Treasury Secretary Hank Paulson’s original proposal called for $700 billion to purchase toxic mortgage-backed assets from troubled banks. Other than quarterly reports to various Congressional committees, the proposal specifically allowed no oversight to any actions taken by the Secretary of the Treasury; he asked that the government hand over $700 billion and let him get on with the job of salvaging the U.S. economy before the financial system collapsed.

Not surprisingly, Paulson’s initial proposal was termed “unacceptable,” and Congress met to discuss alternatives. The next proposed solution, the Emergency Economic Stabilization Act of 2008 (EESA), was much more cautious, awarding the Secretary merely $250 billion, with the remainder of the requested funds withheld until it was proven they would be needed. The EESA prohibited golden parachutes for officers of troubled corporations, instead allowing clawbacks and lowering tax deduction limits on compensation above $500,000. It established a bipartisan oversight committee and options for recovering funds should it appear the program is losing money five years down the road.

The vote in the House of Representatives was tight, but the EESA failed 228–205. Despite being prepared by members of both parties, it proved much more acceptable to Democrats, who voted 140 to 95 in favor of the bill, than to Republicans, who voted 133 to 65 against it.

Undaunted, the Senate added two more provisions to the bill—to temporarily raise the FDIC insurance limit to $250,000 and to allow the SEC to suspend “fair value” accounting rules—and then attached it to several other bills: one for alternative energy production tax credits, one to give insurance parity to mental health disorders and one extending a series of tax reductions for various special interest groups. The Senate passed the swollen bill 74–25, with Democrats voting 40 to 10 in its favor and Republicans voting the same, 34 to 15.

Meanwhile, everybody else is asking, do we really need a bill?

Crunch, Crunch

As to the credit crunch’s effect on the U.S. business climate, the current evidence is mixed. The September results of the Institute for Supply Management’s monthly survey of Chicago’s purchasing managers indicated no disruption in their usual financial management. On the other hand, the Federal Reserve’s most recent (July 2008) survey of senior lending officers reported that more than 65% of domestic banks have raised their lending standards for personal and business loans in all categories, which isn’t necessarily a bad thing.

Meanwhile, the indications of the U.S. economy sliding into a true recession are mounting. Advance orders for durable goods by businesses fell 4.5% by $9.9 billion between July and August, while new orders of all manufactured goods fell 4.0% and new home sales fell 11.5% over the same time frame. Considering how far the real estate market has already fallen, this is not good news. Home prices in Phoenix and Las Vegas have fallen over 29% between July 2008 and July 2007, and do we really want to know what Friday’s September unemployment rate will be?

Economic Sneezes

Here’s a bit of historical perspective. A financial crisis exploded in Scandinavian Europe in the early 1990s when the Soviet empire collapsed and, therefore, quit importing Finland’s and Sweden’s goods. The crash had been preceded by some years of deregulation leading to loose lending criteria and under-capitalization among banks, which sounds ominously familiar. During the four years in question, real GDP in Finland contracted by 12% and unemployment skyrocketed to 16%.

With the decoupling theory laid to rest, four similar years for the U.S. economy would lead to a worldwide recession.

Stock markets around the world are whipsawing, the yield on U.S. short-term government bonds fell so low it was briefly negative and commercial paper markets froze, with U.S. commercial debt falling by $94.9 billion in just the past week. The TED spread, the difference between what the U.S. Treasury pays to borrow money for three months and what everybody else pays, which is usually well below 100 basis points and which is a great indicator of financial market instability, rose to over 360 basis points in an historical first.

These are not merely the assets of Wall Street fat cats. Commercial paper represents short-term funding and working capital for more than 1,700 major U.S. corporations, which directly impacts unemployment across most industrial sectors, while stock market and bond losses hit many average Americans’ retirement accounts.

So who’s going to give first?

Related posts:

1. House Rejects Bailout Plan: Wall Street Loses, America Wins
2. Wall Street Bailout: The World’s Largest Sovereign Wealth Fund?
3. Shutters Are Closed Up and Down Main Street but Wall Street is in the Money
4. Swiss Banking Laws Key To Rescuing Wall Street and Consumers?
5. AIG, Wall Street Bailouts: Is the Federal Reserve’s Independence at Risk?