By now, either you’ve heard US Treasury Secretary Hank Paulson on the Sunday morning talk shows or you’ve read about what he has said on the US government’s bailout plan. There are tremendous issues with the plan as it charts a course distinctly different from what has been used in the past.
Let’s start with the bill itself: it’s 3 pages long. Only 3 pages long….And it asks for a staggering sum of money with wide ranging powers to buy the broadest amount of mortgage related securities with a minimal of oversight. Other than that, it’s great.
It asks for $700, 000,000,000 and needs to amend the statutory limit on the public debt to borrow it. Then it asks lawmakers in Congress to pass the bill in a very speedy manner to stave off the collapse of the US financial system. Last time I checked, there’s no provision in the US constitution to turnover the country’s check book to one plan, one department, and one man.
This is a huge leap of faith and I suspect that leaders of Congress and the presidential candidates will urge caution or act cautiously. Yes, this is the time for action. No, this is not the time to essentially restructure the entire financial system of the country that has worked well up until we had 1% interest rates. There are other solutions and ideas that need to be considered. Remember, this is not an RTC type situation where the government already had the bad assets put to them via the FDIC and then had to figure out what to do. This is a takeover of choice
University of Chicago’s Luigi Zingales writes about why Paulson is wrong by breaking down the basic issues I raised last week: which institutions get to sell which bonds at what price. He comes to this conclusion: “The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis. But, again, at what price?
The answer: Billions of dollars in taxpayer money and, even worse, the violation of the fundamental capitalist principle that she who reaps the gains also bears the losses.” Separating risk from reward is violates the most basic tenet of free markets and creates socialized capital markets.