The NYT has posted the leaked text of the government’s proposed bailout plan. This plan, in effect, gives near dictatorial economic powers to the Secretary of Treasury, giving him upwards of $700 billion of taxpayer money — our “hard earned” money, which fair weather libertarians (aka Reagan conservatives) would regard, if it were being used to help poor people, as having been “stolen” by big government — to dispense more or less as he pleases.
Secretary Paulson “is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States” and to enter “into contracts, including contracts for services… without regard to any other provision of law regarding public contracts.”
Secretary Paulson’s decisions “pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” In other words, Congress is again pooping on the rule of law. The Secretary will have these powers for “two years from the date of enactment of this Act.” Apparently, in order to save us from our financial crisis, no one can question or review the decisions of our new economic Great Leader.
Beyond the rule of law issues, Paul Krugman has this to say about the proposed bailout plan:
The Treasury plan… looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.
And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.
Based on the little we know, and on Krugman’s assessment, I think we have some good reasons to believe that this bailout plan, especially as compared to similar past plans (say, the S&L bailout or Sweden’s financial crisis), may be bad for the economy and for the American taxpayer. At the very least, there should be a detailed public debate about what course we want to take, what sort of bailout plan we want, and what taxpayers can expect to get for their bucks, not to mention public oversight.
As this financial crisis expands, I more and more have a sinking feeling in my stomach about where this is headed. Will this financial debacle begin to affect the regular economy? Will interest rates on credit cards go through the roof, effectively cutting off the credit lines upon which Americans depend for their high standards of living? Will borrowing, to buy a car or to purchase capital, simply become impossible, for individuals and small businesses? Is this economic crisis simply a liquidity crisis, basically a crisis in confidence in the markets, or are there more fundamental problems yet to be revealed? I am beginning to wonder whether I should have majored in something more useful in college, like farming or cobbling.
I rest easy with the knowledge that I can trade my services as a physician for a chicken, or maybe a bag of beans. I’ll invite you over for stew sometime.
Comment by stephanie — September 20, 2008 @ 8:33 pm
Everything I’ve heard lately from the traditional media tells me this financial meltdown is indeed a crisis of epic proportions, precisely because if the government does nothing, the consequences will be felt in the regular economy in a major way — not just when individual have a hard time paying off credit cards or buying cars and homes — but because businesses will fail and millions of people will lose their jobs, creating a snowball effect that could cause what CNBC’s Jim Kramer refered to as another “depression.”
We have to ask ourselves if we have time for detailed public debate, especially in the context of an election year when everything will be highly politicized. I hate to take the position that we should trust our politicians, but we may have no other choice at this point.
Comment by Ian — September 20, 2008 @ 8:49 pm
I am not in principle opposed to every bailout plan. I merely want the bailout plan we implement to be well defined and good for the American taxpayer. If these preliminary reports are to be believed, this specific plan may be bad for the taxpayer and may not do what is necessary to forestall crises like this from happening in the future. On top of the potential inefficacy of this plan, we are giving away the keys to the country’s financial system without any mechanism for seizing them back. I have a bad feeling about it. But maybe we’ll be lucky and everything will turn out for the best.
Comment by Lee — September 20, 2008 @ 9:05 pm
This reminds me of September 2001 and the airline bailout plan that was passed through Congress with record speed without due consideration.
Comment by John — September 20, 2008 @ 9:20 pm
It’s also worth noting that for most of the Act’s effective time it would be McCain’s or Obama’s Secretary of Treasury, not Hank Paulson who has the power.
It seems like the Roman Republic Senate, the Congress wants to appoint someone a dictator and say “fix this!”
Comment by John — September 20, 2008 @ 9:21 pm
I usually hate it when I criticize a plan and then somebody says, “Well, what’s your alternative?”
Bad ideas don’t magically become good ideas just because there isn’t a clear alternative on the table.
But in this case, I have to ask: When you say this plan may be bad for the taxpayer, are you comparing it to what would befall the taxpayer if we did nothing? Or are you comparing it to another plan you think would be better? (Obviously, I don’t expect you to have a fully-developed economic plan in your back pocket, but are there specific suggestions you would propose. I’m just concerned about being obstructionist at a time when fast action may be necessary to avoid catastrophe.)
Regarding what is needed to prevent crises like this from occuring in the future, I don’t believe this plan is intended to address that issue. It’s obvious, however, that it will be up to the next Congress and the next President to put the right laws and regulations in place to protect us from this sort of thing — and it will be up to us to put pressure on them to do so.
Which brings us to the big question: Which candidate do we trust to guide us out of this immediate crisis and then do what it takes to protect us from similar crises in the future? A man who says he’s fundamentally against regulations and doesn’t really understand the economy very well? Or a man with an even temperment, a powerful analytic mind and a commitment to Democratic values regarding the proper regulation of the markets?
Because in a democracy, it’s the American voters who will ultimately appoint someone and say “fix this.”
Comment by Ian — September 20, 2008 @ 9:48 pm
A decent alternative bailout plan would:
* Not strip Congress of its oversight power, giving carte blanche to the Secretary of Treasury.
* Krugman, in his posting notes that “historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets.” We should follow the model of previous, effective rescues.
* The bailout proposal should include specific language about the terms by which taxpayer money can be used to buy debt. We need to prevent whoever holds the enormous powers enumerated in this proposal from buying worthless assets. Trusting the good faith of the Secretary of Treasury is not enough.
There seem to me to be common sense responses to the crisis, nothing fancy, no election necessary since the Democrats control Congress. If the Democratic Congress passes this bill as is, without demanding reasonable changes, it will have in effect given up its oversight of the economy, voluntarily transferring this power to the executive branch. Do we want a President McCain to have such powers in his hands, should he win?
Comment by Lee — September 21, 2008 @ 2:05 am
Lee I agree with your point but wouldn’t same be true of President Obama’s Secretary too? In either we don’t want Congress to abdicate an oversight role.
Comment by John — September 21, 2008 @ 8:50 am
To Lee: In the interests of keeping this important debate going and fleshing these issues out, I’ll challenge your points:
First, if we give Congress a big oversite role in the bailout, aren’t we (a) making it more likely that partisan, ideological concerns will interfere with practical solutions, and (b) create a situation where nobody can be held accountable for any outcome since any member of the 535-member Congress can point the finger at his or her political adversaries and say, “it’s their fault things didn’t work out”?
Second, is it clear that the current bailout plan includes specific plans about how assets will be re-packaged and sold? I thought the plan would give Paulson authority to buy these assets (with taxpayer money), and then it would be up to him to figure out how to deal with these assets.
Third, my problem with including specific language about what assets will be bought is that it may miss the point of the bailout. The point of the bailout isn’t for the federal government to buy and sell assets in order to make a profit; the point of the bailout is to save the financial institutions that are (unfortunately) needed to keep our economy going. If we set up rules that would prevent the US from buying certain assets — and then, as a result of the US not being able to buy those assets, these financial institutions suffer, causing economic havoc — won’t we have done wrong by the American taxpayer?
I share your concerns about the concentration of executive power, but I also have concerns about Congress trying to micromanage this extremely complicated situation — I’m worried that individual congresspeople will be tempted to demagogue issues. We’ve seen government shut-downs when partisan battle overcomes common sense. As I see it, we can’t afford an ineffective bailout plan — the consequences would be too severe for the American worker, the “fundamentals” of the economy, according to John McCain.
Comment by Ian — September 21, 2008 @ 11:26 am
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To John: I agree, we wouldn’t want an Obama SecTreas having that power any more than a McCain SecTreas. I asked about McCain in this context because, to my mind, the theoretical justification for the universality of the rule of law can become more clear when you focus on how bad rulers might use new, extended powers. If we do not like how such power would be used by McCain, we cannot give it to Obama.
To Ian: I think there is a big difference between micromanagement of Congress and Congressional direction. I do not worry as much about Congressional rancor as you do, though I am not suggesting that every provision in a bailout be subject to debate and a vote. If you are going to give the SecTreas such powers, you need to be very specific about what he is going to do with those powers, and include a mechanism whereby if he uses fifty billion dollars to buy the services of prostitutes or something there is some sort of recourse for Congress.
My point is, from what I’ve read there are better models for such bailouts on the books, both in the US and in other countries. Krguman cites the S&L scandal and the Swedish financial crisis as examples of smartly organized bailouts. When he says this one makes no sense, I tend to trust him. He has been consistently right in his economic analysis, form his claim that the private utilities were gouging California to his claim that the housing market was experiencing a bubble.
And the text of the proposed bailout act seems very vague, hastily put together, and frankly dangerous to democracy.
Comment by Lee — September 21, 2008 @ 1:01 pm
How about stepping in on behalf of the homeowner and ‘correcting’ their mortgage payments?
I think Congress ought to ‘bail-out’ the home owners who were predated upon by shady lenders. There are a hell of a lot more of them than there are ‘victim bankers.’
I know that we’d still need to bail out Wall Street but, frankly I’m done with this garbage. This is the end. Wall Street has shown, time and again, that it is not capable of acting responsibly so, what is our obligation to them?
I love how Wall Street claims that the reason they need to pay people out-sized bonuses is because of the ‘risk they’re assuming’ and yet whenever it comes to them actually losing money, in proportion to the amount risked, they come squealing to the government for a bail them out.
Sorry if this is an ill-considered rant. I’m pretty pissed off about this – it’s a never ending cycle that’s been going on since the civil war, this ‘business cycle,’ which is really just a euphemism for reckless entrepreneurs feeding at the trough to the point of an economic catastro-f**k.
Personally, I’m done with it.
Comment by aaron — September 21, 2008 @ 10:36 pm