Saturday, October 04, 2008

Correspondence with my Congressman

On September 29th after I heard the House had voted against the bailout bill, I sent the following letter to my Congressman John Campbell (California, 48th district) :

Dear Congressman,

I'm writing to say that I was heartened to hear the opposition of the House to the $700 billion dollar bailout plan. I strongly urge you to continue your opposition. Far from being a result of so-called "greedy capitalism," this financial mess resulted from government intervention from the Fed, Fannie Mae and Freddy Mac, the Community Reinvestment Act and numerous other regulations that distorted the operation of the free market. To bailout financial companies at tax payers expense would be immoral and impractical. Rather efforts should be made to expose and eliminate the regulations hampering a truly free financial market, including a discussion of a return to a gold standard.

Sincerely yours,

Gideon Reich

That was before I was able to find out whether he voted with the opposition to the bill or in support of it. Later I found out that Campbell had voted in favor of the bill.

On Friday, October 3rd, after the bill passed, Congressman Campbell sent me a detailed letter explaining why he voted for the bailout package. I responded in kind.

First, here's the Congressman's letter:

From: Congressman John Campbell <>
To: Gideon Reich
Sent: Friday, October 3, 2008 2:54:27 PM
Subject: Reply from Congressman John Campbell

October 3, 2008

Mr. Gideon Reich

[address supressed]

[address supressed]

Dear Mr. Reich:

You are one of many people who called, wrote, or e-mailed my office with questions or opinions about the Emergency Economic Stabilization Act of 2008. As you probably know, the bill was passed by both houses of Congress, signed by the president, and is now law. The vote in the Senate was 74-25 and included yes votes from a wide range of the political spectrum including both Senators Obama and McCain, both California Senators, and the most conservative member of the Senate, Tom Coburn (R-OK). It then passed the House by a vote of 263-171 which included yes votes from The Speaker, Majority Leader and Minority Leader.

As you may also know, I voted in favor of the bill and was a strong advocate of it. I hope you will take the time to read on so I can explain why I feel so strongly about this legislation.

First of all, if you are personally opposed to the bill it is probably because you are against a $700 billion bail out of Wall Street. You should be against that. I am too. But that media term for the bill is a complete mischaracterization of what the bill does. It will not cost $700 billion and it is not a bail out of anyone. Let me explain:

$700 Billion: This amount will not be spent. It is being invested in hard assets (mortgages secured by homes) which will have an expected cash flow in excess of the purchase price. So the taxpayers should get all their money back that way. But if that doesn't work, taxpayers will also get warrants (stock options) in the companies from which these assets are purchased. So, if those companies recover, taxpayers get part of profits. And if both of those don't get the whole $700 billion back, whoever is president in 5 years is required to submit to Congress a proposal to get any loss back from the companies who sold the government the assets. That's 3 different ways to be sure the taxpayer is made whole and maybe makes a profit. This bill may wind up costing less than one year's worth of earmarks.

Bail Out: The assets will be bought from companies at probably 30%-60% of what they paid just a year or two ago. If I offered to buy your house that you bought 2 years ago for half what you paid for it, would I be bailing you out? I don't think you would look at it that way. These companies will lose lots of money. Fine. They made an investment that went bad and they have to live with it. But they will not be bailed out. Many companies and a number of banks will still fail even with this bill. The purpose of the purchase is to cut out the cancer that is clogging the world's financial arteries so that credit and loans and cash can flow again. No one is being bailed out.

Wall Street: If we do nothing, expect to see many days on the stock market like Monday, September 29th when the stock market suffered its biggest one day point drop ever. That will devastate the retirement plans of millions of everyday people. All forms of credit have already dried up. If they dry up more, companies small and large will not be able to get standard short term loans to buy inventory and make payroll. That means lots of job losses and layoffs. And people with money market funds and bank accounts may not be able to get their money, even with FDIC Insurance because these entities have to sell a loan to get you cash. And no one is buying the loans.

Many different proposals were looked at and discussed. I was actually part of a working group appointed by the Republican Leader to develop an alternative plan, which, in fact, developed several provisions that were included in the final bill. Our goal was to develop a virtually cost-free plan to stabilize the global financial markets and save every American's savings and investments, not a bail out. I believe that the final bill meets these criteria. There is no guarantee that this bill will work. But I have not seen an alternate plan that I thought had a better chance to both work and pass both houses of Congress.

If the bill works, some banks will still fail and some companies will still not make it. But it will be far, far fewer than would have otherwise occurred. Some of you have asked me why a believer in free markets would support this bill. I have done so because I believe this is a solution to preserve free markets, not replace them. In some ways, this bill is more of a free market solution than other actions that have been taken. The government will not take over any companies here. Even the warrants will be non-voting. No one will be compelled to sell the government their assets if they don't want to. Even the "reverse auction" process of establishing pricing for the assets, where sellers submit bids to one buyer rather than the other way around, is a market based pricing method.

No one wanted this bill. No one wished for this crisis to occur. But it is here. This is a worldwide problem and not just an American one. And we had to act. My vote was carefully considered, but made without reservation. I applaud my colleagues, both Republican and Democrat, who joined me in doing so.

I appreciate the great honor you have given me by allowing me to represent you in the United States Congress.

I remain respectfully,


Member of Congress

Here's my response:

Dear Congressman Campbell,

Thank you for your honest and detailed letter of explanation as to your vote for the "Emergency Economic Stabilization Act of 2008." I have read your letter and I regret I cannot accept your explanation. Morally, based on your support for free markets, you should have been opposed to such blatant an interference with their operation. Since you actually believe that "this is a solution to preserve free markets" I have now come to the conclusion that you do not in fact understand how free markets work.

I also cannot accept your claim that "if we do nothing, expect to see many days on the stock market like Monday, September 29th when the stock market suffered its biggest one day point drop ever." There are several things wrong with that. First, it is not clear the market was reacting to the absence of government bill rather than fear of what a bill that will likely eventually pass may contain. Second, it is not the job of representatives to either save retirement plans or ensure the availability of credit. Capitalism includes the possibility of business failures, and people who invest their retirement in markets must accept the risks of such an investment and not pass it on to others. As to credit, I thought that's how we got into this problem in the first place. It is time we abandoned the failed government controlled credit system, also known as the Federal Reserve, and starting working toward a return to a gold standard. I would also add that in general, the availability of credit does not appear to be in any danger at all, as there are a good many banks including such giants as Wells Fargo and BB&T who seem to be doing quite well. I would also further add that perhaps a move toward more savings and less reliance on credit might of benefit to many in this country.

Furthermore one hears little from Republicans about the fundamental causes of this crisis which are NOT the result of the frequently mentioned mythical free markets (which certainly do not exist in banking or the mortgage industry, minor deregulation tweaks notwithstanding) but first and foremost of Fed action, assisted by quasi-governmental Fannie Mae and Freddie Mac, and encouraged by Carter's and Clinton's Community Reinvestment Act. In addition local conditions, specifically numerous restrictions and regulations, that exist in California particularly exacerbated the situation here such that homes in my area that I might be interested in for my family still cost upwards of $500,000. I do not accept that I need to "invest" a dime, either temporarily or permanently to rescue either the borrowers, lenders, or investors, who respectively, chose to ignore their limited incomes, or not carefully examine that of the borrowers, or not methodically examine the loans that they purchased.

The fact is that you have gone against the principles of the free market. You should have followed the wish of the majority of your constituents, not because they were the majority, but because in this case they happened to be right in their opposition to this terrible bill. I'm afraid your vote here has made it impossible for me to support you in the future. I hope I have made it clear to you why that is the case.

Sincerely yours,

Gideon Reich


Rick "Doc" MacDonald said...

At least you got a response. Here in MA, only 3% of our State government is Republican and most of them are closer to southern democrats than conservatives. As you might expect given that backdrop, I heard absolutely nothing from Sens Kennedy and Kerry or my Rep, Nikki Tsongas. Still, the war rages on here in the Commonwealth. Sooner or later, the sheep will wake and finally say, "No more"!

mtnrunner2 said...

Great response letter.

In the Congressman's response, how about this:

"I have done so because I believe this is a solution to preserve free markets, not replace them"

??? How exactly do we do that by overriding investors' decisions and denying failures? Amazing.

The discourse on this issue within our government and most of the press is just utterly detached from reality. Yet, we have no choice but to press on and hope that some day, real understanding and real integrity rise to the surface and respond.

Gideon said...

Unfortunately, politically we're going to be in for a rough ride for the next few years. But on the other hand, we're in a better position to make our voices heard and participate in the "national conversation" than we have ever been before. I'll be damned to go down without a fight!

Jacob Lee said...

I called and wrote congressman Campbell and said No Bail Out. Since he voted for it I am now telling everyone. Vote No on John Campbell in November.

He owns auto dealerships he was voting for his pocket book not mine.

Jacob Lee
Tustin Ca 92782

Gideon said...

I certainly do not intend to vote for him. I'll have to see if I can vote for the Democratic candidate.

kerrjac said...

I heard that excuse over & over again - 'it's not a bailout because we're buying something for our money'. Congressmen said that mantra so many times that it feels like a lie that's becoming a truth. Forget the fact that the assets were so poor that no one else will want to pick them up, & there's no reason to put faith stock options from companies that should've gone under.

In the late 1990's, Enron became incredibly adept at shifting money through complex internal machinations so that debt appeared as profit. It looks like the government is trying to do to the same thing with companies' overwhelming credit.

At least you got a sensibly detailed response for the senator though.

smacklin said...

Of course once the check was written and the power to spend it was handed over to the Treasury Department the whole idea of buying bad mortgage backed assets went out the window. Not one dime of the $700 billion has ben spent on buying assets. Instead they have been injecting capital into failing institutions to keep them afloat.

It is a bail out now.