Commentary on the bailout has been a bit fractured as people work to understand this and that aspect of it, and try to keep abreast of the portions just now coming to light. But here are the main criticisms. The Imperial Treasury: The bailout plan, as currently designed, gives Hank Paulson almost unlimited power with virtually no oversight. The bill says, "Decisions by the Secretary 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." You almost wonder if they included that line as a gag, or if it was originally a hyperlink that got you RickRolled. As Yves Smith writes, "This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse." It makes Hank Paulson the country's economic czar, and fairly few of us were even aware that was an open position. At What Price?: "Within hours of the Treasury announcement Friday," wrote Sebastian Mallaby, "economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans." Buying the bad assets is an odd strategy: It requires paying much more than the market currently thinks they're worth, but hoping that the amount you paid is less than they eventually will be worth. But no one knows how to price these assets. Mallaby continues: "Bad loans are weighing down the financial system precisely because private-sector experts can't determine their worth. The government would have no better handle on the problem. In practice this means the government would make subjective choices about which bad loans to buy, and it would pay more than fair value." Why Not Equity?: Rather than recapitalizing Wall Street by buying the bad assets (as Krugman terms it: "Cash for Trash"), you could recapitalize Wall Street by lending money directly, and getting an equity stake in return. That would give Wall Street sufficient cash-on-hand to survive the current crisis, but ensure a more stable repayment process where taxpayers would recoup their investment. Instead, as Luigi Zingales writes, "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." The bailout has been designed to do more than protect against collapse. It has been built to limit losses, which it will do by shifting them to taxpayers. And the Foreclosure Crisis? The financial crisis is one symptom of the foreclosure crisis. The bad assets are largely bad mortgages, and when they go bad, it means Wall Street loses some money, yes, but it also means a family loses their home. And though ensuring Wall Street's survival is a definite priority, it's extremely hard to argue that elite investors who made bad bets in order to reap big profits deserve public help while ordinary homeowners who entered into bad mortgages on the strength of bad advice merit nothing. The terms of this bailout, however, actually make it easier to imagine a policy that could aid these folks. As Dean Baker says, "The government will inevitably come into the possession of a vast amount of mortgages in various stages of delinquency. The priority in these cases should be to allow people to remain in their homes, not maximizing the return on the mortgages. This should mean first a good faith effort to negotiate a write-down that makes it possible for homeowners to remain in their house as owners. If this proves impossible, then the next recourse should be to give homeowners the option to remain as renters paying the market rent for the house. Only if the homeowner can neither arrange a new mortgage nor pay the market should the government move ahead with foreclosure procedures." For the government to protect Wall Street by buying these mortgages but abandon Main Street once it owns them would be obscene. Emergency Powers? Lastly, the timing has everyone skittish. There's little doubt that a bailout must be constructed quickly, but watching the Bush administration demand instant passage of an emergency bill that arrogates enormous power to the executive branch and shifts tremendous quantities of cash to the moneyed elite is bringing up bad memories, and rather a lot of them. $700 billion is a huge amount of money. We're talking "foreign war" money. And the Bush administration want all that money under its direct control, with no oversight, under the terms of a Treasury plan developed in secret over a matter of days. Congress, happily is beginning to buck at this. Today, Barney Frank went on CNN and said that doing “one of the most important things ever done in America in two days really doesn’t work.”
