In mid-September, when it became clear to Hank Paulson, Ben Bernanke, and George Bush that extraordinary measures were needed to address the mess that had built up in the financial markets during the past decade or so, their first instincts should have been to say:
- “We need to have a complete plan to deal with this.”
- “We need to make a case to Congress and the American people that our plan will work.”
They did neither of these things; nor did they even seem to consider whether what they wanted was even constitutional.
Instead, they in essence demanded that Congress and the American people give them a blank check, saying, “Do this, or else.” Last Sunday, I called it blackmail. I stand by that.
Of course, a large plurality of Congressmen and Senators, along with a majority of the American people, were repulsed. The wonder is that everyone wasn’t.
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayersÕ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
The monstrosity that became law yesterday (PDF-formatted first 250 pages here) does not begin to adequately address the group’s three key concerns.
Fairness? Let’s talk about fairness to taxpayers and future generations. What assurances do we have, if any, that monies recovered when purchased assets are resold will go towards reducing the just-increased national debt? I fear it will instead be diverted to Uncle Sam’s day-to-day operations, enabling Congress and future presidents to further cover up an already over-the-top annual structural deficit. If you don’t think this can happen, just remember how Social Security has been stripped bare for four decades.
Ambiguity? You can’t get much more ambiguous than what a Treasury official told Forbes Magazine on September 23 (bolds are mine):
….. some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.
“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”
Oh, and do you think that even the made-up $700 billion now enshrined into law is any kind of real limit? Think again.
The supposedly limiting language in Section 115 of the bill has to do with “the authority of the Secretary to purchase troubled assets” to certain amounts “outstanding at any one time.” Treasury’s authority starts at $250 billion; Congress can increase that authorization to as much as $700 billion.
With this language, under its “Troubled Assets Relief Program” (TARP) authorization, Treasury can initially purchase $250 billion in “troubled” loans. If it auctions off $50 billion of that amount, there will then be only $200 billion “outstanding.” Treasury can then go out and purchase another $50 billion. This can go on and on and on.
As far as I can tell, there is nothing that would prevent Treasury from continually buying, reselling, and replacing loans, thereby busting the supposed “limits” by hundreds of billions, if not trillions.
Given the billions that financial firms appear poised to make in managing the largely outsourced program, Wall Street has the ability, and every incentive, to turn TARP into a fee-generating perpetual-motion machine while it is in place (theoretically, until the end of 2009).
Long-term effects? Heck, we’re already seeing proof of the long-term effects in the short-term. California’s Arnold Schwarzenegger, whose state has a welfare dependency rate that is 2-1/2 times that of the rest of the nation, is making noises about getting his own $7 billion bailout. The auto industry is getting what was unthinkable even two years ago: $25 billion in loan guarantees, and with barely a whimper of objection.
….. what possible response, other than “okey-dokey,” is there to anyone who says, “Well, if you could handle $700 billion for the financial-services industry, how can you not provide $_____ (fill in the blank) for _________ (fill in the blank)?”
When the problem became clear, a mature Washington political culture would have done something close to the following:
- Bush, Bernanke, and Paulson would have consulted with some of the aforementioned economists to craft a plan that would meet the three concerns they were forced to raise after the fact.
- Bush would have called a joint session of the Senate and House to give Bernanke, Paulson and economists the chance to make their case to Congress and the nation.
- Bush would have insisted that any changes to what they proposed would have to be germane to the plan (i.e., no pork, and nothing else extraneous).
Instead, what was three pages turned into 451. What was a bill with a made-up $700 billion price tag became a pork-laden bill with a made-up $850 billion price tag chock full of unrelated and dangerous provisions too numerous to mention here.
The just-enacted legislation will likely haunt the economy, and the nation, for years.
That we have a nearly incorrigible and immature Washington political culture has never been more clear.