Riddle me this, Batman

From an editorial in Barron's, regarding Congress's failure to pass the bailout bill:

HOW DO YOU TURN $700 billion into $1 trillion in a matter of hours?

Simple, by voting down the proposed rescue plan in a fit of either principle or pique.

The $700 billion, of course, was the size of the plan that would authorize the Treasury to purchase impaired mortgage assets. The $1 trillion was the amount that was erased from the value of the U.S. stock market.

Specifically, the DJ Wilshire 5000 -- the broadest measure of the American equity market -- plunged 1,024.27, or over 8%, to 11,322.76. Since every point on the DJ Wilshire is worth $1 billion, those thousand-plus points of fright were worth over $1 trillion.

Does anybody see a fallacy here? I mean, really, do the smart people on Wall Street think that a taxpayer financed injection of $700 billion to support prices at the margin is a fair comparison to the paper loss of financial institutions? After all, the money didn't actually go anywhere (except that those who sold put the money in their own accounts). But the bailout bill would have put real people on the hook for money from their real pockets.

If the Wall Street whizzes really wanted a stock market rally, they should just hope that the US government starts buying stock. That would probably be cheaper than buying the smoldering assets in the basement. Now that would be a plan. Governmental day-trading may be the best way out yet.

Finally the script gets interesting

Just when I thought the fix was in, that the Treasury and the Federal Reserve had pummelled Congress into committing $700 billion plus dollars for the magic experiment in emergency finance, things got interesting. A Federal Reserve Governor has essentially publicly told Fed Reserve Chairman Bernanke to take a hike.

Fed's Fisher Says Rescue Would Increase Fiscal Burden.

This is nigh unto unprecedented. I'm thinking the bailout scheme is in tatters, and ole Ben's days are numbered.

Now, I'm not happy about any of this, but I'm not at all impressed with the ideas coming from the top.

"One of the biggest challenges facing both John McCain and Barack Obama in their commitment to provide tax relief to working-class Americans is the simple fact that millions of them already pay no personal income taxes."

This is the opening sentence of a recent article from Tax Foundation. (H/T to TaxProf Blog.)

Already about 33% of all tax filers pay no income tax. Under the Obama plan, the number is projected to reach 44% and under the McCain plan it is projected to reach 43%.

The article contains this interesting chart showing how the percentage of non-payers has been going up:

I have mixed feelings about this. When the income tax first was implemented, it was designed to affect the highest earners. Most normal workers didn't even notice it.

But now, at least until recently, the requirement of paying at least some income tax was fairly pervasive.

My paleo instincts might suggest to me that it is not such a bad thing to narrow the tax base (in terms of population). But the fly in the ointment is that the government is now the big provider of all sorts of things that cost money. And the budget lately has been growing by the day.

From a policy perspective, however, I wonder what the effect will be on government spending if nearly half of the potential beneficiaries do not have to pay taxes?

A quote by John Adams comes to mind:

The moment the idea is admitted into society, that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. If "Thou shalt not covet," and "Thou shalt not steal," were not commandments of Heaven, they must be made inviolable precepts in every society, before it can be civilized or made free.

John Adams, Defence of the Constitutions of Government of the United States, Works 6:9 (1789)

As I've hinted at before, I think neither of the candidates' policies will ever see the light of day. $700 billion, as a starter bailout, is around $2,300 for every human person gracing the face of our fair country, working or not. I expect in the end that pragmatism will overwhelm theory.

No one knows what to do

A confidence building statement from our Senate Majority Leader regarding the late financial crisis showed up in a Bloomberg article today:

Sept. 17 (Bloomberg) -- The U.S. Congress is unlikely to pass new legislation to overhaul financial regulations this year because “no one knows what to do,” Senate Majority Leader Harry Reid said today.

“We are in new territory, this is a different game,” Reid said at a briefing in Washington. Neither Federal Reserve Chairman Ben Bernanke nor Treasury Secretary Henry Paulson “know what to do but they are trying to come up with ideas,” Reid said.

Mish is thankful that Congress thinks it's too late to do anything before the end of the year anyway.

But I suspect that the Obama vs. McCain tax plan debate is pretty much out the window. Whatever the economic scene looks like in two months, we can be pretty sure that the funding the federal budget will take on even greater urgency. Neither plan contemplated the vast expenditures put out the past couple of weeks.