The Administration’s Bailout Plan: Trust Me.

Dan Petegorsky

Within days we could be seeing passage of a Wall St. bailout program that puts public money on the line at a scale unprecedented in our history. We’re told that this is absolutely necessary to prevent the total collapse of financial markets – and that we need to hand over complete discretion to the Treasury Secretary. And with virtually no real explanation – in terms that we can actually understand – of exactly who will benefit and how.

While most discussion has focused on the collapse of the Wall St. investment banks and their losses, I’ve seen shockingly little about how this might address the equally catastrophic losses that homeowners have suffered during the crisis that has been unfolding for many, many months. Will they be able to recover any of their losses – or will the bailout instead provide an opportunity for the mega-investors to scoop up assets at fire sale prices and then profit off the gains as the economy recovers, with taxpayers assuming all of the risk?

Like John McCain, I don’t know much about Economy. But I always get nervous when anyone says “Trust me.” Any of you actually understand what’s going on here?

A couple of thoughts to start of the discussion:

From Center for American Progress:

The vast majority of American homeowners know their house is worth more than 22 cents on the dollar the price that Wall Street (until this week’s crisis) was willing to pay for pools of mortgage-backed securities. It is no solution if taxpayers take those losses and new purchasers get a windfall when values return. Congress has to make sure Paulson’s proposal to purchase these mortgage-backed securities from financial institutions and investors worldwide results in the taxpayers getting the benefit of future restored value, in exchange for putting up our Treasury at risk to absorb current market risk.

Paul Krugman:


Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

You?

Comments

  • Bill R. (unverified)
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    We're caught between a rock and a hard place. The credit system is broken because banks and financial institutions have stopped lines of credit between each other because of this mess. How to open it up again, I don't know. It's a bad buy to shift Wall St. debt unto the tax payer and who knows what those assets would really be worth once a Resolution Trust Co. started to really sell them over time. Anywhere we look it looks like all of us are going to take a big hit because of our broken and irresponsible financial markets. Supposedly the Dems are demanding a different deal to bail out homeowners rather than bankers, which is good. And Bernie Sanders and others want to create a surtax to make the millionaires pay for it all. We'll see how it plays out. Right now I would say there is less than 50% chance of a deal. And McCain wants us to turn over our soc. sec. to these robber barons. Imagine where we would be if the Repugs had managed to privatize Soc. Sec. the last four years.

  • Allison Wegner (unverified)
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    It is difficult to trust our elected representatives at times, especially when we focus on the past rather than looking forward to the future.

    Personally, I am relieved and reassured by the tones and words coming out of Washington during this crisis. What I hear is that together our leaders in Congress and the administration are seeking to: 1) prevent worldwide collapse of our financial system 2) use this opportunity to make sure that those who committed the crime (ie, greedy selfish speculators) take the biggest hit while the country as a community will use our resources to relieve foreclosure and mortgage pressure on the American people. There's a good reason why Lehman Brothers went down and AIG was bought.

    Don't give up hope folks. Yes, our leaders need to tell us what they are doing, but if we expect that they -- and when I say "they" I mean US -- will fail, well we might be heading toward self-fulfilling prophecy land.

    Keep the faith.

  • (Show?)

    The bailout is problematic on a number of levels..not the least of which is the fact that they're working to keep oversight out of the picture:

    Sec. 8. Review.

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

    Basically--these guys are working to give one person sole authority over millions and millions of dollars.

    And that doesn't even begin to address the fact that they're siphoning huge amounts of cash away from fixing health care, dealing with global climate change and foreign oil dependency, national security, etc.

  • regulararmyfool (unverified)
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    1. In panic give the gang unfettered, unrestricted use of the full faith and credit of the United States.

    2. Paulson resigns

    3. Cheney resigns as Vice President

    4. Bush appoints Cheney as Treasury Secretary

    5. Kiss any semblance of democracy goodby.

    Any questions?

  • Greg D. (unverified)
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    A few random (early) thoughts

    1. The bill permits the Treasury to hire Wall Street investment banks to "manage" the toxic mortgages to be purchased by the Treasury from those same investment banks. Instead of being a source of risk, those toxic mortgages now present a great fee generating opportunity for Wall Street.

    2. If Treasury purchases sub-prime paper at a steep discount and then resells the paper into the market at a slightly smaller discount, the buyers will have tremendous incentive to liquidate their positions and turn toxic paper into real assets. That liquidation process may well include a stepped up foreclosure rate. Woe to the delinquent homeowners who get caught in that squeeze.

    3. I have little faith in the govt. staff and lawyers being smarter than their Wall Street counterparts. As of this morning, AIG shareholders are trying to reneg on the bailout deal that would have given Uncle Sam 79.9% of AIG equity. Their plan is to raise capital and repay the govt. - now that the emergency is over - before the stock warrants to the govt. are approved by AIG shareholders. If AIG can screw Uncle Sam, just think what cleverness will come from the combined power of every bank and investment company!

  • Harry Kershner (unverified)
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    "...or will the bailout instead provide an opportunity for the mega-investors to scoop up assets at fire sale prices and then profit off the gains as the economy recovers, with taxpayers assuming all of the risk?"

    Does a bear shit in the woods?

    Is there any better example of the fact that we don't have "capitalism" or "socialism" in this country? What we have is privatized profits for the rich and socialized risks and costs for the rest of us.

    And it's a bipartisan deal.

  • Ted (unverified)
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    Jan 2004, Nobel prize winning economist George Ackerlof said Bush's economic policy is not "normal" fiscal policy, "It's a form of looting." The entire monetary expansion we have seen was a form of looting, transferred through war and energy profits, justified by a fake war on terror that is really a disguise for empirial plunder. That is basically what got us here, folks. Conspiracy to start an unnecessary war and pillage the US economy. Bush, Rove, Cheney, and their co-conspirators engaged in a massive pump-and-dump of the US economy, Enron-style. Now we're supposed to whole heartedly trust the same crooks to save us?

    The DOW is an illusion. The NASDAQ, S&P 500, etc, never recovered from the 2001 bust. Go look. If you adjust for ridiculous portion of monetary expansion of the last seven years, you can write off that 14,000 DOW. It belongs back down under 10,000 where it started when Bush got in, but the fundamentals are much weaker now. Should the poor be propping up rich or should we say no to socialism for the rich and let the market fall back to where it belongs? However good it makes you feel to see your 401K supported, it's just a game. You're still losing your money through price inflation and currency devaluation. Besides, fully 50% of the American people have absolutely no savings, stocks, mutuals, etc.

    We don't need this latest scam. Let the DOW fall. End the war. Return to the (second) Glass-Steagall act. Aggressively enforce the Sherman and Clayton acts and break up these industrial cartels--that will also help reempower unions and invididual job seekers. The only bailouts should be for personal savings up to 100,000 per institution. Period. End war spending immediately. These crooks don't want to go back to the regulatory structure that worked for 50 years, they want to consolidate control and immunize themselves from their own mistakes.

  • (Show?)

    if there was ever at time for a march on Wall St. this would be it.

  • Bill R. (unverified)
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    Obama announces opposition to Paulson plan as drafted. His statement of principles: http://my.barackobama.com/page/community/post/amandascott/gGg9zm

  • (Show?)

    This is the same thing I've been saying for a while:

    While most discussion has focused on the collapse of the Wall St. investment banks and their losses, I’ve seen shockingly little about how this might address the equally catastrophic losses that homeowners have suffered during the crisis that has been unfolding for many, many months.

    We've bailed out the companies, yet the homeowners are still getting stuck with terrible mortgages and are being foreclosed on. Wouldn't a better solution have been putting that money towards those loans, making the companies give them better mortgages, and we end up with people still in their homes and companies that are stable?

  • Jerome James Cole (unverified)
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    I just want to see the world burn.

    Banks and lenders lowered their lending standards and were well aware of the associated risks. Mortgage brokers pushed people to buy homes they could not afford, tacitly encouraged borrowers to lie about their financial condition, and marketed bizarre loans that were almost guaranteed to end up in default. Borrowers knowingly borrowed more than they could afford to pay back. Wall street and the government (through the FHA, Fannie Mae, and Freddie Mac) securitized the sub-prime mortgages in order to lubricate this evil machine.

    No more bailouts! I want to see people who took out insane mortgages kicked out of their houses. I want to see a few Wall Street titans in bankruptcy. I want to see anyone who did anything criminal doing the perp walk. Most of all, I want home prices to return to sane levels so that responsible working class people can save up a decent down payment and buy a nice home with an affordable mortgage.

  • marv (unverified)
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    OK. No more bail outs? Then you had better be asking the representatives in Congress that way too much authority is being given to buy, "other assets as deemed necessary." With no possibility for review, therefore, Bushco would have authority to buy, at a price they set, the right of way for the Alberta to Port Arthur pipeline. Making all court challenges moot Bush would be carrying out the wish of his Grandfather, Prescott, who financed Hitler. This is an example of disaster capitalism. Create a crisis and then force "reforms" that become permanent. Guess that if you could get someone to call it Green it would be fine.

  • Bill R. (unverified)
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    The Paulson plan is dead. Obama has come out against it, and so has Pelosi.

  • RW (unverified)
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    Bail out foreign-owned banks in US? "Distinction without a difference"

    http://www.politico.com/news/stories/0908/13690.html

    Apparently foreign banks that do a substantial bit of business in the US are also slated to be bailed out along with US banks.

    To quote: "Treasury Secretary Henry Paulson confirmed the change on ABC's "This Week," telling George Stephanopoulos that coverage of foreign-based banks is "a distinction without a difference to the American people."

    "If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said.

    "That's a distinction without a difference to the American people. The key here is protecting the system. ... We have a global financial system, and we are talking very aggressively with other countries around the world and encouraging them to do similar things, and I believe a number of them will. But, remember, this is about protecting the American people and protecting the taxpayers. and the American people don't care who owns the financial institution. If the financial institution in this country has problems, it'll have the same impact whether it's the U.S. or foreign."

    Am I ignorant, bloody naive here? Am I missing something key? A rank xenophobe in a wonderful world of Diversity? I'm not exactly thrilled that we sell off our land itself, our landmarks et. al. to ANYONE who has the money to buy it out from under us and rack up the rent etc. I'm not thrilled that we seem to have few or none of the protections/controls that other nations DO have on the assets you cannot manufacture more of!

    And I'm awfully much not thrilled at the prospect of moving now to spend my tax dollars to bail out foreign interests who have found the picking good here.

    I am becoming a hillbilly under the pressure of all of this risk!

  • RW (unverified)
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    Harry: I agree with you.

    Sincerely, Bex

  • Nick C. (unverified)
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    I like the Reich ultimatum:

    1. The government (i.e. taxpayers) gets an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk.

    1. Wall Street executives and directors of Wall Street firms relinquish their current stock options and this year’s other forms of compensation, and agree to future compensation linked to a rolling five-year average of firm profitability. Why should taxpayers feather their already amply-feathered nests?

    2. All Wall Street executives immediately cease making campaign contributions to any candidate for public office in this election cycle or next, all Wall Street PACs be closed, and Wall Street lobbyists curtail their activities unless specifically asked for information by policymakers. Why should taxpayers finance Wall Street’s outsized political power – especially when that power is being exercised to get favorable terms from taxpayers?

    3. Wall Street firms agree to comply with new regulations over disclosure, capital requirements, conflicts of interest, and market manipulation. The regulations will emerge in ninety days from a bi-partisan working group, to be convened immediately. After all, inadequate regulation and lack of oversight got us into this mess.

    4. Wall Street agrees to give bankruptcy judges the authority to modify the terms of primary mortgages, so homeowners have a fighting chance to keep their homes. Why should distressed homeowners lose their homes when Wall Streeters receive taxpayer money that helps them keep their fancy ones?

    From http://robertreich.blogspot.com/

  • (Show?)

    Rebecca - there may be more going on here re. the foreign banks; this from Josh Marshall

    The Times further reports that two of the biggest foreign banks in need of such relief are Barclays and UBS. In fact, my understanding is that UBS is more on the line here than any other foreign bank.

    Let's add this up.

    John McCain's top economics advisor, who is widely believed to be his choice for Treasury Secretary, should he win in November, is former Sen. Phil Gramm. (Indeed, just last night his spokesman refused to say Gramm wouldn't be McCain's choice for Treasury Secretary.)

    Gramm is both vice chairman of UBS's US division and a lobbyist for UBS.

    If UBS successfully lobbied over the weekend to get in on the bailout, what was Gramm's role in the lobbying?

  • (Show?)

    So far as I can tell, this bailout is going to put the US in debt to the tune of about $2500 for every man, woman and child in our nation. I for one wish I understood what my $2500 was actually buying and not just told to trust.

  • TR (unverified)
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    Is Obama going to return or rebuff the $60 million he received in campaign contributions from now bankrupt Lehman Brothers and the other now banking/financial institutions and executives the taxpayers will now bailing out this plan? So far he has not come out and challenged the plan. Maybe he plans just to keep the money.

  • TR (unverified)
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    Is Obama going to return or rebuff the $60 million he received in campaign contributions from the now bankrupt Lehman Brothers and other banking/financial institutions/executives the taxpayers will be bailing out with this plan? So far he has not come out and challenged the plan. Maybe he plans just to keep the money and therefore does not want to rock the boat.

  • dennis morre (unverified)
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    Bail out package for saving whom the general public or t the rich people. This is a vital question which must be answered in detail.Why the tax payer is always being made a scapegoat for the benefit of small section of people. The contesting presidential candidate must talk sincerely on this subject without in political or selfish motives. The subject of economy is very complicated, without finalizing the bail out package all the concern department must be involved.http://www.statedemocracy.org Thanks

  • Bill R. (unverified)
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    Is John McCain going to ask his campaign manager, Rick Davis, to return the two million dollars he received as protection money to keep the regulators away from Fannie and Freddie? http://www.nytimes.com/2008/09/22/us/politics/22mccain.html

    But wait, McCain was against regulation before he was for it. Or is he against it again... hard to keep up. Last night on Sixty Minutes he said de-regulation has been good for the stock market. It's hard to tell from day to day with McCain. With his impairment he doesn't know either.

  • Tom Civiletti (unverified)
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    William Greider is perceptive, experienced, and on the side of the American people.

    If Wall Street gets away with this, it will represent an historic swindle of the American public--all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics--exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.

    Paulson Bailout Plan a Historic Swindle

  • Dave (unverified)
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    if there was ever at time for a march on Wall St. this would be it.

    Others agree with you. The following email just came across my desk, forwarded to me by a friend in NYC:

    Everyone,

    This week the White House is going to try to push through the biggest robbery in world history with nary a stitch of debate to bail out the Wall Street bastards who created this economic apocalypse in the first place.

    This is the financial equivalent of September 11. They think, just like with the Patriot Act, they can use the shock to force through the “therapy,” and we’ll just roll over!

    Think about it: They said providing healthcare for 9 million children, perhaps costing $6 billion a year, was too expensive, but there’s evidently no sum of money large enough that will sate the Wall Street pigs. If this passes, forget about any money for environmental protection, to counter global warming, for education, for national healthcare, to rebuild our decaying infrastructure, for alternative energy.

    This is a historic moment. We need to act now while we can influence the debate. Let’s demonstrate this Thursday at 4pm in Wall Street (see below).

    We know the congressional Democrats will peep meekly before caving in like they have on everything else, from FISA to the Iraq War.

    With Bear Stearns, Fannie and Freddie, AIG, the money markets and now this omnibus bailout, well in excess of $1 trillion will be distributed from the poor, workers and middle class to the scum floating on top.

    This whole mess gives lie to the free market. The Feds are propping up stock prices, directing buyouts, subsidizing crooks and swindlers who already made a killing off the mortgage bubble.

    Worst of all, even before any details have been hashed out, The New York Times admits that “Wall Street began looking for ways to profit from it,” and its chief financial correspondent writes that the Bush administration wants “Congress to give them a blank check to do whatever they want, whatever the cost, with no one able to watch them closely.”

    It’s socialism for the rich and dog-eat-dog capitalism for the rest of us.

    Let’s take it to the heart of the financial district! Gather at 4pm, this Thursday, Sept. 25 in the plaza at the southern end of Bowling Green Park, which is the small triangular park that has the Wall Street bull at the northern tip.

    By having it later in the day we can show these thieves, as they leave work, we’re not their suckers. Plus, anyone who can’t get off work can still join us downtown as soon as they are able.

    There is no agenda, no leaders, no organizing group, nothing to endorse other than we’re not going to pay! Let the bondholders pay, let the banks pay, let those who brought the “toxic” mortgage-backed securities pay!

    On this list are many key organizers and activists. We have a huge amount of connections – we all know many other organizations, activists and community groups. We know P.R. folk who can quickly write up and distribute press releases, those who can contact legal observers, media activists who can spread the word, the videographers who can film the event, etc.

    Do whatever you can – make and distribute your own flyers, contact all your groups and friends. This crime is without precedence and we can’t be silent! What’s the point of waiting for someone else to organize a protest two months from now, long after the crime has been perpetrated?

    We have everything we need to create a large, peaceful, loud demonstration. Millions of others must feel the same way; they just don’t know what to do. Let’s take the lead and make this the start!

    AGAIN: When: 4pm – ? Thursday, September 25. Where: Southern end of Bowling Green Park, in the plaza area What to bring: Banners, noisemakers, signs, leaflets, etc. Why: To say we won’t pay for the Wall Street bailout Who: Everyone!

  • Tom Civiletti (unverified)
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    Democrats.com has a petition:

    Stop Paulson's Plunder

  • Greg D. (unverified)
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    If you can't trust Wall Street, who can you trust? Ha Ha Ha

    If the economic package goes through (and it will) I expect to hear the President-elect (regardless of who it is) tell us all that there can be no extra money to improve schools, roads, social security, medicare, or the medical insurance disaster. Our foreign bond holders will not permit the US to waste money on domestic programs when it could be used to repay interest and principal on our debt. Third world countries have heard this from the IMF and World Bank for years. Now it is our turn.

    But, if we are all going to be screwed, it is nice to know that a bipartisan coalition is doing it. Feels so much better than being screwed by the Republicans alone.

  • Harry Kershner (unverified)
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    Compare Obama's "plan" to Reich's and tell me why you think Obama's language is not the same triangulating bullshit that his plan for ending the "Iraq War" was. If he now has decided to cut his ties to the Wall Street thugs who caused this disaster, let's see him spell it out.

    William Greider (Paulson Bailout Plan a Historic Swindle) called Paulson's Wall Street bailout: "All sugar for the villains, lasting pain and damage for the victims."

    "A serious intervention in which Washington takes charge would, first, require a new central authority to supervise the financial institutions and compel them to support the government's actions to stabilize the system. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own--cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed."

    "As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice," Greider said.

    One or both = the same thing.

  • Tom Civiletti (unverified)
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    Some worthwhile comment from The American Prospect, though the bailout plan is folly only in the way the fox's plan to take over the henhouse is folly.

    Paulson's Folly

  • Bill R. (unverified)
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    Chris Dodd and Barney Frank are negotiating this thing. So if people want to pile on, that's where you go. Frank is asking for a surtax for millionaires to pay for it, apparently has already got concessions from the WH for mortgage relief and oversight. For all the populist purists here, what are you going to tell the good middle class working people with pensions when they're worth nothing, if nothing is done?

  • Harry Kershner (unverified)
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    Nader is not saying do nothing. Here are his proposals:

    1.No bailouts without conditions and reciprocity in the form of stock warrants.

    1. No more lobbying for any company that is bailed out.

    2. No golden parachutes or get-out-of-jail-free cards for guilty executives.

    3. No bailouts without public hearings.

    4. Reduce the moral hazard in U.S. mortgage markets by introducing covered bonds for the majority of mortgage products, as is done in Western Europe. That gives institutions that finance mortgages an incentive to be prudent, because they cannot just unload them and wipe their hands clean of the liability, but are instead on the hook if the homeowner defaults.

    5. Maintain neighborhood stability and housing security by passing a law with a sunset clause allowing below-median-value homeowners facing foreclosure the right to “rent to own” their homes at fair market value rates.

    6. Avoid future housing bubbles by removing implicit government guarantees for new mortgages that exceed thresholds of greater than 15 to 20 times the annual fair market rent value of the home.

    7. Make the Federal Reserve a Cabinet position, so it is accountable to Congress, as well as make sure all Federal Reserve Bank presidents are appointed by the president and answerable to Congress.

    8. Reduce conflicts of interest by taking away power for auditor and rating agency selection from companies and placing it in the hands of the SEC to be administered on random assignment.

    9. Implement a securities speculation tax, starting with derivatives, to deter casino-style capitalism.

    "Ralph Nader, who has spent his adult life battling corporations, understands more about the rise of the corporate state and the steady fleecing of American citizens by corporations than anyone else in the country. The core of his message is that Republicans and Democrats are hostage to corporate power. (Chris Hedges, Fleecing What’s Left of the Treasury).

  • (Show?)

    I think if the government is going to get into the the whole absorbing of debt of private institutions, then we ought to create a Department of Debt-Transferability where private citizens can go and get the government to pay off their debt.

    I'd be willing to wait in a line a few weeks if it meant I got a 4,000 dollar chunk of that 700 billion.

  • Peace (unverified)
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    AIG gets over 85 billion and they yell hooray and we won't go bank rupt and take off to a spa and spend over $400,000 dollars at the St. Regis Resort.Thought that was more mud flying on election 08 and didn't believe it at first. Heard Obama say in the debate they need to pay every dime of it back.This is a mess and please hire some Nobel Prize economist to over see the 700 billion which is more like 850 billion.What banks are the govt. buying stock ? Green Chip Stocks ? We are not doing the Great Depression and there is to much innovation and spirited American fight for all that. My state just happens to be in the red, is yours ? Congress just passed the unemployment extension act. Keep your sense of humor and pass the smelling salts ! We'll figure out how to turn poop to methane and sell it ! Wonder when Congress is going to get our wind corridors open to move with solar and wind ? Down 4435 ready set S2196 hike !If my little mom was still alive she'd be in Washington raising hecks ,bells and cocktail shells ! There goes driving Mrs. Daisy to Washington and she'd have had all her girl friends in the car with her.They'd have been at the White House gates and all dressed up ! I'm not sure security would have known what to do !Oh my God Bless America !

  • Peace (unverified)
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    <h2>If you have an older mom or dad watching all this that grew up and went through a depression still tough as nails and mad as heck, they have every reason to be ! Driving Mr. and Mrs. Daisy protest economic bus trips to Washington ! Where can they gather peacefully ? They'll jerk these young whippie snappers ball headed in politics and we want Nobel prize economist on the oversight team. That's what they told me to write and I'm not going to argue !They all play bridge and count cards fast as lightening and Paulson better look out !</h2>

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