Paulson's Breathtaking Power Grab

By Alan White

The New York Times has posted a draft of the bill Treasury Secretary Paulson wants Congress to pass next week, handing over the Constitutional appropriation power to him, to the tune of $700 billion. The bill would allow Paulson to purchase any mortgage-related assets (mortgages, securities, real estate) with only two objectives in mind: financial stability and protecting taxpayers. Notably absent from the considerations (which are not enforceable by Congress or the Courts in any case) is protecting homeowners from foreclosure.

The problems with this are too numerous to catalog. While making loans and accepting questionable mortgage assets as collateral is one thing, buying the assets is something else entirely. Treasury bureaucrats will be deciding once and for all how much of a loss (if any: perhaps we'll pay 100 cents on the dollar) investors must absorb. The rest will fall on the taxpayer.

True, the one-step-at-a-time method used in prior weeks may not have satisfied Wall Street, but this new approach is little more than capitulating to Wall Street extortion. If there is a run on money market accounts, by all means provide some (temporary) deposit insurance. If there is a major bank or insurance company going under, by all means arrange an orderly takeover of its assets and back up essential obligations.

Taxpayers bailed out all the savings and loans depositors because we had no choice - their deposits were insured by law. The investors in CDOs and CDOs squared are not entitled to a bailout, and we should not empower the Treasury to provide them with one. Congress should insist that Treasury come back with a more measured approach focusing on the immediate needs of American consumers and businesses, hedge funds excepted.

Comments

[duke harris]

Paulson and bush are part of WANTAGATE THIEF PLAN,which they got caught at,check out on the internet THE BUSH CRIME FAMILY...BUSH HAS BEEN TOLD STEAL FROM ENGLAND AGAIN...and you will be killed.Also paulson as CEO of goldman had $2 BILLION DOLLARS DISAPEAR from the Fannie Mae pension plan,never found,he then went to the US Treasury Dept.

[W. Raymond Mills]

Congressional leaders were said to be dismayed when confronted with the depth of the problem. They were also said to be dismayed that no one other than Paulson had a solution. Shouldn't more than one solution be considered?

For example, try viewing the problem as an accounting problem. These toxic contracts are not hurting anybody directly. If they were removed from the market by some other means other than Federal purchase, would that not be a solution?

I propose quarentine. Remove these toxic contracts from the market temporarily and then restore them later, after the current owners have positioned their firms that they are able to take them back on their books without problems.

Establish a Federal agency to receive, store and manage these toxic contracts temporarily, with the original owners able to repossess their contract any time they choose.

The proposed legislation would specify that the agency would only accept contracts voluntarily stored with them. While these contracts are stored off the market, they cannot be bought or sold and any hypothetical change in their value would not be refected in the books of the owners. The value of these toxic contracts would be held constant, by law, at the level they were estimated to have at the time they were stored. When recovered, their value would be reassessed at the market level at that time.

I encourage Economist to come up with other alternatives. This one is radically different from the massive bailout. Will it do the job?
What do you think? A major advantage of this proposal is that it can be tried first and if the problem persists, the bailout can be considered.