There is no doubt that past government intervention in the market, particularly by Fannie Mae and Freddie Mac, is largely to blame for the current financial turmoil. And while past government intervention cannot be used to justify further government interference, we also have to ask how much unnecessary pain the economy must bear. Absent action along the lines proposed by Treasury Secretary Hank Paulson, capital markets at home and worldwide would eventually normalize. But how many large and small companies are going to have to fail to make payroll because of failed credit markets before we get to that point? That is the question we are facing.
The plan Treasury released Sunday was by no means perfect. It needed more oversight and more limits on Treasury’s power so that markets could be restored while also protecting the taxpayer. Unfortunately, the debate on Capitol Hill is heading on the opposite direction. Lawmakers, in particular Senate Banking Chairman Chris Dodd (D-CT), have only added proposals that enlarge Treasury’s mandate and encourage wider government intervention in the market.
Government ownership of Wall Street: The Dodd draft instructs Treasury not just to buy select assets of distressed firms, but to also demand ownership of them. Treasury’s current plan already allows taxpayers to keep 100% of any profits from assets bought. There is no reason the government should be allowed to go beyond on this and be allowed to own and manage previously private firms.
Destruction of contract: The Dodd plan undermines contracts in two ways. First, it directs Treasury to tell banks which mortgages they should and should not rework. Worse, it expands the power of judges to arbitrarily rewrite mortgage contracts. This will only increase the uncertainty that is plaguing the financial system.
Government as human resources manager: Americans are understandably upset at the compensation packages financial executives have received over the past decade. But putting government in charge of setting compensation levels for private firms is not the answer. Pay should be decided by the company and its shareholders, not managed by a congressman or a bureaucrat.
Housing slush fund: The worst feature of the Dodd plan not only directly hurts taxpayers, but it also encourages the very fraud and corruption that caused this crisis in the first place. Dodd wants to divert 20% of all revenues from the eventual sale of currently distressed assets into housing slush funds for his political allies.
Markets both here in the United States and throughout the world fell yesterday as it appeared the Paulson plan might fail to win approval on Capitol Hill. According to The Hill, Speaker Nancy Pelosi (D-CA) is telling Democrats that she will not support President Bush’s $700 billion bailout unless there is significant Republican support for the controversial plan. Conservatives have a voice in this fight. A clean bill limiting Treasury’s authority to the absolute minimum is necessary to restore the markets and protect taxpayers
Quick Hits:
- The FBI is investigating whether fraud played a role in the troubles at Fannie Mae, Freddie Mac, Lehman Brothers and American International Group.
- Vice President Cheney’s meeting with Republicans on Paulson’s plan yesterday was described as both “a bloodbath“ and “an unmitigated disaster.”
- House Democrats are set to let the offshore oil drilling ban expire through March of next year.
- The Senate Permanent Subcommittee on Investigations found $4.8 billion in Medicare payments for suspicious claims.
- Up to three more combat brigades could be available to go to Afghanistan beginning next spring.
