Our friends at OMB Watch have a series of articles on the newest of the bailout proposals (see this New York Times entry for the text of Paulson's $700 billion bailout proposal as released on Sept 20). OMB Watch appropriately raises important concerns about the staggering executive authority called for in Paulson's proposal for the $700 billion bailout of toxic waste assets, the need for appropriate oversight, the necessity of coupling the downside risk with adequate upside potential for taxpayers, and--perhaps the most important for Congress to heed now as it seems on the brink of rushing to decision to satisfy petty electioneering goals--the need for Congress to examine the issue transparently and thoroughly before providing the massive contemplated bailout.
See Commentary: On Bailouts, Congress Should Move with Great Care, Sept. 23, 2008; Free Market Ends as Washington and Wall Street Merge, Sept. 23, 2008.
While all the rhetoric about the freezing up of the financial system, and the harm to the little guys on Main Street of such a freeze up is not without merit, Congress should not rush into this monumental decision without pausing to consider the bailout's full implications. It seems to me that the bailout --which hopes to work by buying toxic assets, using private investment "experts" (the same ones that have gotten us into this mess) to manage the assets, and eventually selling the assets back into the market after it has stabilized-- will have a long term effect of primarily assisting those who own financial assets. Those aided in the first instance will be the investors in financial institutions whose toxic waste is bought up at a premium above market price. (It has to be a premium of some sort, else the infusion of federal dollars would not be likely to relieve the pressure of the low-valued waste products. It is not clear that Congress will insist on commensurate stringencies equity stakes for taxpayers to realize the upside of the bailout or appropriate limitations on the usual generosity of Wall Street compensation packages.) Those aided in the second place would be the hedge and private equity funds and other scavaging investors with lots of dollars that would swoop in and purchase financial players cheaply once the taxpayers have assumed the risk of the worst toxic waste. Yes, businesses and individuals would presumably also benefit by the flow of credit, but would that not be able to be accomplished through other means, such as a measured bailout that does not give Paulson a carte blanche and limits the sums available during an experimental period prior to the inauguration of the new administration?
With this proposed bailout, the credit crisis created by the decades of "free marketarian" deregulation and privatization will paradoxically result in enormous expansion of executive powers (thus complementing this administration's bold power grab through disregard of statutes and treaties, and even spying on American citizens). Under Paulson's proposals, he alone decides how to spend the authorized fund--for what, at what price, and with whose assistance. This is a fund that amounts to a sizable portion of the United States' annual GDP. One man, with that power, is unthinkable, and thankfully Congress at least seems intent on imposing some kind of oversight body, though accountability has not been a strong suit of the last eight years of the Bush Administration so I am not holding my breath that either the form or the substance of the oversight will be satisfactory.
Further, the bailout intervenes in market processes to such an extent that even those, like me, who have consistently asserted the invalidity of the free marketarian ideology find it unwise. Sometimes it is useful to allow incompetent, badly managed institutions that take too much risk to fail. The bailout will aid Wall Street institutions whose investors and managers have enjoyed years of enormous profits and often relatively low taxes (including, for those with multinational operations, their ability to defer taxation under the "active financing exception") and exercised enormous lobbying influence over our laws for their own benefit and to the detriment of ordinary taxpayers (including persuading Congress not to permit homeowners to modify their mortgage loans in bankruptcy). And without changes, the bailout will commit an amount about equal to the entire Pentagon budget; it would jump our national debt ceiling to more than $11 trillion. See, e.g., Greg Hitt et al, Lawmakers Battle over Rescue Plan, Wall St. Journal, Sept. 22, 2008; CIA, the World Factbook: the United States. Worst of all, we really don't know just how bad the losses will be. (If assets are valued at 25% of face in any market sales today, they may or may not ultimately pay at 50% of face or 75% or 40%.) This, at a time when military spending continues to balloon endlessly because of the commitments in Iraq and Afghanistan and the long-term costs to support returned vets and when the hugely extravagant revenue reduction measures of 2001-2003 will play out in Congress in false cries of tax increases to pressure Congress not to allow the sunset provisions to operate as ostensibly intended.
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