SEC, the FED, the Treasury — need Congressional approval. As any first year economics student is taught, actions and expenditures by the government have attached multipliers and consequences on the macroeconomic landscape, not all of which can be accurately predicted. It would prudent then for Congress to do the minimum necessary to treat the problem. Doctors Bernanke, Paulson and Cox have a prescribed treatment plan — one that doesn’t involve additional economic incentive payments, additional mortgage subsidies, or riders to support venting of additional humours. Congress should realize that these prescriptions are for Main Street and not for just Wall Street.

Keeping the Act to enable these prescriptions to the minimum necessary will surely test the wills of both sides of the aisle. It will be difficult enough to fill in the details without loading up the bill with each party’s pet programs and election-year incentives. And as for the details, a couple of suggestions:

  1. Let’s go easy on the shorts. Markets work best by including all information and short sales provide a valid channel of information. By all means, lets clamp down on the ‘naked’ shorts, but an accross-the-board ban on shorts is a bad thing.
  2. If the Treasury is going to buy securitized mortages, CMOs and SIVs, the so-called “toxic paper”, then let’s value the asset on the basis of discounted cash flows and not mark-to-market. Especially when a viable market doesn’t exist. Not only will this eliminate a bad accounting practice, but it will rapidly establish a mechanism for global markets to understand the risk/value of assets already on their books. It will also eliminate the death spiral of under-capitalization, Agency rating downgrades and further capitalization reserve requirements which are weighing down Goldman Sachs and Mogan Stanley. It probably would have helped Merrill Lynch and Lehman Brothers also.
  3. Providing FDIC-like insurance to Money Markets and Mutual Funds needs to be thought through. We don’t want to make the funds more attractive than deposits and cause a massive unintended shift of capital from the commercial banks. That would just shift the crises from Wall Street to Main Street. Perhaps insurance coverage could be adjusted to equalize over the return on investment on any given instrument — treating deposits and funds equally after weighting.

But most importantly, moderation and minimal intervention.

After all, when the heart surgeon cracks you for that triple bypass, he doesn’t usually divert to perform a liposuction, or have his OR technicians perform a manicure on the patient, no matter how beneficial to the patient’s image. Anything that diverts attention from the heart attack is to be avoided. Perhaps the Congressional motto should be changed to “Primun non nocere”. Congress take note.

Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and Treasury Staff have been working five weeks non-stop through weekends and away from wives and family to attempt to resolve one of the most complicated and interwoven nests of pit vipers ever conceived. First there was Bear Sterns, then Fannie Mae and Freddie Mac, then Lehman Brothers and Merill Lynch, followed immediately by AIG, and now what looks to be a rash of capital deficient investment houses and banks. Critics are everywhere and are second guessing their every move with front page news and breaking news reports on the crises entertainment channels. Our candidates for President, in spite of their economic illiteracy are formulating “plans” which, while having no bearing on reality, are spot-on to their philosophical leanings: Obama — we need more regulation and more government; McCain – we need to reform Wall Street as well as Washington.

But the best out of Washington comes from Congress. Both Republican and Democrat ranking members are a bit put out that Paulson has not included them in discussions and strategy plans to resolve the crisis. (A crisis they are largely responsible for.) It should be obvious to most that Paulson and Bernanke are a tad busy to put up with the posturing that would result, and have excluded them largely for the same reasons that generals exclude them during the execution of a battle plan.

Senate Majority Leader Harry Reid has indicated Wall Street is a problem — “a multi-trillion dollar issue.” But this requires study and can’t be done on an unrealistic timeline. House Financial Services Chairman Barney Frank and Senate Banking Chairman Chris Dodd both want to consider the problem, but believe that there is insufficient time to consider the issue this year, i.e., before they adjourn for the autumn political campaigning season. Dodd has postponed the Banking Committee meeting.

So while the evil Bush administration appointees are working in the worst pressure cooker of the century (so far) attempting to resolve a difficult set of problems, Congress is more concerned about the election, and would rather not perform any action that might be construed to be a position on the crisis that might affect their standing in the polls. In other words, … business as usual.

Congress

Congress at the Trough

Can 100 Senators and 435 Congressmen represent the people of the United States better than, say, 100 Senators and 51 Congressmen? The composition of the Senate is fixed at two (2) Senators per State, but the constitution, in Article I, Section 2 specifies that each State shall have at least one (1) Congressman; and no more than one (1) Congressmen per 30,000 people. Why is it that we have to accept the upper limit rather than the lower one? Would be be better off with only the constitutionally mandated minimum?

As the people of the United States transition to the Internet age with over 56% of the population having access (and those without access not voting or caring anyway), the ability to fairly and accurately access the the wishes of the People should be fairly easy to engineer. With a little technical and staff support, which by the way, exists now, a single State representative should be able to generate a precis of the will of the people and still have time to be wined and dined by the special interest groups.

Fifty-one people are easier to perform overwatch on than several hundred. The annual savings on salaries alone would be $63.4MM not counting the franking priviledge costs, the research and staff costs, and all those other perks. Although the Constitution establishes the House as a body constituted proportionate to the population, the same effect could be obtained by allocating votes proportionately with each State Member casting them. A State having twenty representatives now would have one representative with twenty votes. The State legislature perhaps could establish that the votes had to be cast, in terms of Ayes and Nays, in accordance with some mechanism such as Internet polls. [More likely — the representative would cast all twenty votes in accordance with his or his current sponsor’s desires.]

Now granted, the lobbyists would have a harder time of it. They would have to perform some serious time management in order to present their case to the Member from Minnesota (No – not the member hanging out in the men’s room!) before he left on his junket. On the other hand, the net result might be that the legislation passed would be less complicated and less prone to obfuscation. After all with only one representative per State, that one Congressman might have to actually read the laws that are written.

Chuck Norris has a point here. If you want to stop the pork, you don’t make rules on how to fill the trough; and you don’t make a smaller trough — you reduce the number of pigs.

A lot of time has been spent recently, mostly by folks who have nothing better to do with their time, arguing about the citizenship of Obama and McCain. While the accusations against Obama are completely without merit and were caused by a hoax, and gullible Republicans (hey, if you’ll vote for Dubya, you’ll pretty much buy into anything I guess), the questions about McCain’s status are unfortunately very real. Now this isn’t to say that I think McCain should be ineligible for the presidency. I’m pretty sure McCain bleeds red, white, and blue, and personally wouldn’t be upset if he was elected. He’s a fine citizen and would probably make a pretty good president. The problem, as always is Congress.

The problem with McCain’s questionable status stems from those crazy kooks on Capitol Hill, as John Adams reminds us in the musical 1776:

…one useless man is called a disgrace, …two are called a law firm, and …three or more become a Congress!

You see, back in 1790, Congress had the whole issue solved and cleared up. The United States Naturalization Law of March 26, 1790 stated that “the children of citizens of the United States that may be born beyond Sea, or out of the limits of the United States, shall be considered as natural born Citizens.” There we go, case closed, all with a simple easy to understand law that is hard to abuse. This could have been the end of the story, but no, we have a whole Congress of useless men in this country which meant that 5 years later, things got more complicated.

In 1795, Congress complicated immigration issues by issuing the United States Naturalization Act of January 29, 1795. This act, which says nothing of natural born Citizens, explicitly repealed the US Naturalization Law of 1790, throwing the question of who was a natural born Citizen back up into the air.

But don’t worry, the Act of 1795 isn’t in play any longer either, today we have 8 USC 1401 to define Citizenship for us, and with a name like “8 USC 1401” you know it’s liable to be easy to understand! And simple and easy it is… if you’re a lawyer… maybe. 8 USC 1401 is written in essay format, and does not conform to the 500 word limit. To sum up the verbose law:


  • A person born outside the US whose parents are both US citizens is a citizen

    • IF one of them is a resident of a US State, Territory, or Possession prior to the birth.
    • OR one of them was physically present in a US State, Territory, or Possession for a period of no less than one year prior birth.

  • OR A person born outside the US whose parents include a citizen and a US national (but non-citizen)

    • IF the parent who is a citizen was physically present in a US State, Territory, or Possession for a period of no less than one year prior birth.

  • OR a person born outside the US whose parents include a citizen and an alien

    • IF the parent who is a citizen was physically present in a US State, Territory, or Possession for a period of no less than five years prior birth, at least two years of which must have been after the parent turned 14 years of age
    • PROVIDED that the citizen was honorably serving in the US Military, or working for the US Government those periods may be used to fulfill the five years if the person was born after December 24, 1952.

  • OR a person born outside the US whose parents were an alien father and a citizen mother, and the individual was born before May 24, 1934.

Clear enough? To make matters worse that just includes folks born OUTSIDE of the US. Aptly named 8 USC 1401 also covers every other case of citizenship, but makes absolutely no mention of what it means to be a naturally born Citizen.

I don’t know about you folks, but I thought the law of 1790 did a fine enough job defining things, why we need the obfuscated 8 USC 1401 is beyond me. Thanks to Congress we’ve eschewed a simple and fair law that would make it clear McCain is a natural born citizen, in favor of a confusing loopy law that leaves his status as subject to inane and stupid Internet debate.

-Angry Midwesterner