Yesterday, the Bush administration’s proposed $700 billion bailout was defeated in the House, after the Republican leadership failed to deliver their 70-100 promised votes from the conservative side.

Following the bill’s defeat, congressional conservatives took to the airwaves, explaining what should be included in the legislation in order to persuade other conservatives to vote for it. Their additions: cutting the capital gains tax and cutting corporate taxes. Watch a compilation:

From the beginning of the bailout process, conservatives have been advocating tax cuts, claiming that they will fix the current financial crisis. Today, the Washington Times editorial board reiterated this idea, saying that tax cuts will fix “some of the structural problems behind the mortgage meltdown.”

But these tax-cutting proposals do nothing to address the mortgage crisis and don’t help troubled homeowners. They amount to little more than a conservative hand-out to the wealthy and corporations.

As the Wonk Room has previously noted, most capital gains flow to millionaires. Conservatives argue that a cut in cap gains will cause capital to “flood” into the market again, thus solving the crisis. But as Michael Ettlinger notes, this wouldn’t happen because “this money would have to come from somewhere. If it’s interest bearing accounts, the banks would be hurt by as much as Wall Street benefited.”

As for corporate taxes, the U.S. rate is already in line with the G-7 average, and the U.S. raises below the OECD average in corporate tax revenue. An analysis by the Center for American Progress found that corporate profits do not trickle-down, and thus giving corporations tax breaks would not alleviate any of the pressure on the economy.

The legislation that failed to pass yesterday was already short on provisions actively aimed at helping those facing foreclosures. Any restructuring of the bill should address that shortfall – and focus on the root of the crisis – instead of turning the legislation into a gift for corporations and the richest Americans.

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UPDATE: On Hardball today, former Rep. Tom Delay proposed suspending the capital gains tax for two years. Host Chris Matthews responded by saying “you guys have wanted that forever…you’re going to reward the people that blew it.” Watch it:

Sen. John McCain (R-AZ) has openly come out against tying U.S. trade deals to labor standards. His senior policy adviser Douglas Holtz-Eakin said in an interview that “McCain would reject the use of labor and environmental issues to block trade.” Instead, “his preference would be to monitor trading partners in order to determine if they are improving their standards.”

However, in a recently released paper for the Center for American Progress, – “Labor Rights Can Be Good Trade Policy” – Christian Weller argued that the United States can improve its trade deficit, which has been at or above 5% of gross domestic product since the middle of 2004, by calling for improved labor standards from America’s trading partners:

Better labor standards in trading-partner countries, especially in less industrialized economies, can positively affect U.S. exports and U.S. imports. Better labor rights could increase demand for U.S. exports by boosting the incomes of workers overseas. And better labor standards abroad reduce the cost advantage that some countries may enjoy by paying their workers poorly.

To back this assertion, Weller provided evidence showing that, currently, the U.S. “has smaller trade deficits or even trade surpluses with less industrialized countries that have some or even strong labor rights compared to countries that have limited or no labor protections.” Among Weller’s findings:

- Trade with less industrialized countries with weak or no worker protections has substantially contributed to the increase in the U.S. trade deficit from 2000 to 2007. If the United States had only traded with less industrialized economies that had some or strong worker rights during those years, its trade deficit in 2007 would have been $123 billion smaller than it actually was.

- In 2000, U.S. exports to countries with strong or some worker rights were 182.3% greater than U.S. exports to countries with limited or no worker rights.

- U.S. imports grew faster from 2000 to 2007 for countries with limited or no labor rights than for countries with some or even strong labor rights.

The AFL-CIO asserts that “McCain is missing the point“:

Labor and environmental rules are just as much a part of the trade equation as copyright protection or investment rules. It isn’t a question of blocking trade but of making sure that trade deals are fair to workers, don’t trash the environment and provide the right incentives to businesses and governments. McCain’s trade policy would serve only one constituency: multinational corporations.

Our guest blogger is Brian Levine, a Senior Policy Adviser at the Center for American Progress Action Fund.

This morning, the Republican National Committee launched a new ad, which suggests that the only thing that could make our current economic problems worse is reckless spending, which will create “new debt.”

After watching the ad, viewers might assume that McCain is a deficit hawk who won’t create “new debt.” Nothing could be further from the truth. According to the nonpartisan Tax Policy Center, John McCain’s tax plan – which bestows lavish benefits on corporations and wealthy individuals — would increase the deficit by $5 trillion over the next ten years.

McCain claims he will balance the federal budget by 2013. The Washington Post recently called this claim “not credible,” as it is based on low-ball estimates of the cost of his tax cuts and $470 billion in unrealistic and largely unspecified spending cuts. The Post called the McCain campaign’s claimed savings “illusory.” McCain constantly talks about cutting earmarks. But eliminating every earmark in the federal budget would only save $18 billion – a small fraction of the cost of McCain’s tax plan.

The McCain budget also does not account for the new spending associated with his health care and energy plans as well as fully funding No Child Left Behind. His health care plan could cost $130 billion a year and McCain’s top economic adviser admitted that the high risk pools McCain promises to subsidize to cover those with pre-existing conditions could cost $20 billion.

If the Republican National Committee is so concerned about fiscal responsibility, they must be terrified at the prospect of their own candidate being elected.

In the aftermath of the financial crisis, conservative commentators have blamed the Community Reinvestment Act (CRA), low-income people, minorities, and past Democratic administrations for the sub-prime mortgage meltdown:

- Laura Ingraham: “When Bill Clinton decided to tell Robert Rubin to re-write the rules the Community Reinvestment Act and push all of these institutions to lend to minority communities.”

- Neil Cavuto: “I don’t remember a blaring call that said, Frannie and Freddie are a disaster, loaning to minorities and risky folks is a disaster.”

- Gov. Mike Huckabee (R-AR): “It was their harsh regulation under the Community Reinvestment Act that started this ball rolling down the hill.”

Watch a video compilation:

Congress passed the Community Reinvestment Act in 1977, requiring banks “to lend throughout the communities they serve.” In the 1990s, greater “home mortgage lending to lower income households and in lower income communities by the banks and thrifts covered by the CRA,” increased the homeownership rate “for lower income and minority families.” As a result, “property values went up dramatically in low and very low income urban” communities, “reversing severe declines during the prior two decades.”

But the Bush administration ushered an end to CRA enforcement. In 2004, Bush “announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law’s toughest standards.” Ironically, conservatives are now blaming legislation that “was losing force and relevance” just as “sub-prime lending was exploding,” for the current crisis.

As CAPAF Senior Fellow Robert Gordon argues in The American Prospect, “the real problems came from the institutions beyond the reach of the CRA“:

- CRA Only Applies To Federally Insured Banks And Thrifts: CRA did not apply to independent mortgage companies, which were responsible for “half of sub-prime loans.” Only about “one in four sub-prime loans were made by the institutions fully governed by CRA.”

- CRA Institutions Engaged In Less Dangerous Lending: As the president of the San Francisco Federal Reserve points out, “independent mortgage companies, which are not covered by the CRA, made high-priced loans at more than twice the rate of the banks and thrifts.”

- CRA Does Not Encourage Or Condone Bad Lending: According to Ellen Seidman, Director of the U.S Treasury Department’s Office of Thrift Supervision from 1997 to 2001, CRA-covered institutions were warned “that badly underwritten subprime products that ignored consumer protects were not acceptable. Lenders not subject to CRA did not receive similar warnings.”

While most economists blame the current crisis on market failure and sparse regulation, conservatives are attempting to elude responsibility by smearing the victims of predatory lending. As Matt Yglesias points out, “it was conservatives who watched as the housing bubble developed and it was conservatives who blocked any action to try to ensure a soft landing once the bubble popped….It was conservatives who blocked efforts to curb predatory lending and it was conservatives who blocked efforts to investigate fraud more robustly.”

Now, the preachers of ‘personal responsibility’ are ducking for cover.

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The events of the last two weeks have illustrated the volatility of America’s financial markets. Today, the Dow closed below where it was on George W. Bush’s first day in office.

And yet, John McCain still supports a Bush-style Social Security privatization plan that would encourage Americans to risk their retirement benefits on the stock market.

Social Security provides the majority of income for most seniors and is a vital insurance system for disabled workers and dependent spouses. Income provided by Social Security keeps 13 million seniors from living in poverty.

McCain’s proposal, which would allow workers to divert their social security payments into private accounts, is risky, expensive, a financial boon to Wall Street, and would undermine, not shore up, the long-term solvency of Social Security.

This is a debate that’s been had before. When Bush proposed a similar plan in 2005, analysts were able to assess its impact and debunk its myths. Here’s what they concluded:

Private accounts are risky: Bush and McCain tout the potential for higher returns as a reason to shift Social Security payments into the stock market. But an analysis by Robert Shiller of Yale University of a standard “lifetime” personal account, as envisioned by Bush and McCain, show they actually lose money one-third of the time. Furthermore, projections of rosy growth used to justify personal accounts stand in stark contrast to the projections of slower growth that indicate there may be an eventual shortfall in Social Security.

Private accounts are expensive: Bush’s 2005 plan, supported by John McCain, to divert Social Security payments to private accounts, would have unnecessarily added an additional $17.7 trillion to the national debt by 2050, according to an analysis by James Horney and Richard Kogan. This borrowing was needed entirely to fund the creation of private accounts, not to shore up Social Security solvency.

Private accounts provide a boon for Wall Street: Wall Street firms advocate Social Security privatization for a reason: they’ve got a lot to gain. A 1997 estimate by actuary David Langer for the Washington Post projected that Wall Street firms would make $240 billion in fees during the first 12 years of a privatization scheme– this number is undoubtedly much higher now.

Private accounts won’t fix Social Security: The CBO recently projected that Social Security will continue to pay full benefits for the next 30 years. After 2041, the system will pay out 78% of benefits. Private accounts wouldn’t address this shortfall, they would cause more damage by requiring benefit cuts and shortening Social Security’s long-term outlook.

What McCain won’t tell you: The cost of closing the long-term shortfall in Social Security is less than the cost of extending Bush’s tax breaks for the richest 1% of Americans, as John McCain has proposed.

But McCain seems less interested in saving Social Security than gambling it away.

During the presidential debate Friday night, Sen. John McCain (R-AZ) was asked for “major ways” in which his approach to the presidency has changed, in light of the budget problems potentially associated with the $700 billion federal bailout bill working its way through Congress.

McCain responded to the question by advocating a “spending freeze on everything but defense, veteran affairs and entitlement programs.”

McCain did qualify his answer a bit with his next statement, adding that he would fund “several other vital issues,” which remained unnamed. But if McCain were to freeze “everything” then, among other things, he would allow inflation to eat away at:

- Funding to the 908,412 children in the federal Head Start program.

- Funding for the 6 million students who receive federal Pell Grants for college.

- The $5.1 billion spent on the Low-Income Home Energy Assistance Program (LIHEAP), which provides households with financial “assistance for their home energy bills.”

- Unemployment benefits, even though unemployment is at a seven-year high of 6.1%.

- The $24.6 million currently funding “110 national park improvement projects and programs.”

This list is almost endless. Would McCain freeze spending on foreign aid to Israel and Columbia? Is he going to freeze the Community Development Block grants program or funding for NASA? Will he freeze funding to infrastructure projects, like those undertaken by the Federal Highway Administration?

McCain needs to be asked what, in the end, he considers a “vital issue” worth spending federal money on, and what programs would fall victim to his massive spending freeze.

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According to the text of the draft bailout bill, the “troubled assets” that the Secretary of the Treasury is given $700 billion to purchase are not only mortgage-backed securities, but “any securities, obligations, or other instruments that are based on or related to such mortgages.” And Paulson is actually given authority to blow past even that vague limitation, since “troubled assets” also include:

Any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, of the appropriate committees of Congress.

On October 11, 2002, the Senate approved the following:

The President is authorized to use the Armed Forces of the United States as he determines to be necessary and appropriate in order to–
(1) defend the national security of the United States against the continuing threat posed by Iraq; and
(2) enforce all relevant United Nations Security Council resolutions regarding Iraq.

Digg it!

UPDATE: Paulson — and his successors — “is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act” . . . “without limitation.”

UPDATE II: A Wonk Room reader writes in that Paulson’s authority is restrained because he has to consult with Congress. In fact, the Iraq war resolution required the same:

In connection with the exercise of the authority granted in subsection (a) to use force the President shall, prior to such exercise or as soon there after as may be feasible, but no later than 48 hours after exercising such authority, make available to the Speaker of the House of Representatives and the President pro tempore of the Senate his determination that

(1) reliance by the United States on further diplomatic or other peaceful means alone either (A) will not adequately protect the national security of the United States against the continuing threat posed by Iraq or (B) is not likely to lead to enforcement of all relevant United Nations Security Council resolutions regarding Iraq, and

(2) acting pursuant to this resolution is consistent with the United States and other countries continuing to take the necessary actions against international terrorists and terrorist organizations, including those nations, organizations or persons who planned, authorized, committed or aided the terrorists attacks that occurred on September 11, 2001. . . .

The President shall, at least once every 60 days, submit to the Congress a report on matters relevant to this joint resolution, including actions taken pursuant to the exercise of authority granted in section 2 and the status of planning for efforts that are expected to be required after such actions are completed, including those actions described in section 7 of Public Law 105-338 (the Iraq Liberation Act of 1998).

UPDATE III: The oversight provisions in the Emergency Economic Stabilization Act of 2008 include reports from the Treasury Secretary; an Special Inspector General appointed by the President; an Oversight Board of cabinet-level Presidential appointees, including the Treasury Secretary; reports and audits by the Comptroller General, appointed by the President; reports from Office of Management and Budget (White House) and the Congressional Budget Office; and a bipartisan Congressional Oversight Panel appointed by Congressional leadership.

UPDATE IV: The House defeated the bill 225-208.

During Friday’s presidential debate, Sen. John McCain (R-AZ) argued that if the United States lowered its corporate tax rate, American businesses would “be able to create jobs, increase your business, make more investment”:

Right now, the United States of American business (OOTC:ARBU) pays the second-highest business taxes in the world, 35 percent. Ireland pays 11 percent. Now, if you’re a business person, and you can locate any place in the world, then, obviously, if you go to the country where it’s 11 percent tax versus 35 percent, you’re going to be able to create jobs, increase your business, make more investment, et cetera. I want to cut that business tax. I want to cut it so that businesses will remain in — in the United States of America and create jobs.

Watch it:

The Irish corporate tax stands at 12.5%, not 11, but that’s almost besides the point. McCain’s argument is full of so many other holes, you can drain spaghetti with it:

- America’s Effective Tax Rate Is Comparable To Other G7 Nations: According to a recent U.S. Treasury report, the effective tax rate on equipment financed by equity is 24 percent, the same as the G-7 average. The rate on equipment financed by debt is minus 46 percent, meaning that the government actually subsidizes these investments rather than taxing them.

- America Is The Number One Country To Do Business: The World Economic Forum’s Global Competitiveness Report for 2007-2008 concluded that the United States is most business friendly, followed by Switzerland, Denmark, Sweden, Germany, Finland and Singapore. Ireland came in at number 22.

- Two-Thirds Of Corporations Did Not Pay Taxes: According to last month’s Government Accountability Office (GAO) report, between 1998 and 2005 “about two-thirds of corporations operating in the United States did not pay taxes” because of a variety of corporate tax loopholes.

- US Raises Less Taxes From Corporations Than Ireland: In the United States, corporate revenues as a percentage of GDP was about 2.2 percent; Ireland raised close to 4 percent.

The past eight years of Bushonomics have refuted McCain’s trickle-down argument. In fact, from 2000 to 2006, increased corporate profits did not grow middle class incomes — as “corporate profits grew nearly four times as fast as GDP,” increasing by an estimated 66 percent, the median household income fell by $963, even after inflation.

Unfortunately, rather than “create jobs,” corporations retained their extra profits, invested little in new commercial structures such as factories and office buildings, bought back their own stock, and “increased dividends rather than expand capacity.”

Digg It!

Appearing on CNN’s post-debate coverage is a graphic with the text:

FACT: McCain says he would lower business taxes in order to encourage job growth.

McCain did say during the debates, “I want to cut that business tax. I want to cut it so that businesses will remain in — in the United States of America and create jobs.”

But the real fact is this: according to the Congressional Budget Office, a corporate tax cut “does not create an incentive for [corporations] to spend more on labor” and “is not a particularly cost-effective method of stimulating business spending.” And McCain opposes eliminating the tax loopholes that encourage companies to send jobs overseas.

CNN should have indicated it was posting a “fact” about a “lie.” Is that a lact? A flie?

Yesterday, negotiations over the $700 billion federal bailout imploded after House Republicans, led by Rep. Eric Cantor (R-VA) and Rep. John Boehner (R-OH) circulated an alternative plan that “advocates tax cuts and relaxed regulations.”

This is the second alternative plan offered by conservatives. This week, the Republican Study Committee (RSC) released its own plan, which is also being supported by former Speaker of the House Newt Gingrich.

Both of these plans are fundamentally flawed, and fail to address the causes of the current financial crisis.

The Boehner/Cantor Plan, among other provisions, calls for the removal of “burdensome regulatory and tax barriers” to pull capital into the market:

Instead of injecting taxpayer funds into the market to produce liquidity, private capital can be drawn into the market by removing burdensome regulatory and tax barriers that are currently blocking private capital formation. In short, too much private capital is sitting on the sidelines during this crisis, and it is well past time to unleash it.

This plan is essentially a non-starter. It doesn’t address the underlying problems in the mortgage market by allowing any restructuring of bad mortgages. Also, the plan’s provision to “insure mortgage backed securities (MBS) through payment of insurance premiums” is “akin to selling homeowners insurance in New Orleans after the dikes broke.” Only those financial institutions with the very worst assets would be willing to participate.

Cantor has admitted his plan has a problem, and said “he would support giving the Treasury secretary some authority to purchase the most troubled securities linked to failing mortgages,” because “some of the ‘exotic sliced and diced’ mortgage-backed securities at issue for the financial institutions are of such little value.” But the plan still does nothing to restructure the “sliced and diced” mortgages.

For its part, the RSC proposed cutting the capital gains tax to zero and privatizing Fannie Mae and Freddie Mac, in a “market based alternative” to the bailout. The RSC solution also calls for the suspension of mark-to-market accounting.

As previously noted on the Wonk Room, zeroing the capital gains tax would mostly benefit the wealthy and not draw capital into the market. Meanwhile, privatizing Fannie and Freddie incorrectly places the blame for the crisis on the GSE’s alone. While Fannie and Freddie did invest in bad mortgages, Bush administration regulators failed to prevent such practices.

Moreover, the collapse of Fannie and Freddie “was patently not the beginning of the latest leg of this crisis.” Instead, that honor belongs to the unregulated credit default swaps issued by insurance giant AIG that AIG subsequently couldn’t back up. The elimination of mark-to-market accounting would simply allow U.S. financial institutions to continue pretending that their bad assets are good, which would not fix the underlying problem of toxic mortgages pervading the market.

All in all, the conservatives have proposed deregulation to get the U.S. out of a problem caused by deregulation – with some tax cuts for the wealthy thrown in as a bonus.

Our guest blogger is Michael Ettlinger, Vice President for Economic Policy at the Center for American Progress Action Fund.

The late-arriving proposal from a group of arch-conservative Congressional Republicans for dealing with the financial crisis is a disaster on two fronts. First, right now the credit markets worldwide are close to collapse and it may well not be long before we start seeing consequences in the rest of the economy where most of us work, use credit cards, buy consumer goods and purchase houses — with companies not making payrolls and all manner of credit disappearing. Congressional leaders were right in not passing the administration’s flawed bailout proposal precipitously, as the Center for American Progress discussed here.

But the responsible parties in Congress were moving the administration towards compromise, and it appeared that legislation that includes meaningfully addressing the underlying problem of home and asset values was very close. The last minute proposal by the defecting Republicans has, however, essentially put the discussion back to square one. That is a huge problem.

Also, the new proposal would be absolutely, totally and completely ineffective. Details are scarce at this point, but if reports are to be believed, its central components are:

1. Tax cuts for the rich and corporations (surprise!)
2. Insurance for mortgage-backed securities
3. Deregulation (sound familiar?)

Why each of these components would be ineffective is discussed below. Read more

Nancy Pfotenhauer, a senior economic adviser to Sen. John McCain (R-AZ), is the former top lobbyist for Koch Industries, the right-wing corporate polluter. Her current husband, Kurt Pfotenhauer, is the CEO and top lobbyist of the American Land Title Association, “the national trade association and voice of the abstract and title insurance industry.” Until this year, Kurt was the senior vice president and top lobbyist of the Mortgage Bankers Association (MBA), “the national association representing the real estate finance industry.”

Pfotenhauer, like his wife, is part of Washington’s revolving-door lobbyist culture. Prior to joining MBA in May 2002, Pfotenhauer was chief of staff to Sen. Gordon Smith (R-OR) for five years (in 2006, Smith received $14,000 in campaign contributions from the MBA PAC). Previously, Pfotenhauer was a lobbyist for United Parcel Service (UPS) for five years, and before that was chief of staff to Rep. Denny Smith (R-OR).

Kurt Pfotenhauer’s past and present clients are, of course, the real estate finance corporations that are at the center of the present financial crisis. Their predatory and deceptive lending practices in pursuit of irrational profit margins — in concert with hedge funds and investment banks who blew up toxic mortgages into towers of unregulated debt — have threatened the fiscal underpinnings of the global economy.

For years, they worked in concert with the Bush administration to block, weaken, and delay regulatory reform by Congress, such as the Predatory Mortgage Lending Practices Reduction Act of 2007, which died in the Senate. Last year, Pfotenhauer testified before Congress against the Emergency Home Ownership and Mortgage Equity Protection Act, a bill that would have allowed judges to restructure toxic mortgages to allow people to keep their homes — and would have helped prevent the current financial meltdown and bailouts. Read more

Last night, President George Bush addressed the nation, in an attempt to explain the current financial crisis and to build support for the administration’s $700 billion bailout proposal. In the address, Bush said that the crisis began after “a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business,” which led to easy credit and then to the housing bust. Watch it:

Bush, though, left out a large part of the equation. The problem isn’t simply that too much foreign investment came into the U.S. because of businesses. It’s that the U.S. had to borrow money from foreign nations at an alarming rate, after it dug itself into debt paying for the Iraq War while cutting taxes. This, as well as lax regulation and oversight of Wall St. on the part of the administration, contributed to the credit troubles.

A significant reason for the current $9.6 trillion federal debt has been the Iraq War. And while the Bush administration has been spending $12 billion a month in Iraq, it’s also been cutting taxes. The Center for Budget Policy and Priorities (CBPP) says Bush’s tax cuts accounted for 42% of the “unprecedented” explosion of the deficit in recent years, which of course adds to the debt. The total cost of the full cuts amounts to about $400 billion per year.

Thus, the U.S. had to turn to foreign investment for financing. Currently, 45% of U.S. Treasury securities are owned by foreign nations, with the most owned by China and Japan. Other nations owned less than 20% of these securities as recently as 1994.

Bush simply left out of his assessment the fact that much of the foreign investment went to finance a war and tax cuts that couldn’t be paid for.

Tonight, during her interview with Katie Couric, Gov. Sarah Palin (R-AK) dodged repeated inquiries about Sen. John McCain’s (R-AZ) regulatory record. When pressed by Couric “to name a specific example, in his 26 years of pushing for more regulation,” Palin fumbled:

COURIC: I’m just going to ask you one more time – not to belabor the point. Specific examples in his 26 years of pushing for more regulation.

PALIN: I’ll try to find you some and I’ll bring them to you.

Watch it:

Palin may be looking for the nonexistent. Despite calling for more regulation and oversight in the wake of the Wall Street’s collapse, throughout his long career in the Senate, McCain, and his top campaign advisers, dutifully championed deregulatory policies.

In fact, during an interview with CBS News just this Sunday, McCain said he did not “regret” championing the deregulation of Wall Street, arguing that “the deregulation was probably helpful to the growth of our economy.”

In 1999, McCain supported deregulatory legislation championed by Sen. Phil Gramm, a top McCain adviser and the “odds-on favorite to be the Treasury Secretary.” The Gramm-Leach-Bliley Act “destroyed the Depression-era barrier to the merger of stockbrokers, banks and insurance companies” and ended any “significant regulation of the financial community.”

Calling the Bush-Paulson bailout proposal a “dead loser” and a “very, very bad idea,” Newt Gingrich is offering his own plan: eliminate the capital gains tax, suspend mark-to-market accounting, repeal Sarbanes-Oxley, and pass an “all-of-the-above” energy bill. The Wonk Room has discussed in detail how Gingrich’s energy agenda wouldn’t fix gas prices but would hasten a climate catastrophe. Yesterday, Michael Ettlinger, Vice President for Economic Policy at the Center for American Progress Action Fund, explained why eliminating the capital gains tax “would in fact be a disaster for the market.”

Today, guest blogger Ed Paisley, Vice President for Editorial at the Center for American Progress Action Fund, explains why Gingrich’s “mark-to-market” proposal — embraced today by conservatives in Congress — would also be disastrous.

Former Speaker of the House Newt Gingrich the other day made the claim that mark-to-market accounting — the kind of free market-oriented accounting rule he and other conservatives should love — is at fault for the collapse of our financial institutions. In fact, it was a lack of government oversight — cheered on by conservatives like Gingrich — led us to this financial crisis. Now Gingrich wants us to compound the problem by removing market transparency.

Presumably, free marketeers would want commercial and investment banks to account for the value of their assets according to their value in the open market — what is known as “mark-to-market” accounting. Otherwise, how can we know what the true value of those assets are? And what better way than market-based accounting rules. That was the reasoning behind the decision last year by the Financial Accounting Standards Board to introduce mark-to-market accounting.

Gingrich – and now the conservative Republican Study Committee in Congress – want to end mark-to-market accounting for long-term assets as part of their alternative to the $700 billion financial rescue package proposed by Bush administration Treasury Secretary Henry Paulson this past weekend. Gingrich and the RSC claim that no market exists for long-term assets such as mortgage-backed securities to be priced in.

That’s wrongheaded policy on two counts. First, as equity strategist Christopher Woods, an expert on the reasons behind Japan’s two-decade long economic funk, pointed out recently in the Wall Street Journal, pretending that the value of long-term assets are more valuable than the market says they are would result in financial institutions “warehousing bad debts, Japan-style.” Presumably, conservatives don’t want to engineer the non-recovery of our economy akin to what Japan has suffered since the collapse of its real estate markets in the late 1980s. Read more