Still a little unclear how house flipping and sub-prime mortgages are linked to the Lehmann Brothers bankruptcy and Collateralized Debt Obligations? WallStats.com offers “A Visual Guide to the Financial Crisis,” showing how low interest rates, the longstanding belief that housing values don’t decrease, and media hype — not to mention strikingly off-base quotes about the strength of the housing market by leading figures — lead us to today’s economic meltdown.

In this week’s edition of the Schultz Report, David Schultz examines the looming vote recount in the Minnesota US Senate face-off between Sen. Norm Coleman and Al Franken.

Is the situation here another Florida 2000 cage match, as so many pundits are claiming? “No,” says Schultz, “in the sense that we don’t face the same problems as Florida on several counts. In Florida, we had clear evidence of a secretary of state, Katherine Harris, engaging in vote suppression and purges of voter lists. We have no evidence of that in Minnesota. The secretary of state is trying to figure out how to count every vote, and to encourage people to vote. Second, unlike Florida, where we had multiple different technologies used across the state to vote, Minnesota pretty much has one technology to vote.

David Schultz

“Third, unlike Florida, when they actually started doing the recount in the four counties — where the Supreme Court entered in, for good or for bad, was when it reacted to the problems we all remember, where you had people in one county counting ballots differently [from another county]. Is a dimpled chad counted? A pregnant chad? What if it had two of its corners torn loose? In that state, you had wide variance across the four recount counties regarding what was considered to be the intent of the voter. That’s where the Supreme Court entered in and said you had to have uniform standards.

“Unlike that problem in Florida, Minnesota has a state law that describes how you ascertain voter intent. And what the law first says is that, if at all possible, the intent of the voter should be ascertained. And more importantly, the law says that technical noncompliance with the law in terms of how you cast your vote should not be an obstacle to counting votes. The law says that even if you don’t follow [ballot rules] to a tee — even if, for example, you circle a name as opposed to filling in a bubble dot — if you can figure out how that person meant to vote, you have to do it. So the law is very different in terms of establishing uniform standards.

“For all those reasons, we’re not Florida. Where we are Florida is in terms of the ideological battle that’s being waged by the Republicans to attack Mark Ritchie and to cast doubts on what’s happening in Minnesota — anywhere from claiming that Mark Ritchie is the new Katherine Harris to claiming that votes are being manufactured. To that extent, Minnesota has become a powerful battleground, like Florida. And additionally, while Florida was the state that decided a presidency, it is possible that, depending on what happens in Alaska and Georgia, Minnesota could be the deciding state to determine whether the Democrats get 60 votes in the US Senate. If they get 60 votes in the Senate, that means they have the votes to break a Republican filibuster. So the stakes are enormous, and from that score we’re potentially another Florida in terms of the high stakes going on.”

Listen: David Schultz discusses the great recount shootout of ’08 (and Michele Bachmann’s last laugh on the bailout bill) (12:48)

Any further description would spoil the punchline, so we’ll just say… watch it.

Prominent Minnesota economists gathered at the Humphrey Institute to grade the work of Henry Paulson and Ben Bernanke, and to look ahead.

This Tuesday, on a day when the federal government announced it will pump a quarter-trillion dollars into our nation’s banks, four of Minnesota’s most prominent economists were by turns caustic and cautionary in their criticism of the federal response to changing financial markets and to the economic crisis that has spread across the globe over the past few weeks. (The 90-minute program, sponsored by the Hubert H. Humphrey Institute of Public Affairs, can be seen in its entirety here, and there’s a live-blog account of the event too.)

After an interminably long-winded introduction by Humphrey Institute faculty member Robert Kudrle and a rather benign history of how and why the Federal Reserve Bank was created from Arthur Rolnick, the director of research for the Fed’s Minneapolis branch, the program sharpened considerably when U. of M. professor V.V. Chari spoke. Calling the bailout legislation passed by Congress and signed by President Bush a week ago “remarkable, and in my judgment remarkably unwise,” Chari, who is also a consultant to the Federal Reserve Bank of Minneapolis, sarcastically noted that the bill authorizes the Treasury Secretary Hank Paulson “to purchase essentially any kind of paper that the Treasury Secretary deems necessary to save the world. As far as the Fed is concerned,” Chari continued, “the Fed is now lending to anybody who meets one of two conditions: Either you are breathing and alive, or you are not breathing and dead.

“Are we doing the right thing?” Chari asked rhetorically. “That’s impossible to answer. We have done so many things over the course of the last month or so in particular, that I am convinced some of the things have got to be right—the law of large numbers dictates it. [But] the vast bulk of things we have done…will lead to either a substantial increase in the amount of risk that financial institutions will take in the future, or to extreme and punitive regulations that will prevent them from undertaking any reasonable commercial activities.”

Chari then acknowledged that he probably “would have done exactly the same things they have done” because the prevailing narrative is that the capitalist economy “rests on a thin skein of confidence, and if you break that confidence, everything comes crashingly to an end.” He said such a premise is “highly questionable” and leaves onlookers to assume that the Fed knows things it isn’t telling the general public. But that led to another biting commentary about the lack of transparency in the bailout process. “Our policymakers are treating us like children who can’t be told all the bad things that might happen. ‘Just do what we say and everything will be fine. If you don’t, then the end of Western Civilization is nigh,’” he said.

Chari pointed out that some of the Fed’s claims are demonstrably alarmist. For example, a central theme has been that credit is so tight that banks have stopped lending to viable commercial entities, or even to each other. But when he delved into the Fed’s own database, he said, he found that in the week ending October 1, “bank lending — for commercial-industrial loans, securities, mortgages — are all up. Most surprisingly, intrabank lending rose at its fastest rate in three or four years.” He concedes that the cost of such borrowing has skyrocketed and that “prices are an important indicator of where we are going. But quantity [of borrowing] is also important.

“It is entirely possible that policymakers are seeing things that the rest of us poor children are not seeing or don’t have access to,” Chari concluded. “My one plea is, tell us what you are seeing that worries you so much.” Otherwise, it may be that “policymakers are panicking for no good reason.” Either way, Chari says, “If I was in the market, I’d be panicking too.”

In an effort to mitigate Chari’s extraordinary statements, which seemed to debunk the magnitude of the crisis, program moderator Jay Kiedrowski (the former finance commissioner under Gov. Rudy Perpich) said his former colleagues at Wells Fargo told him the markets were so rattled that they weren’t receiving premiums on three-month Treasury notes — indeed, they had to pay more than the guaranteed return. And Minnesota state economist Tom Stinson noted that the market for municipal general obligation bonds has almost completely dried up, with the largest sales offerings being relatively puny issues of $40 million in North Carolina and $35 million in Kansas. The previous week, Stinson said, Kentucky had been forced to pay 6 percent interest on tax-exempt bonds. In other words, credit is indeed tight.

At this point, Kiedrowski turned to Tim Kehoe, who, like Chari, is a U. of M. professor and adviser to the Fed in Minneapolis, and asked him to explain the roots of the crisis. Kehoe cited a lack of adequate safeguards, saying that if various financial institutions were deemed “too big to fail,” then they should have better regulated. He also said that the bond rating agencies were conferring Triple-A ratings “on assets that were fundamentally bets that the housing market could do nothing but go up.” They were rated so highly, he continued, “because they had insurance against them from AIG. We didn’t understand that if something happened to the housing market, AIG would go down…that the bonds being rated Triple-A in effect were riskier than Argentinian government bonds in the 1990s.” This sucked cautious investors who backed only the highest-rated bonds into the crisis.

Kehoe then sought to put the crisis into perspective. He said that in October 1987, the stock market plunged 34 percent in two weeks, considerably more than the 24 percent the market had dropped in the past two weeks before Monday’s 900-point gain. “You all remember the Great Depression of 1987? No you don’t, because we didn’t have one. The stock market was back to where it was [before] in three years.” He said he wouldn’t be surprised if the present market rebounded in a period of three to five years. But he mentioned “one big caveat” that might prevent that from happening — “what the overreaction we are seeing in Washington [now] is going to do in the future.

“In a well-functioning financial system, we should get paid for taking risks” in bailing out these questionable mortgages and securities, Kehoe continued. “It is not clear to me that the people designing the bailout are making sure that the taxpayers are going to get paid for taking this risk.” Furthermore, bailing out these financial institutions creates a horrible precedent. “If somebody tells you to go down to the casino in Shakopee and bet, and if you win take the money home, and if you lose, don’t worry, I’ll cover it — well, then you’re going to do some pretty crazy betting,” he said. “That’s what the government is telling financial institutions in this country.”

To dramatize how much this way of thinking has already cost taxpayers, Kehoe ran through a financial calculation to determine the actual losses due to bad mortgages in the financial system. He arrived at a figure of $320 billion. “Why are we talking about these huge amounts then?” he asked, such as Rolnick’s earlier estimate that the government had poured close to $3 trillion into the system over the past six months. “We are going to not just bail out the bad mortgages. We are going to bail out lots of the bets on the bad mortgages, which are far bigger,” he emphasized. “The incentives that that gives the financial system to do things wrong in the future are overwhelming.”

Kehoe then held up a book, the result of a project he and a colleague had run for the Federal Reserve Bank of Minneapolis, joining with 24 other economists to take a look at all the economic depressions that had taken place around the world in the past century. “We find that the causes of these Great Depressions are not financial shocks. Instead they are [caused by] misguided overreactions on the part of government.” He compared the current crisis to what happened in Mexico in 1982 and Japan in 1991. He said that the government reactions guaranteed that Mexico’s finances would not grow over the next 13 years and that Japan would have no significant growth since 1991. “I don’t agree with Chari yet — I don’t think we’ve destroyed this economy to keep the sky from falling down. But the danger is that we might,” Kehoe concluded.

Kiedrowski turned the conversation to Stinson, asking Minnesota’s state economist what the implications of this federal crisis were for Minnesota. Stinson said the short answer is he doesn’t know — too much has happened in terms of the crisis and the federal response to permit reliable conclusions. But he did allow that they look at a number of different forecasting mechanisms, and “uncomfortably they are all very similar. The best guess we have is that the policy actions are unlikely to keep us from a recession.” This is hardly news, as — much to Governor Tim Pawlenty’s chagrin — Stinson claimed a statewide recession was underway months ago. He acknowledged this, held out hope that the bailout measures “may cause the recession to be less deep,” then delivered some very sobering news.

“The quarter we just finished was probably negative… In Minnesota, our sales tax receipts fell from a year ago. It is very likely we are going to have a negative outcome for the fourth quarter and it is also quite likely that we are going to have a negative quarter for the first quarter of 2009.”

However, Stinson added, “The recession is not expected to be particularly deep,” Stinson said. He added that high fuel prices had undercut the federal stimulus package this summer, but that falling fuel prices conversely should mitigate the recession over the next two quarters. Then, more bad news: “Housing is really a disaster. The construction industry is really a disaster. This year we will have had less housing starts than [any year] since World War II. And the forecasts now, looking on out, is that we will have even less housing starts in 2009 than in 2008.”

Finally, unemployment is a huge concern across the U.S.: “Private sector employment started declining last December, total employment started declining in January. It has gone down and down and has a long ways to go probably further. Everybody now is expecting to see unemployment rates in excess of 7 percent, which is a substantial jump from where they are right now.”

The final half hour was taken up with audience questions. This recap is long enough already, so I’ll bullet-point a few highlights and let you go to the videotape for more.

• Kehoe said he thinks Wells Fargo bought out Wachovia because he knew the federal government would bail out Wachovia. “I am going to interpret that what Wells Fargo did is just betting on a government bailout. They are betting that me as a taxpayer is going to pay.”
• Talking about how the political situation of an unpopular President and a looming election plays a role, Chari likened the Bush Administrations behavior on the bailout to what it did with the buildup to the Iraq war. “The consistent message is: ‘We are grownups, we understand the real problems, you don’t.’ What we found out about Iraq was, they did not have the information. In this particular instance, I hope they do have the information. All I am asking is that they disclose it. But there is this nagging feeling: Maybe they are overreacting to weird feelings in their own heads.” Stinson countered that the financial crisis is more tangible and credible than the supposed threat in Iraq. “This isn’t Mr. Chalabi reporting visions of mobile bio-weapons labs running around the streets in Baghdad…We are in a difficult situation with the President and a lot of other political leaders who had never little credibility. But I do believe the threat was credible in this situation.
• There was a general consensus that developing nations are going to be penalized by this global crisis more than economically established countries. “The Mexican peso has depreciated 30 percent. The biggest movement it has had in the last 13 years happened in the last two weeks,” Kehoe said. “It is a phenomenon we call ‘flight to quality.’ The financial problem originated in the United States,” he continued, but when the crisis hit, “when it spread throughout the whole world and makes people nervous, what do they do? Invest in the United States.” Rolnick sees a longer term problem of countries who had pinned their hopes on globalization being cut out of the mix as countries become less confident in the stability of global markets.
• How will we know when the crisis is lessening? Rolnick said it will be when housing prices begin to stabilize. Kehoe fancifully replied that it will be when “Secretary Bernanke and Chairman Paulson stop running around like chickens with their heads cut off, pulling every lever they can get their hands on.”
• Which aspect of the financial system is most in need of re-regulation? Rolnick says all investors have to take a hit whenever a bailout is enacted. Kehoe says it should be Fannie Mae and Freddie Mac since they are the institutions most regarded as being safeguarded by government resources. Chari and Stinson agree that it should be the regulation of “credit default swaps,” markets that regulate against bond defaulting. Chari believes it is used by banks and others as a dodge against capital requirements.

A CNN poll earlier this week said that 60 percent of Americans believe we are headed for a depression.

Yesterday afternoon I talked with MnIndy’s favorite business/economics journalist, Doug Henwood of Left Business Observer (who also hosts a weekly radio show on WBAI in New York and KPFA in Berkeley that’s archived at the LBO site), to see what he’s thinking about the economy and about the panic in credit markets, which so far seems unfazed by the bailout bill or by any of the other measures the Fed and the Treasury have undertaken. (We last spoke with Henwood about the economy in September, a day after Lehman Brothers went under and AIG got bailed out; that interview is here.)

“I think there’s certainly the risk of a severe recession,” Henwood tells MnIndy. “I don’t know where you put the dividing line between a severe recession and a depression. An unemployment rate of 10 percent is a severe recession. An unemployment rate of 15 percent starts looking like a depression. But that’s kind of arbitrary.

“Certainly the risk of something really nasty looks the highest it’s been since the end of World War II. There have been a couple of instances in the past where it looked like we were teetering at the edge and then managed to avoid it.

“The fact that the level of panic in the markets looks so high despite all these extraordinary interventions is a little scary. Now, on the other hand, if you want to draw some comfort from that, sometimes when people are thinking the world is coming to an end, that can be a sign that we’re close to the bottom. Or that we’re closer to the bottom than we are to the beginning.”

There’s a transcript of the interview below.

Listen: Doug Henwood on the troubles (15:21)

Minnesota Independent: I wanted to start by hearkening back to the last time we talked, a day or so after Lehman Brothers went down. You said at the time that the bad scenario–the situation we needed to watch out for–was one in which the credit markets, bank-to-bank and bank-to-business lending, dried up. That seems to be happening now as I read Nouriel Roubini and others on the crisis. What is going on with the credit markets?

Doug Henwood: They’re pretty much frozen up. The inter-bank market is virtually completely frozen. They quote interest rates, but they’re pretty meaningless because there’s no loan volume. Banks are basically refusing to deal with each other because they don’t trust each other. They’re just hoarding their cash and putting it into government securities. We’re also seeing signs that lending to business is drying up — the commercial paper market is contracting very rapidly. Commercial paper is a form of unsecured borrowing by large corporations, financial and non-financial, that is usually a very large market. And it’s usually blue-chip corporations who normally would not have a difficult time borrowing. But that market is contracting.

The Federal Reserve has just announced some support facility for the commercial paper market, so we’ll see if that does anything to kick-start the market. But it looks like there’s just a general atmosphere of panic that’s causing anybody with money to hold on to it. And it doesn’t appear that there’s any change in that psychology imminent.

MnIndy: Are people rushing to get out of credit markets part of the problem here?

Henwood: Yeah, at some point this becomes self-fulfilling, because everyone gets scared and they run away, and the running away drives down the prices and drives up interest rates and drives down stock prices. And people look at that and say, “Oh my god, it’s falling apart.” It’s a vicious cycle that keeps feeding on itself.

The whole point of government intervention in situations like this is to break that cycle — to put some sort of floor under prices and also some floor under the decline in confidence. So far, despite very extraordinary measures — not just the bailout that passed last week, but all the central bank activities around the world — to pump money into the markets, pump reassurance into the markets, very innovative lending by the Federal Reserve and other central banks … They’re clearly pulling out all stops, and have made it clear they will continue to pull out all stops, and maybe even find more stops to pull out if they haven’t exhausted the supply completely.

That has not yet put a floor under prices or provided much foundation for confidence. It may; historically, for the last couple of decades, government bailouts have always succeeded. They haven’t necessarily been able to prevent recessions, but they have been able to prevent panics from just completely unwinding everything.

But so far, not so good.

MnIndy: Why are banks freezing up in their lending to each other, in simple terms? Because they’re afraid of each other’s solvency, of all the bad paper on their books?

Henwood: Yeah … This is all really uncharted territory. The original problem, as everyone knows now, was a lot of bad mortgage debt. But on top of all those bad mortgage debts, the investment banks built an enormous structure of very heavily leveraged and opaque instruments. Now that is coming undone, and very rapidly. And nobody knows, really, how bad it is. The danger of leverage, which is a fancy word for borrowed money, is that it’s wonderful on the way up. The borrowed money can really juice things up on the upside. But when things turn down, it accelerates things as they head back down to earth.

That’s what’s happened. I think a lot of these very heavily leveraged structures are imploding. A lot of progressives who opposed the bailout, for example, say that if we just get money to the mortgage borrowers who can’t meet their obligations, then that would protect everything else. But in fact there are all these other leveraged structures that are imploding as well, and that’s what the bailout and all the other extraordinary gestures are intended to address.

But the scale is so huge, and the level of panic is so high, and the possibility of disaster is so frightening, that people are just — it’s everyone for themselves.

MnIndy: Why does the bailout package that was passed last week, and for that matter, the $630 billion in new funds that the Fed injected earlier in the week, to less notice — why have they had so little impact on this?

Henwood: It’s been a short period of time, for one. I’ve noticed that people, even as sophisticated as Paul Krugman, have been saying the bailout is a failure. Well, the thing is less than a week old, so it’s a little early to judge.

The history of past banking crises and government bailouts is that these sometimes take years to work out. Our own savings and loan rescue took several years. The Nordic banking crises of the early ’90s took several years to work out. The Japanese banking crises of the ’90s, which were never really adequately addressed with any kind of government package, took more than a decade to work out.

So we don’t really know. The whole idea is that this is supposed to make things less bad. But it can’t make things good, and it certainly can’t do anything overnight. But I think it’s also just the scale of the problem. There’s just so much leverage in the system, and this is where the regulators — the central banks, our Federal Reserve, the Treasury, independent regulatory agencies — just failed so miserably. They let this borrowing, this leveraging, all these opaque instruments, get so out of control. They could have stopped this five years ago, but they didn’t. Especially back during the Greenspan years. Greenspan thought that whatever the markets do is okay. Who is he, a mere human, to doubt the collective wisdom of the market? So he stood back and even cheerled onward as all these structures were being laid on. Now they’re being undone.

The best hope is that they can be undone at a reasonable pace so it doesn’t all come crashing down overnight, [instead] it gets spread over the course of several years. That would, I think, mitigate the economic impact somewhat.

But we’re already in a recession, I think, and it looks like it’s only going to get deeper in the coming months. We haven’t really had a deep recession in the United States since the early 1980s. We had a fairly mild one in the early ’90s, a fairly mild one in the early ’00s. We did have slow recoveries from those recessions; it took awhile to get out of them. But they were not deep. The economy did not contract greatly and the unemployment rate did not rise all that dramatically. For consumer markets in the early ’00s, there was virtually no consumer recession at all. The housing markets, which are usually hit in a recession, barreled ahead. Car sales, which are also usually hit hard in recessions, and durable goods purchases, also usually hit in recessions — that didn’t happen.

So we haven’t had a consumer recession of any kind in this country for about 17, 18 years, and we haven’t had a really broad, deep recession in about 25, 26 years. It looks like we’re overdue for one of those. It could be a shock to many people.

MnIndy: During the debate that led to the passage of the bailout bill last week, there were a lot of words of assurance that the taxpayers will do all right in the long run. The Treasury will get most of this money back, might even make money. And yet, as far as I can tell, very few concrete protections were written into the bill. What’s your understanding of the protections we have for the public investment here?

Henwood: They look — at least in the language of the bill, they don’t look all that reassuring. But one thing about the whole structure is that the bill gave the secretary of the Treasury very broad discretion to do what he wants to. Barney Frank said the other day that it also means the secretary of the Treasury can buy stock in corporations, in banks that are in trouble.

Now, the history of these bailouts — there’s a very interesting review of the history of these banking crises and bailouts that came out a couple of weeks ago from a couple of IMF economists. Their conclusion was that buying bad assets, which was Paulson’s original proposal, doesn’t work as well as just directly injecting fresh capital into banks. That certainly wasn’t Paulson’s original intention, but apparently the way Congress wrote the legislation, they can do that.

The thinking on Wall Street, as far as I can tell, is that while Paulson might not do that, Paulson will be history in a few months, and it’s highly likely that if we happen to have a new Democratic administration and a new secretary of the Treasury, they will take that equity route. It’s not only more effective, according to a survey of the historical evidence, but it also offers the taxpayers an upside. If they manage to stem the crisis, or limit its effects, the banking sector will eventually recover and the stocks of the banks will rise again.

Looking at the history of some comparable bailouts in the Nordic countries and Japan, we see that stock markets continue to fall for a year or two after a banking crisis begins, but then they begin to rise, often rather dramatically. So there is a good possibility that if the government buys stock in these troubled institutions, and they manage to turn themselves around, then the Treasury can — if not make money in this deal, at least recoup a lot of what it spent. So I think there’s a good chance that this $700 billion price tag is a ceiling, and we may actually get away with less than that. We don’t know, but that is a possibility, and a not completely outlandish possibility.

MnIndy: Doug, last question. And again, I’ll go back to our talk in September. You said then that you thought the chance this would descend to something catastrophic for the real economy, something like a depression — which, according to a CNN poll this week, 60 percent of the public thinks we’re headed for — was not a terribly near possibility. Three weeks down the road, would you still say that, or is all the panic likelier to be self-perpetuating at this point?

Henwood: You know, it’s really hard to say. I think there’s certainly the risk of a severe recession. I don’t know where you put the dividing line between a severe recession and a depression. An unemployment rate of 10 percent is a severe recession. An unemployment rate of 15 percent starts looking like a depression. But that’s kind of arbitrary.

Certainly the risk of something really nasty looks the highest it’s been since the end of World War II. There have been a couple of instances in the past where it looked like we were teetering at the edge and then managed to avoid it.

The fact that the level of panic in the markets looks so high despite all these extraordinary interventions is a little scary. Now, on the other hand, if you want to draw some comfort from that, sometimes when people are thinking the world is coming to an end, that can be a sign that we’re close to the bottom. Or that we’re closer to the bottom than we are to the beginning.

So some of the signs of panic are suggesting that maybe people are getting a little carried away with the worry. I don’t know. It’s very risky. There’s a possibility that those high levels of anxiety are actually contrary indicators.

But on the other hand, there’s a serious risk that things could come unraveled. There’s just a whole lot of problems out there, and we may not have the luxury of dealing with them in a comfortable fashion at a time we choose. They may just come crashing down all at once. If enough people think we’re heading into a depression and they stop spending money, that runs the risk of becoming self-fulfilling. It’s a scary time. There’s no doubt about it.

Wall Street answered that question for us. Now Team Obama is promoting this short documentary on the subject. There are some sound dropouts in this version of the vid; corrected version is here.

Barack Obama: “Keating Economics: John McCain and the Making of a Financial Crisis” (13:26)

Excerpt:

“In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now…. This is really an economic Pearl Harbor. That sounds melodramatic, and I’ve never used that phrase before, but this really is one. When $40 billion of Treasury bills are sold, like they were last week, 7-day Treasury bills, at a yield of 1/20 of 1 percent, that means the whole country, or a lot of the country, is at the point of putting their money under the mattress. You’re only 1/20 of 1 percent away from where it’s better to put the money under the mattress. You don’t want 300 million Americans putting their money under the mattress. This economy doesn’t work well without the lubrication of credit. And trust. And that’s been lost.”

Krugman’s first-blush reaction: “I think that Congressional leaders know that it’s a bad bill, but feel compelled to defend it, because they’re (rightly) scared of the financial consequences of a second rejection. And to some extent economists like myself are in the same position; I think I called it the ‘hold your nose caucus.’ So am I for the bill? Yuk, phooey, I guess so. And I’m very angry at Paulson for putting us in this position.”

An Alternative Minimum Tax (AMT) patch, a mental health parity bill, a package of tax break extensions, and tax breaks and relief for victims of natural disasters, specifically Hurricane Ike. These don’t sound like they have any relation to the relief of an financial crisis, but, as of today, they will all play a major role…. At the heart of the tacked-on legislation is a combination of an AMT patch and tax break extensions for corporations and renewable energy investments. Senate Democrats, most prominently Sen. Max Baucus, believe that the inclusion of these measures will help draw the support of House Republicans who previously voted down Monday’s bailout bill. However, this measure is already drawing the ire of House Democrats, including Blue Dogs and Majority Leader Steny Hoyer.

The AMT/tax break extension package was previously passed by the Senate, but House leaders, pushed by Hoyer and the Blue Dogs, intended on shelving the proposal due to its failure to abide by pay-as-you-go rules (providing offsetting cuts to go with revenue reductions). The inclusion of the package in the bailout bill will revive the animus between the two Democratic factions. Hoyer has already stated that the inclusion of the “tax extenders” is “controversial” and was included only because “they thought that’s the only way they could get it passed.” Of course, the Blue Dogs, being prominent supporters of the bailout bill, may find themselves in a situation where this compromise is the best they can get.

Lovely. And Barack Obama wants to claim the lead in forcing passage of this bill because…?

A full transcript of his prepared remarks is below the jump.

Regarding the Senate bill, the Washington Post has published an explainer that, truth be told, does not explain much–except that the Senate version appears to contain more tax cuts and loopholes, a few of them geared to the public.

Remarks of Senator Barack Obama
As Prepared for Delivery
La Crosse, Wisconsin
Wednesday, October 1st, 2008

We meet here at a time of great uncertainty. Our economy is in crisis. The dreams of so many Americans are at risk. And the American people are waiting for leadership from Washington.

On Monday, over the course of a few hours, the failure to pass the economic rescue plan in the House led to the single largest decline of the stock market in two decades.  Over one trillion dollars of wealth was lost by the time the markets closed.  And it wasn’t just the wealth of a few CEOs or Wall Street executives.  The 401Ks and retirement accounts that millions count on for their family’s future are now smaller.  The state pension funds of teachers and government employees lost billions upon billions of dollars.  Hardworking Americans who invested their nest egg to watch it grow are now watching it disappear.

But while the decline of the stock market is devastating, the consequences of the credit crisis that caused it will be even worse if we do not act and act immediately.

Because of the housing crisis, we are now in a very dangerous situation where financial institutions across this country are afraid to lend money.  If all that meant was the failure of a few big banks on Wall Street, it would be one thing.

But that’s not what it means. What it means is that if we do not act, it will be harder for you to get a mortgage for your home or the loans you need to buy a car or send your children to college.  What it means is that businesses won’t be able to get the loans they need to open new factories, or hire more workers, or make payroll for the workers they have.  Thousands of businesses could close.  Millions of jobs could be lost.  A long and painful recession could follow.

Let me be perfectly clear.  The fact that we are in this mess is an outrage.  It’s an outrage because we did not get here by accident.  This was not a normal part of the business cycle.  This was not the actions of a few bad apples.

This financial crisis is a direct result of the greed and irresponsibility that has dominated Washington and Wall Street for years. It’s the result of speculators who gamed the system, regulators who looked the other way, and lobbyists who bought their way into our government.  It’s the result of an economic philosophy that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else; a philosophy that views even the most common-sense regulations as unwise and unnecessary.  And this crisis is the final verdict on this failed philosophy – a philosophy that we cannot afford to continue.

But while there is plenty of blame to go around and many in Washington and on Wall Street who deserve it, all of us now have a responsibility to solve this crisis because it affects the financial well-being of every single American.  There will be time to punish those who set this fire, but now is the moment for us to come together and put the fire out.

I know that many of you are feeling anxiety right now – about your jobs, about your homes, about your life savings.  But I also know this – I know that we can steer ourselves out of this crisis. Because that’s who we are.  Because this is the United States of America.  This is a nation that has faced down war and depression; great challenges and great threats.  And at each and every moment, we have risen to meet these challenges – not as Democrats, not as Republicans, but as Americans.  With resolve.  With confidence.  With that fundamental belief that here in America, our destiny is not written for us, but by us.  That’s who we are, and that’s the country we need to be right now.

This is not just a Wall Street crisis – it’s an American crisis, and it’s the American economy that needs this rescue plan. I understand why people would be skeptical when this President asks for a blank check to solve a problem. I’ve spent most of my time in Washington being skeptical of this Administration, and this time was no different.  That’s why over a week ago, I demanded that this plan include specific proposals to protect the American taxpayer – protections that the Administration eventually agreed to, as well as Democrats and Republicans in Congress.

First, I said we needed an independent board to provide oversight and accountability for how and where this money is spent at every step of the way.

Second, I said that we cannot help banks on Wall Street without helping the millions of innocent homeowners who are struggling to stay in their homes.  They deserve a plan too.

Third, I said that I would not allow this plan to become a welfare program for the Wall Street executives whose greed and irresponsibility got us into this mess.

And finally, I said that if American taxpayers are financing this solution, then you should be treated like investors – you should get every penny of your tax dollars back once this economy recovers.

This last part is important, because it’s been the most misunderstood and poorly communicated part of this plan. This is not a plan to just hand over $700 billion of your money to a few banks. If this is managed correctly, we will hopefully get most or all of our money back, or possibly even turn a profit on the government’s investment – every penny of which will go directly back to you, the investor.

The rescue plan now includes those four principles. It also includes a proposal I made yesterday morning to expand federal deposit insurance for families and small businesses across America who have invested their money in our banks. This will boost small businesses, make our banking system more secure, and help restore confidence by reassuring families that their money is safe.

Even with all these taxpayer protections, this plan is not perfect. Democrats and Republicans in Congress have legitimate concerns about it. I know many Americans share those concerns. But it is clear that this is what we must do right now to prevent a crisis from turning into a catastrophe. That’s why I’ve been reaching out to leaders in both parties to do whatever I can to help pass this plan. That’s why I’ll be flying back to Washington today to cast my vote to safeguard the American economy. And to the Democrats and Republicans who have opposed this plan, I say – step up to the plate and do what’s right for the country, because the time to act is now.

I know many Americans are wondering what happens next. Passing this bill will not be the end of our work to strengthen our economy – it’s just the beginning of a long, hard road ahead.  So let me tell you exactly how I’ll move forward as President.

From the moment I take office, my top priority will be to do everything I can to make sure that your tax dollars are protected. I will demand a full review of this financial rescue plan to make sure that it is working for you. If you – the American taxpayer – are not getting your money back, then we will change how this program is being managed. If need be, we will send new legislation to Congress to make sure that taxpayers are protected in line with the principles that I have put forward. You should expect nothing less from Washington.

If we do have losses, I’ve proposed a Financial Stability Fee on the financial services industry so Wall Street foots the bill – not the American taxpayer. And as I modernize the financial system to create new rules of the road to prevent another crisis, we will continue this fee to build up a reserve so that if this happens again, it will be the money contributed by banks that’s put at risk.

This will only work if there is real enforcement and real accountability. And that starts with presidential leadership. So let me be very clear: when I am President, financial institutions will do their part and pay their share, and American taxpayers will never again have to put their money on the line to pay for the greed and irresponsibility of Wall Street. That’s a pledge that I’ll make to you today, and it’s one that I’ll keep as President of the United States.

Accountability must start with this rescue plan, but it cannot end there. Across Wisconsin – and across the country – families are sitting down at the kitchen table and making hard choices. You’re planning for your future in tough times. You’re squeezing just a little bit more out of next month’s paycheck so you can pay next month’s bills. It’s time for Washington to do the same.

We cannot mortgage our children’s future on a mountain of debt. It’s time to put an end to the run-away spending and the record deficits – it’s not how you would run your family budget, and it must not be how Washington handles your tax dollars. It’s time to return to the fiscal responsibility and pay as you go budgeting that we had in the 1990s. Many in Congress have been fighting for these commonsense principles, and I will be a President who supports them and makes sure they succeed. That’s why I’m not going to stand here and simply tell you what I’m going to spend – I’m going to start by telling you how we’re going to save when I am President.

I will go through the entire federal budget, page by page, line by line, and eliminate the programs that don’t work and aren’t needed.  We should start by ending a war in Iraq that is costing us $10 billion a month while the Iraqi government sits on a $79 billion surplus. We should stop sending $15 billion a year in overpayments to insurance companies for Medicare, and go after tens of billions of dollars in Medicare and Medicaid fraud.  We need to stop sending three billion a year to banks that provide student loans the government could provide for less. And we can end the hundreds of millions a year in subsidies to agribusiness that can survive just fine without your tax dollars, and use some of the money to help struggling family farmers.  That’s what I’ll do as President.

And we can’t stop there. We lose $100 billion every year because corporations set up mailboxes offshore so they can avoid paying a dime of taxes in America. In the Senate, I worked across the aisle to crack down on these schemes. And as President, I will shut down those offshore tax havens and all those corporate loopholes once and for all. You shouldn’t have to pay higher taxes because some big corporation cut corners to avoid paying theirs. All of us have a responsibility to pay our fair share.  That’s accountability. And that’s what we’ll have when I’m President.

As for the programs we do need, I will make them work better and cost less. I will create a High-Performance Team of experts that evaluates every agency and every office based on how well they’re serving the American taxpayer. I will save billions of dollars by cutting private contractors and improving management and oversight of the hundreds of billions of dollars our government spends on contracts. And I will finally end the abuse of no-bid contracts once and for all – the days of sweetheart deals for Halliburton will be over when I’m in the White House.

Make no mistake: we need to end an era in Washington where accountability has been absent, oversight has been overlooked, and your tax dollars have been turned over to wealthy CEOs and well-connected corporations. You need leadership that you can trust to work for you – not for the special interests who have had their thumb on the scale. And together, we will tell the Washington lobbyists that their days of setting the agenda are over. They have not funded this campaign, they won’t work in my White House, and they won’t drown out the voices of the American people when I’m President.

Now, people have asked whether the size of this rescue plan, together with the weakening economy, means that the next President will have to scale back his agenda and some of his proposals. The answer is yes and no.  With less money flowing into the Treasury, some useful programs or policies that I’ve proposed on the campaign trail may need to be delayed.

But there are certain investments in our future that we cannot delay precisely because our economy is in turmoil.  You can always put off giving your house a new paint job or renovating your kitchen, but when your roof is crumbling or your heater goes, you realize that these are long-term investments you need to make right away.

The same is true of our economy.  We cannot wait to help Americans keep up with rising costs and shrinking paychecks by giving our workers a middle-class tax cut.  We cannot wait to relieve the burden of crushing health care costs.  We cannot wait to create millions of new jobs by rebuilding our roads and our bridges and investing in the renewable sources of energy that will stop us from sending $700 billion a year to tyrants and dictators for their oil.  And we cannot wait to educate the next generation of Americans with the skills and knowledge they need to compete with any workers, anywhere in the world.  Those are the priorities we cannot delay.

As soon as we pass this rescue plan, we need to move with the same sense of urgency to rescue families on Main Street who are struggling to pay their bills and keep their jobs.  I’ve said it before and I’ll say it again:  we need to pass an economic stimulus plan that will help folks cope with rising food and gas prices, save one million jobs by rebuilding our schools and roads, and help states and cities avoid budget cuts and tax increases.  A plan that would extend expiring unemployment benefits for those Americans who’ve lost their jobs and cannot find new ones.

Beyond this stimulus, we need an economic agenda to restore opportunity for Americans and prosperity to America.  So that we’re not borrowing debt from China and buying oil from Saudi Arabia.  So that the jobs of the future don’t go to better-educated workers in India and the cars of the future aren’t made in Japan.  So that we can leave a legacy of greater opportunity to our children and their children.  That is how we will emerge from this crisis stronger and more prosperous than we were before, and that is what I will do as President of the United States.

I will begin by reforming our tax code so that it doesn’t reward the lobbyists who wrote it, but the American workers and small businesses who deserve it.  I will eliminate capital gains taxes for small businesses and start-ups, so that we can grow our economy and create the high-wage, high-tech jobs of tomorrow.

I will cut taxes – cut taxes – for 95% of all workers and their families.  And if you make less than $250,000 a year, you will not see your taxes increase one single dime – because in an economy like this, the last thing we should do is raise taxes on the middle-class.

I will reform our health care system to relieve families, businesses, and the entire economy from the crushing cost of health care by investing in new technology and preventative care.  If you have health care, my plan will lower your premiums.  If you don’t, you’ll be able to get the same kind of coverage that members of Congress give themselves. And I will stop insurance companies from discriminating against those who are sick and need care the most.

To create new jobs, I’ll invest in rebuilding our crumbling infrastructure – our roads, schools, and bridges.  We’ll rebuild our outdated electricity grid and build new broadband lines to connect America.  And I’ll create the jobs of the future by transforming our energy economy. We’ll tap our natural gas reserves, invest in clean coal, and find ways to safely harness nuclear power.  I’ll help our auto companies re-tool so that the fuel-efficient cars of the future are built right here the United States.  I’ll make it easier for the American people to afford these new cars.  And I’ll invest 150 billion dollars over the next decade in affordable, renewable sources of energy – wind power and solar power and the next generation of biofuels; an investment that will lead to new industries and five million new jobs that pay well and can’t ever be outsourced

And if I am President, I will meet our moral obligation to provide every child a world-class education, because it will take nothing less to compete in the global economy.  I’ll invest in early childhood education.  I’ll recruit an army of new teachers, and pay them higher salaries and give them more support.  But in exchange, I will ask for higher standards and more accountability.  And we will keep our promise to every young American – if you commit to serving your community or your country, we will make sure you can afford a college education.

Finally, I will modernize our outdated financial regulations and put in the place the common-sense rules of the road I’ve been calling for since March – rules that will keep our market free, fair, and honest; rules that will make sure Wall Street can never get away with the stunts that caused this crisis again.

These are the changes and reforms that we need. Bottom-up growth that will create opportunity for every American. Investments in the technology and innovation that will restore prosperity and lead to new jobs and a new economy for the 21st century. Common-sense regulations for our financial system that will prevent a crisis like this from ever happening again.

I won’t pretend this will be easy or come without cost.  We will all need to sacrifice and we will all need to pull our weight because now more than ever, we are all in this together.  What this crisis has taught us is that at the end of the day, there is no real separation between Main Street and Wall Street. There is only the road we’re traveling on as Americans – and we will rise or fall on that journey as one nation; as one people.

This country and the dream it represents are being tested in a way that we haven’t seen in nearly a century.  And future generations will judge ours by how we respond to this test.  Will they say that this was a time when America lost its way and its purpose?  When we allowed our own petty differences and broken politics to plunge this country into a dark and painful recession?

Or will they say that this was another one of those moments when America overcame?  When we battled back from adversity by recognizing that common stake that we have in each other’s success?

This is one of those moments.  I realize you’re cynical and fed up with politics.  I understand that you’re disappointed and even angry with your leaders.  You have every right to be. But despite all of this, I ask you to believe – believe in this country and your ability to change it.  I ask you what has been asked of the American people in times of trial and turmoil throughout history – what was asked at the beginning of the greatest financial crisis this nation ever endured.  In his first fireside chat, Franklin Roosevelt told his fellow Americans that “..there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people themselves.  Confidence and courage are the essentials of success in carrying out our plan.  Let us unite in banishing fear.  Together, we cannot fail.”

America, together, we cannot fail.  Not now.  Not when we have a crisis to solve and an economy to save.  Not when there are so many Americans without jobs and without homes.  Not when there are families who can’t afford to see a doctor, or send their child to college, or pay their bills at the end of the month. Not when there is a generation that is counting on us to give them the same opportunities and the same chances that we had for ourselves.

We can do this. Americans have done this before. Some of us had grandparents or parents that said maybe I can’t go to college but my child can; maybe I can’t have my own business but my child can. I may have to rent, but maybe my children will have a home they can call their own. I may not have a lot of money but maybe my child will run for Senate. I might live in a small village but maybe someday my son can be president of the United States of America.

Now it falls to us. Together, we cannot fail. And I need you to make it happen. If you want the next four years looking just like the last eight, then I am not your candidate. But if you want real change – if you want an economy that rewards work, and that works for Main Street and Wall Street; if you want tax relief for the middle class and millions of new jobs; if you want health care you can afford and education that helps your kids compete; then I ask you to knock on some doors, make some calls, talk to your neighbors, and give me your vote on November 4th. And if you do, I promise you – we will win Wisconsin, we will win this election, and we will change America together. Thank you La Crosse, God bless you, and may God bless America.