Some said it couldn't be done. Others doubted his resolve. But it looks as though President George Bush has broken his own record this week - the largest budget deficit on record. Woohoo! The Congressional Budget Office (CBO) has released new estimates on the federal budget deficit for FY 2008 - which they believe will come in at an incredible $438 billion, or 3.1 percent of GDP. This shatters Bush's previous record set in 2004 of $413 billion.

CBO Director Peter Orszag blogged about the estimates yesterday:

CBO released its Monthly Budget Review today. Based on data from the Daily Treasury Statements, CBO estimates that the federal budget deficit was about $438 billion in fiscal year 2008, $276 billion more than the shortfall recorded in 2007. (The Treasury Department will report the actual deficit for fiscal year 2008 later this month.)

Relative to the size of the economy, that deficit was equal to 3.1 percent of gross domestic product, up from 1.2 percent in 2007. (The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.) The $438 billion figure is about $31 billion more than the $407 billion deficit CBO projected this summer, primarily because revenues are lower than we anticipated and spending for defense and deposit insurance is turning out to be higher.

An Associated Press article published today rips into President Bush and his administration's fiscal record, noting "virtually every administration promise on the deficit has failed to come to pass," and "a later promise to cut the deficit in half by the time Bush leaves office is in tatters, and virtually no one takes seriously his proposed path to a balanced budget by 2012." Ouch!

Related Resources:
AP Story: U.S. Budget Deficit Hits Record $438 Billion For Year
CBO Blog: Monthly budget review: FY 2008 deficit of $438 billion
Statement of Senate Budget Committee Chair Kent Conrad (D-ND)

Stan Collender ponders the bottom line of the Troubled Asset Relief Program (AKA "TARP", AKA "Wall Street Bailout", AKA "financial rescue", AKA "Just Trust Us") and what it means for the next administration inthis week's Fiscal Fitness column.

Because of TARP, my estimate is that the budget deficit could easily reach or exceed $1 trillion this year. This includes my estimate of a $600 billion? deficit before TARP and an additional $400 billion afterwards. A deficit of? that size would be between and 6 percent and 7 percent of gross domestic? product, a level that hasn't been reached since fiscal 1942-1946 when the? United States was fighting and paying for the direct costs of World War II.

But the bigger cost of TARP may well be less in dollar terms than in? making progress in other areas. A $1 trillion, 7-percent-of-GDP deficit? likely will chill most of the spending and taxing plans of whoever is? elected as hoped-for tax cuts and spending increases have to be delayed.? There could even be a big push for deficit reductions if the market reacts? very negatively to the 1-year, 10 percent increase in the national debt and? interest rates are pushed higher by the bond market vigilantes that were so? evident at the start of the Clinton administration.?

In a stark reversal of Monday's vote, the House approved the Senate-passed version of a financial market rescue bill. By a vote of 263 to 171, the House passed a $700 billion plan to buy up troubled financial assets, patch the AMT for a year, and extend dozens of expiring tax cuts (some for a year, some for two). While the final cost to taxpayers of the bailout is impossible to estimate, the tax portion of the bill will reduce revenues by $107 billion.

Moments after passage, President Bush signed the bill into law.

President Bush signs the Emergency Economic Stabilization Act of 2008 in the Oval Office after the House passed the $700 billion financial bailout bill at the White House in Washington, Friday, Oct. 3, 2008. (AP Photo/Charles Dharapak)

Citizens for Tax Justice released a timely report yesterday examining the special tax breaks and subsidies that are currently handed out to Wall Street firms (and other companies). One in particular this report dissects is the special low rate on capital gains and dividends.

The report's introduction frames the relationship between current proposals to cut capital gains further as a solution to alleviate the financial turmoil:

Americans are in no mood to subsidize Wall Street. This became clear Monday, when the House of Representatives rejected the financial rescue plan that was supported by leaders from both parties as well as the President. Reasonable people can differ on whether the government should step in to prop up the financial system right now. There are progressives and conservatives on both sides of that issue. But what seems indisputable is that Wall Street has mismanaged its affairs and Americans are in no mood to pay for its mistakes.

...

Oddly, the conservative Republicans who say they oppose the financial rescue plan because they don't want to subsidize Wall Street have simultaneously called for more subsidies for Wall Street in the form of a further reduction in taxes on investment profits! We think these GOP conservatives are seriously confused.

The report concludes by citing a reform proposal that would go a long way to make the tax code more simple, fair, and progressive - a reform that happened to be supported by Ronald Reagan:

If House Republicans are sincere about protecting middle-income taxpayers and not giving away the store to Wall Street, then they should abandon their proposed tax cuts for Wall Street. Instead, they should join us in advocating a return to President Reagan's approach of taxing investment profits at the same income-tax rates as wages and other kinds of income.

Great news from the technology trade pubs today - FedSpending.org has been selected by PC World Magazine as one of the top five sites out there that will raise your political awareness. Woohoo!

Below is the screenshot of the article:

Read the full article: 5 Sites That Will Boost Your Political Awareness

Last night, the Senate approved a financial rescue (or Wall Street bailout) bill, HR 1424, by a 74-25 vote. As we noted yesterday, the package includes not only a provision that grants the Treasury Secretary $700 billion to purchase troubled financial assets, but also a package of tax cuts passed previously by the Senate.

According to the Congressional Budget Office (CBO), the ten-year cost of the tax cuts, which include a fully-offset set of tax incentives for renewable energy production; an extension of dozens of miscellaneous individual and business tax cuts; and a $64 billion patch for the Alternative Minimum tax, would total $107.1 billion. The CBO, however, indicates that the cost of the asset purchase program is "impossible at this point to provide a meaningful estimate of the ultimate impact on the federal budget from enacting this legislation," but would be "substantially smaller than $700 billion." Nor can CBO estimate the cost of increasing FDIC limits on insured deposits.

Congressional Budget Office: Letter to Honorable Christopher J. Dodd (estimated budgetary effects)
Joint Committee on Taxation: Estimated Budget Effects of the Tax Provisions Contained in an Amendment in the Nature of a Substitute to HR 1424

Neil Gordon blogs over at the Project on Government Oversight about a troubling provision in the current debate over a bailout proposal for Wall Street that would give Secretary of the Treasury Hank Paulson the ability to waive provisions and requirements of the Federal Acquisition Register (FAR), the set of regulations that govern how the feds run government contracting. Gordon points out a very disturbing irony of this provision:

This would have enabled the Treasury Secretary to award billions of dollars in sole-source contracts to private asset managers firms and financial consultants, even those with a direct financial interest in the bailout. In addition, the Secretary could waive other FAR provisions that protect taxpayers.

Gordon also points out the fascinating analysis released Monday from the Center for Responsive Politics which showed a relationship between campaign contributions from the finance, insurance, and real estate sectors and the way House members voted on the bailout on Monday. The data might shock you - it shocked me, although I suppose after so many years working in Washington, these things should stop surprising me.

It seems that House members who voted for the bill on Monday have collected about 51 percent more in campaign contributions from the affected industries (finance, insurance and real estate) than those who voted against it. Among Democrats, that discrepancy between bill supporters and opponents is an even more astonishing 88 percent.

I wonder if any of those contributions came from companies who may gain from a government contract to fix this mess? Gulp!

If Monday's Wall Street bailout bill, which the House failed to pass, was, as House Minority Leader John A. Boehner (R-OH) called it, a "crap sandwich," then the Senate's latest offering is a crap sandwich platter: a crap sandwich served with a heaping side of tax cuts and an FDIC deposit limit increase for desert.

The Senate will vote on a package today that includes the bailout legislation rejected by the House on Monday, a Senate-approved bill containing some $120 billion in tax cuts, and an increase in the FDIC-insured deposit limit from $100,000 to $250,000 through the end of 2009, with premium increases funded by the governemnt. The tax language in the new financial rescue bill will come in the form of an amendment that replicates a Seante-passed tax package (HR 6049) that contains an AMT patch and an extension of dozens of expiring tax cuts. The move is intended to entice more House Republicans to vote for the bailout. House Democrats, however, object to the tax bill because the cost of extending the expiring tax cuts remains only partially offset, but like Winnie the Pooh and honey, Republicans just cannot say "no" to a tax cut.

The text of the bill can be found here.

The Washington Post: Lawmakers Revise Rescue Plan
CQ Politics: Financial Rescue Vote Set for Wednesday in Senate
AP: Hoyer, Blunt hopeful of progress on rescue bill
Roll Call: Senate to Move Next on Bailout

Image by Flickr user disneyandy used under a Creative Commons license

With all the action recently on the financial sector bailout, it almost slipped our notice that Congress has finalized the FY 2009 appropriations process, at least through March 6 of next year. Last week, on Wednesday (Sept. 24), the House passed its package of three appropriations bills (Defense, Homeland Security, and Military Construction-VA), along with a continuing resolution (CR) that will cover all the other sections of the government until March 6, 2009. The vote was 370-58. The Senate passed the House proposal over the weekend on Saturday by a vote of 78-12.

The CR was put together and passed in less than a week, with little transparency or time to review specific provisions, earmarks, and funding levels. The bill level-funds most government programs outside of the three individual security bills that were included and a few select programs and priorities in need of more immediate funding. These include the Low Income Home Energy Assistance Program (LIHEAP), which received a $5.1 billion increase. This is more than double the $2.5 billion appropriated in FY 2008 and finally brings the program up to its authorized funding level. There is also $22.9 billion in emergency funding for disaster relief and $7.5 billion to support a $25 billion loan to the U.S. auto industry.

Even though this was the result of the appropriations process that everyone was expecting for most of this year, the result that Democratic leaders themselves had announced early on as a deliberate strategy, it is still pretty disappointing. In fact, it might be more disappointing because it was pre-ordained by Reid, Pelosi, and others on the Hill early on this year. Congress is supposed to pass appropriations bills on time. In fact, it is their primary responsibility. They have repeatedly failed to do this over the last decade regardless of circumstances, regardless of who controls Congress, and this year we've reached the point where they aren't even trying anymore. How can we expect them to enact a solution to the financial sector crisis if they can't even complete their basic job responsibilities?

Congressional leaders were left scratching their heads, contemplating what to do next after the House failed, by a vote of 205-228 to approve a $700 billion plan to buy up troubled financial assets that are purportedly threatening the financial markets.

CQ Politics reports that although the House voted to adjourn, they will return Thursday to continue working on assuaging the angst of financial markets. Calling the issue "much too important to simply let fail," Treasury Secretary Henry Paulson vowed to return to working out a plan to bailout Wall Street. However, legislators have been at best vague in spelling out what to expect in the next few days. As Speaker of the House Nancy Pelosi said, "stay tuned."

Members of the House Democratic Leadership, from left, House Majority Leader Rep. Steny Hoyer, D-Md., House Speaker Nancy Pelosi, House Democratic Caucus Chair Rep. Rahm Emanuel, D-Ill. and House Majority Whip James Clyburn, D-S.C. meet reporters on Capitol Hill in Washington, Monday, Sept. 29, 2008. (AP Photo/Lawrence Jackson)

This post is an updated version of our previous post on a summary of the $700 billion Wall Street bailout plan that the House rejected (205-228) this afternoon.

Size: Up to $700 billion
• $250 billion would be immediately available to Treasury to buy up troubled assets
• Another $100 billion would be available to Treasury "upon report to Congress"
• The final $350 billion would be available upon request of the presidentt, which Congress could reject within 15 days . The rejection could then be vetoed by the president.

Mechanics
• The government could purchase mortgage-backed securities and other troubled assets and their derivatives. With support from the Fed, it could also purchase other troubled assets from investment, commercial, and smaller community banks, credit unions, pension funds, and local governments.

Taxpayer Protection
• Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock, if the firm becomes profitable.
• Participating firms would be subject to executive pay restrictions, implemented through the tax code. The plan would also bar firms from giving "golden parachutes" to executives leaving participating firms for reasons other than retirement
• The Treasury Secretary would have the authority to establish an insurance fund not unlike the FDIC to guarantee troubled assets; premiums would be paid for by private firms
• If, after five years, the Congressional Budget Office and the Office of Management and Budget agree that the government has not profited from the sale of troubled assets, the president must submit to Congress a plan to recuperate the cost of the plan from the financial industry

Foreclosure Protection
• Treasury can encourage mortgage servicers to modify troubled mortgages
• Requires federal entities that own mortgages to develop a plan to mitigate the foreclosure rate
• Relaxes requirements for eligibility for the Hope for Homeowners program

Oversight and Transparency
• A bipartisan oversight board appointed by members of both parties in Congress would be created
• An inspector general would monitor Treasury decisions, and the Government Accountability Office would regularly audit the program
• Treasury would be required to make transactions made through the troubled asset program available publicly online
• There would be conflict-of-interest rules for firms hired by the Treasury to help run the program
• There would be judicial review of Treasury decisions

Executive Power Enhancement
• An affirmation of the SEC head to suspend mark-to-market accounting, thus allowing firms to report asset values different from what the market believes them to be
• Allows Treasury Secretary to suspend federal contracting rules

Not Included
• The package does not have language that would allow bankruptcy judges adjust mortgage rates or principal
• No profits from the scheme would flow to an affordable housing trust fund

Media reports and a press release from House Speaker Nancy Pelosi (D-CA) indicate that Congressional leaders and the White House have agreed to a package of measures designed to prevent a financial market meltdown. An official announcement of agreement is expected tonight, and final details of the plan remain unsettled. Here are the package's main provisions:

Size: Up to $700 billion
• $250 billion would be immediately available to Treasury to buy up troubled assets
• Another $100 billion would be available to Treasury "upon report to Congress"
• The final $350 billion would be available upon request of the president. Media reports, however, are inconsistent on this. Some are reporting says that the money would be available "only upon action by Congress," while others say it would be available upon presidential request, which Congress could reject. The rejection could then be vetoed.

Mechanics
• The government could purchase mortgage-backed securities and other troubled assets from investment, commercial, and smaller community banks, credit unions, pension funds, and local governments.

Taxpayer Protection
• Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock.
• Participating firms would be subject to executive pay restrictions, although the details remain vague
• The Treasury Secretary would have the authority to establish an insurance fund not unlike the FDIC to guarantee troubled assets; premiums would be paid for by private firms
• A fee may be imposed upon the banking industry to pay for the bailout if the government loses money on the purchase of these toxic assets. Reports on this provisions vary, an no details have been announced

Foreclosure Protection
• Treasury can renegotiate mortgages purchased by the federal government with borrowers
• A "tax holiday" for homeowners facing foreclosure will be extended

Oversight and Transparency
• A bipartisan oversight board appointed by members of both parties in Congress would be created
• An inspector general would monitor Treasury decisions, and the Government Accountability Office would regularly audit the program
• Treasury would be required to make transactions made through the troubled asset program available publicly online
• There would be conflict-of-interest rules for firms hired by the Treasury to help run the program
• There would be judicial review of Treasury decisions

Not Included
• The package does not have language that would allow bankruptcy judges adjust mortgage rates or principal
• No profits from the scheme would flow to an affordable housing trust fund

This information has been compiled from the following news sources:
The Wall Street Journal
The New York Times
The Washington Post
McClatchy Newspapers
Congressional Quarterly ($)

Extenders
Hose Democrats have unveiled a $620 billion tax bill (HR 7060) that would extend dozens of expiring tax cuts, including renewable energy tax incentives. The bill is fully offset, and if put to a vote will likely pass has been approved by the House, 257-166. The bill contains $14.2 billion in expiring renewable energy tax cuts, $46 billion in other expiring tax cuts, including a provision to lower the income threshold at which filers can claim the child tax credit, and is fully offset.

The Senate, however, despite having approved the House bill's offsets in one form or another on various bills remains allergic to fiscal responsibility. The bill has also drawn a veto threat from President Bush, not so much because of the bill's contents, but because it doesn't come with a bunch of other stuff included in Senate-passed HR 6049.

• JCT score of HR 7060

AMT Patch
The House has passed a bill (HR 7005) that would patch the AMT and is not fully offset, but that's just not good enough for the Senate: It's their way or the highway. Senate Republicans apparently are only interested in passing one bill and one bill only -- HR 6049, the partially offset package approved by the Senate earlier this week. And fearing the minority party or hoping to spare Bush the political pain of vetoing a bill that would effective lower taxes for 22 million families, Democrat and chairman of the Senate Finance Committee Sen. Max Baucus (RD-MT) has decided to run away and hide in the bushes wishing it would all just go away wimpering, "Republicans won't do it. They [the House] need to just take up the Senate package."

Image by Flickr user Brooks Elliott used under a Creative Commons license

The House Appropriations Committee is circulating this morning an economic stimulus proposal (summary and bill text) they hope will be debated by the full House later this afternoon (nothing like the last minute). Chairman David Obey (D-WI) writes about the need for this legislation in the summary:

84,000 Americans lost their jobs last month and the number of unemployed Americans is the highest it has been since 1992. The economy has lost jobs for eight straight months, with 605,000 American jobs lost this year.

Congress responded quickly to the White House's call for a financial rescue package. The White House should join Congress in putting together a solid package for Main Street. Today the House will take up legislation to boost our economy, create jobs, and help provide additional relief to families who are struggling.

The House stimulus package consistents of blocks of spending on infrastructure (public housing, transit, schools, and water and sewer), energy development (electric grid moderinization, advanced vehicle battery technology, and renewable energy development) and human needs (unemployment benefits extension, job training, health care, and food assistance). The full cost of the House package is reported to be around $50 billion or a bit more.

Of course, Obey (and others who have been calling for this type of package) are right. If Wall Street was not literally melting before our eyes, the quickly deteriorating economy would be the top issue in the news. As Andrew Samwick reminded us yesterday blogging over at Capital Gains and Games, traditional economic indicators are really not doing very well, with demand for workers and manufactured products decreasing.

The Senate is working on a similar package, and Majority Leader Reid (D-NV) and Appropriations Committee Chairman Robert Byrd (D-WV) have announced the Senate's will be $56.2 billion. The bill would "extend unemployment insurance benefits for seven weeks, address high food costs and energy prices, create jobs, promote education and job training, and aid small businesses." A detailed summary of the bill is available.

House Stimilus Summary
House Stimulus Bill Text

Senate summary

Senate Finance Committee Chairman Max Baucus (D-MT) has released a statement calling for a special Inspector General to oversee whatever program is put in place at the Treasury Department to bailout failing Wall Street banks and investment houses. Baucus's letter is signed by 32 other Senators and really makes a lot of sense, which is something we don't often say about Sen. Baucus's proposals.

So hats off to Baucus! Let's hope this proposals is integrated into the final plan being developed.