The Power of the Purse

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Please don't miss the Debt Rattle, April 2 2008

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Ilargi: Karl Denninger is getting really serious these days. According to him, it's time for Americans to put up or shut up. The Automatic Earth is based in Canada, not in the US, so we are somewhat on the sidelines when it comes to the issues Karl has been addressing lately with so much vehemence.

Still, since many of our readers are in the US, one thing we can do is to provide them with his latest article on what he sees as his country going to the dogs. And what those same readers can do in turn is to sign Karl's petition to turn back the Bear Stearns deal at www.financialpetition.org..



"Off The Reservation"?

There are probably a few of you wondering what sent me "Off The Reservation" earlier today, and why I locked the forum down to all but Gold members for a day (tomorrow, 4/2.)

No, it wasn't because the DOW went up 391 points. Remember, we had two more of those in the last three weeks.

It is simply this folks: The power of the purse is the first, last and greatest power that any government has. It is effectively the power to TAX, because spending must be paid for in some fashion - either by taxing or issuing debt.

This power is explicitly reserved to Congress - specifically The House of Representatives, set forth in Article 1 Section 9 and formalized in The House over time.

While there is much to say about the abuse of that power over the years and the influence of lobbyists and other bad things, the fact remains that once you lose the power of the purse all else soon follows.

It is one thing for Congress to delegate that power for some period of time, for some specific purpose, or in some other way to some other part of the government.

It is an entirely different matter when a government actor or agency, or worse, a quasi-government organization such as The Fed, arrogates to itself this power.

The latter is the most serious of matters and in fact rises to the level of a Constitutional Crisis.

Why?

Because once you lose this power you NEVER GET IT BACK.

If we allow this as a nation we will never again have the power of the purse held where it belongs under our Constitution, which is SOLELY in the United States Congress, specifically, in the US House.

Let me put this in a different light and ask you how you'd feel about it:

Tomorrow, the TSA decides that there is a "heightened risk" of an imminent terrorist attack. As a consequence they decide they need to spend $100 billion dollars immediately on new equipment and people, and in fact they commit those funds immediately. Of course there is no time for Congress to pass a bill authorizing this.

Next week, The Army Corps of Engineers decides that New Orleans requires new levees, and in addition, that Tampa has a high risk of flooding if they do not have a seawall constructed around Tampa Bay. They decide to commit $200 billion dollars immediately to rectify this. After all, hurricane season is coming and there is no time to get Congress to pass a bill.

The week after that......

Get it yet?

Think this can't happen?

The hell it can't!

The hell it won't!

We live in a Constitutional Republic. The United States is NOT a Democracy. You wouldn't want to live in a true democracy; in one minorities have no rights, as just one example.

That Constitutional Republic has a very specific delineation of powers.

Note that right now we have a RAGING debate over The War In Iraq.

Many in this nation think we made a huge mistake going into Iraq. Others think it was the right thing to do. But both sides, thus far, are respecting The Constitution and, despite the objections of some, every appropriation of funds for that war has in fact gone through Congress as is required.

Let's take just one small piece of the wartime debate - The Homeland Security Act. To some, a damn good thing. To others, over-reaching but acceptable. To still others, an outrageous invasion of privacy and personal freedom.

Where you sit on this particular issue in your political beliefs is not the point.

The point is that the bill was in fact introduced and debated, then passed through Congress, and it made its stop in Appropriations where the money was allocated by The House in order to implement the law.

You may disagree with the outcome, but the black letter of Constitutional Principles were followed. The law as passed was properly constructed and funded.

How would you feel if George Petraeus were to decide that he needed $500 billion more for the War and just spent it without a vote or even consideration by Congress?

What if "Homeland Security" was simply implemented by George Bush as he saw fit, with his "Homeland Security Czar" arrogating to his "new responsibility" $500 billion dollars from the Treasury?

Is that ok?

Well, if you don't do whatever is necessary to reverse what happened with Bear Stearns and mete out punishment for that blatant violation of our Constitution, you WILL wake up one day to find out that some General in Iraq, or some Homeland Security person, or some other agency or arm of government just decided to pick your pocket and spend without the appropriation of those funds by Congress, effectively legislating without ever seeing the chambers of the House or Senate!

It is INEVITABLE that if we do not step up right here and now that this will happen again.

And again.

And again.

The line must be drawn here and now.

If we fail to do so we may as well flush one of the remaining pieces of our Constitutional Republic down the toilet, and cede to a "New World Order" in which you can and WILL be taxed without a vote and without representation of any sort and where laws will be imposed by fiat of the executive whenever they damn well feel like it without the prior approval, debate and consent of Congress.

Remember that 230-odd years ago we went to war over this EXACT issue - taxation without representation. The British King saw fit to spend and tax the colonists as he saw fit without any sort of redress to or vote by the colonists, and to impose laws via unitary decision, with the costs of implementation forcibly extracted from the Colonists' wallets.

The end result was The American Revolution.

We were fortunate in that the brave men who understood that responsibility were honest and not particularly interested in personal self-aggrandizement. History strongly suggests that our Founding Fathers were somewhat of a historical aberration, in that most of the time when a society finds itself under extreme duress it usually ends with someone more akin to Adolph Hitler than Jefferson, Madison or Hamilton figuring out what the government should look like.

It is critical that we the people do not permit this usurpation of power to stand, and insist that the power of the purse be restored to where it belongs - solely and exclusively in the hands of Congress.

Should we fail to do so it is a virtual certainty that three, five or ten years hence you will think back about this very issue and this Ticker and realize in horror what you could have prevented, but didn't.

Let us remember that this power to "raid" the public purse has never been wisely used in the past. From Germany prior to WWII on down to the present day, we have never seen a public official that is anywhere close to accurate on their "estimates" as to the fiscal damage from their programs.

Most of you remember the Medicare Part D debate. It was quoted at one number, then another, then another in terms of cost. After it was passed and signed we found out that those numbers were radically underestimated and the cost would be several times greater than we were told - but it was already law.

Some of you remember Ben Bernanke on The Hill giving what used to be called "Humphry-Hawkins" testimony last spring and summer, in which he said that the subprime problem was going to be a "tens of billions" of dollar problem, all-in. We now have seen over $100 billion in writedowns thus far, and Goldman Sachs has said out loud they think its a one trillion dollar problem, which is somewhere between 10 and 100 times as large as Bernanke originally told Congress. Has Bernanke been held accountable for this radically inaccurate "guess"? Of course not. Nor will he be unless you speak up.

Some of you remember the RTC, which allegedly was a "ten or twenty billion dollar" enterprise when the S&L crisis broke. It ultimately cost between $150 and $200 billion of taxpayer money, depending on who you ask, or ten times the original estimate. Yet none of those lawmakers and "agency wonks" were held to account either.

Social Security and Medicare were originally tiny portions of Federal outlays, and were projected to remain a "tiny" portion of public spending. They now constitute, together, some 30% of The Federal Budget, and are growing at a rapacious pace, and yet nobody in the government has ever been held to account for the incredible damage this not only has done but will do to our federal budget down the road.

All of this, thus far up until Bear Stearns, was done above the table and under the rules proscribed by the Constitution.

How much accountability do you think we will achieve when the appropriation is done BEYOND the reach - and accountability - of Congress?

"What is zero, Alex."

The 900lb Gorilla in the room is home prices. Pimco's Bill Gross, as I noted in The Ticker, is ranting and raving about "the need to stop home price declines", and has been doing so repeatedly both in his letters and on national television.

That is because he knows what is coming and how bad it is going to get.

The problem is that we can't stop home price declines, which is why you haven't heard Gross actually come out with a proposal to do so.

It is mathematically impossible to achieve his goal and he knows it.

Debt-to-income ratios over 36-40% are unaffordable no matter what you do, and this naturally caps home prices in the 2.5-3x income range, with the lower end being present when interest rates are relatively high (8-10%) and the upper end being present when they are low (6-8%.) Long-money rates under 6% are historically an aberration and cannot be sustained with the public debt and deficit spending our government engages in.

The nasty in all of this mess is that any attempt to prop up banks like Bear Stearns or others - and there will be others - inevitably screws the vast majority of Americans.

Let's remember - 30% of homes in America have no mortgage at all. Those homeowners have nothing to be gained by "bailouts" for speculators or homeowners, as they own their homes outright.

Another 50% of the housing stock has a mortgage on it that was underwritten under sound guidelines - 20% down, no piggybacks, owned for a long time. These mortgages are not underwater and won't go underwater. Yes, there will be home price depreciation, but the principal will remain less than the note, top to bottom, even if we have a severe, deep recession.

The last 20% of the homes are the problem.

About half of those were purchased during the "bubble years". They are either underwater now or will be. There is no escape from this reality, and most of these will foreclose if the borrowers/owners are intelligent about it. They will exercise the right of "efficient breach" and jingle mail the keys. Their credit will be destroyed for several years, but that's where it stops for them.

The other half of the remainder, 10% of the total, are worse. These are the homes that were serially flipped or serially refinanced. Many, but not all, are held by speculators who got left "holding the bag." Those who serially refinanced and MEW'd out the money to blow on various toys and spending are the ones with real problems. Essentially all of these homes will eventually foreclose and most of those loans are "recourse", which means the borrowers - your neighbors - will be forced in to bankruptcy. This number may eventually reach 10% of all American households, or fifteen to twenty million filings over the next few years.

Now let's look at the economic damage.

The "best figure" I have on the US housing stock value is right near $36 trillion. 20% of that value, or about $7.2 trillion, is "at risk" in terms of borrowers. Let's further assume that through FHA and other programs, we can save half of these homes from foreclosure.

None of that housing stock subject to foreclosure is a zero. If we assume rather pessimistic recovery on first mortgages of 50%, this is $1.8 trillion in real losses that are going to be realized on the value of the homes.

The bad news is that there are also in the high several hundred billion in HELOCs that are worthless on top of the rest. It is reasonable to assume that of the HELOC money out there, that associated with the foreclosed homes has a zero recovery, as these homes are all underwater on the firsts. Call this $100 billion more of realized losses.

As you can see, we are rapidly approaching the $2 trillion mark and we have not yet accounted for any of the "knock on" effects such as decreases in consumer spending, decreases in construction activity and lost jobs across the economy. All in it is likely that the total bill for this carnage will exceed $5 trillion dollars.

To put this in perspective, and why we must stop any attempt to corrupt the power of the purse here and now, we must keep in mind that the total outstanding public debt in the United States is approximately $9 trillion.

In order to "absorb" this we would have to further devalue our currency to an outrageous degree or, alternatively, suffer monetary and price inflation in the 10% area for several years. Such an act would immediately and permanently impoverish all those who made prudent homebuying decisions, whether they are people who paid cash, who have reasonable mortgages, or who have long since paid off their house.

In addition such an attempt would destroy those on fixed incomes, including all retired Senior Citizens living in whole or part off Social Security. The entirety of the population reliant on Social Security to any significant extent would be reduced to poverty and the middle class of America would lose at least half of its discretionary purchasing power on a permanent basis.

If we do not restore the power of the purse to Congress where it belongs the bankers WILL attempt to prevent these losses from flowing back to them, effectively forcing them down the throats of your retired parents, grandparents, and the working class, all of whom will see severe decreases in their standard of living.

With the bankers having the power of the purse, instead of Congress, you will eat all of the losses and the catastrophe will be served upon you in order to save them!

The Bear Stearns bailout will likely not cost $29 billion, it is very likely to cost $100-300 billion if historical precedent holds. The Fed does not HAVE an extra $300 billion, and will, since it has been given the power of the purse, shove off that cost on the taxpayer by demanding it of Treasury.

Nor will this stop with Bear Stearns, as I have illustrated above.

The amount at risk in housing alone is close to $2 trillion! This does not count any of the "at risk" amounts in auto loans that will go bad, credit card debt that will default, or commercial real estate, nor does it, as I noted, include all the "knock on" effects.

All of these losses are real and WILL be realized.

We can argue over who eats these losses but we cannot prevent them from occurring.

When, not if, this flows through to the public balance sheet we will see immediate and severe cramping of the Federal Budget. Unable to fund itself on reasonable terms the government will find itself forced to drastically slash entitlement spending.

That, in turn, will lead to severe "voter unrest", and from there you can figure it out - what always happens will happen once again, as "someone" will appear on the political stage offering bread and circuses, which of course will require that the citizens give up "just a bit" of their freedom........

Still want to sit around and drink beer?

No?

Good.

Then sign the petition to ask the House and Senate to force the unwind of this transaction and, if Bernanke and Paulson refuse, to Impeach Bush (and by extension Hanky Panky)

While you're at it, Ben has been "invited" to several committee meetings the next few days. Here's the list of the Committees in the House and Senate - I strongly suggest that you give the appropriate Congressfolk a jingle and tell them what you think about all of this....

I made several of these calls today and was told they were very busy.

Perhaps tomorrow could be even busier...... but that, of course, is up to you.

The question, and what should drive you to act (or not) is simple - do you want our flag to look like this in a few short years? If not then pick up the phone.




Senate Banking Committee

   First       Last       Phone         Fax         State
------------+---------+-------------+-------------+------
 Richard      Shelby    202-224-5744  202-224-3416  AL
 Wayne        Allard    202-224-5941  202-224-6471  CO
 Christopher  Dodd      202-224-2823  202-224-1083  CT
 Tom          Carper    202-224-2441  202-228-2190  DE
 Mel          Martinez  202-224-3041  202-228-5171  FL
 Daniel       Akaka     202-224-6361  202-224-2126  HI
 Evan         Bayh      202-224-5623  202-228-1377  IN
 Jim          Bunning   202-224-4343  202-228-1373  KY
 Jon          Tester    202-224-2644  202-224-8594  MT
 Elizabeth    Dole      202-224-6342  202-224-1100  NC
 Chuck        Hagel     202-224-4224  202-224-5213  NE
 Robert       Menendez  202-224-4744  202-228-2197  NJ
 Charles      Schumer   202-224-6542  202-228-3027  NY
 Sherrod      Brown     202-224-2315  202-228-6321  OH
 Tim          Johnson   202-224-5842  202-228-5765  SD
 Bob          Corker    202-224-3344  202-228-0566  TN
 Robert       Bennett   202-224-5444  202-228-1168  UT
 Michael      Enzi      202-224-3424  202-228-0359  WY

House Financial Services Committee

    First         Last         Phone          Fax        State
--------------+------------+-------------+-------------+-----------
 Spencer        Bachus       202-225-4921  202-225-2082  AL
 Kevin          McCarthy     202-225-2915  202-225-2908  CA
 Bradley        Sherman      202-225-5911  202-225-5879  CA
 Gary           Miller       202-225-3201  202-226-6962  CA
 Maxine         Waters       202-225-2201  202-225-7854  CA
 Ed             Royce        202-225-4111  202-226-0335  CA
 Joe            Baca         202-225-6161  202-225-8671  CA
 John           Campbell     202-225-5611  202-225-9177  CA
 Ed             Perlmutter   202-225-2645  202-225-5278  CO
 Christopher    Shays        202-225-5541  202-225-9629  CT
 Christopher    Murphy       202-225-4476  202-225-5933  CT
 Michael        Castle       202-225-4165  202-225-2291  DE
 Ginny          Brown-Waite  202-225-1002  202-226-6559  FL
 Robert         Wexler       202-225-3001  202-225-5974  FL
 Tom            Feeney       202-225-2706  202-226-6299  FL
 Tim            Mahoney      202-225-5792  202-225-3132  FL
 Ron            Klein        202-225-3026  202-225-8398  FL
 Adam           Putnam       202-225-1252  202-226-0585  FL
 Tom            Price        202-225-4501  202-225-4656  GA
 Jim            Marshall     202-225-6531  202-225-3013  GA
 David          Scott        202-225-2939  202-225-4628  GA
 Peter          Roskam       202-224-4561  202-225-1166  IL
 Judy           Biggert      202-225-3515  202-225-9420  IL
 Luis           Gutierrez    202-225-8203  202-225-7810  IL
 Donald         Manzullo     202-225-5676  202-225-5284  IL
 Melissa        Bean         202-225-3711  202-225-7830  IL
 Joe            Donnelly     202-225-3915  202-225-6798  IN
 Geoff          Davis        202-225-3456  202-225-0003  KY
 Michael        Capuano      202-225-5111  202-225-9322  MA
 Barney         Frank        202-225-5931  617-332-2822  MA
 Stephen        Lynch        202-225-8273  202-225-3984  MA
 Keith          Ellison      202-225-4755  202-225-4886  MN
 Michele        Bachmann     202-225-2331  202-225-6475  MN
 William        Clay         202-225-2406  202-226-3717  MO
 Emanuel        Cleaver      202-225-4535  202-225-4403  MO
 Brad           Miller       202-225-3032  202-225-0181  NC
 Walter         Jones        202-225-3415  202-225-3286  NC
 Patrick        McHenry      202-225-2576  202-225-0316  NC
 Melvin         Watt         202-225-1510  202-225-1512  NC
 Paul W.        Hodes        202-225-5206  202-225-2946  NH
 Albio          Sires        202-225-7919  202-226-0792  NJ
 Scott          Garrett      202-225-4465  202-225-9048  NJ
 Steve          Pearce       202-225-2365  202-225-9599  NM
 Dean           Heller       202-225-6155  202-225-5679  NV
 Peter          King         202-225-7896  202-226-2279  NY
 Carolyn        McCarthy     202-225-5516  202-225-5758  NY
 Gary           Ackerman     202-225-2601  202-225-1589  NY
 Carolyn        Maloney      202-225-7944  202-225-4709  NY
 Gregory        Meeks        202-225-3461  202-226-4169  NY
 Nydia          Velazquez    202-225-2361  202-226-0327  NY
 Deborah        Pryce        202-225-2015  202-225-3529  OH
 Steven         LaTourette   202-225-5731  202-225-3307  OH
 Charles        Wilson       202-225-5705  202-225-5907  OH
 Dan            Boren        202-225-2701  202-225-3038  OK
 Frank          Lucas        202-225-5565  202-225-8698  OK
 Paul           Kanjorski    202-225-6511  202-225-0764  PA
 Jim            Gerlach      202-225-4315  202-225-8440  PA
 Gresham        Barrett      202-225-5301  202-225-3216  SC
 Lincoln        Davis        202-225-6831  202-226-5172  TN
 Randy          Neugebauer   202-225-4005  202-225-5547  TX
 Al             Green        202-225-7508  202-225-2947  TX
 Ruben          Hinojosa     202-225-2531  202-225-5688  TX
 Jeb            Hensarling   202-225-3484  202-226-4888  TX
 Ron            Paul         202-225-2831  202-226-9379  TX
 Kenny          Marchant     202-225-6605  202-225-0074  TX
 Gwen           Moore        202-225-4572  202-225-8135  WI
 Shelley Moore  Capito       202-225-2711  202-225-7856  WV

Joint Economic Committee

  First      Last       Phone           Fax        State
----------+----------+-------------+-------------+------
 Loretta    Sanchez    202-225-2965  202-225-5859  CA
 Baron      Hill       202-225-5315  202-226-6866  IN
 Sam        Brownback  202-224-6521  202-228-1265  KS
 Edward     Kennedy    202-224-4543  202-224-2417  MA
 Elijah     Cummings   202-225-4741  202-225-3178  MD
 Amy        Klobuchar  202-224-3244  202-228-2186  MN
 John       Sununu     202-224-2841  202-228-4131  NH
 James      Saxton     202-225-4765  202-225-0778  NJ
 Jeff       Bingaman   202-224-5521  202-224-2852  NM
 Maurice    Hinchey    202-225-6335  202-226-0774  NY
 Charles    Schumer    202-224-6542  202-228-3027  NY
 Carolyn    Maloney    202-225-7944  202-225-4709  NY
 Phil       English    202-225-5406  202-225-3103  PA
 Robert P.  Casey      202-224-6324  202-228-0604  PA
 Jim        DeMint     202-224-6121  202-228-5143  SC
 Lloyd      Doggett    202-225-4865  202-225-3073  TX
 Kevin      Brady      202-225-4901  202-225-5524  TX
 Ron        Paul       202-225-2831  202-226-9379  TX
 Robert     Bennett    202-224-5444  202-228-1168  UT
 Jim        Webb       202-224-4024  202-228-6363  VA

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