When the Treasury came out with its $750 bailout plan on September 22, I thought it lacked so many necessary ingredients that it deserved a thumbs down. (Many others had similar objections, including George Soros.)
But in the negotiations between the Treasury and Congressional leaders over the course of last week, most of the missing ingredients were inserted. Starting with the additions that were most necessary on the merits, and moving toward the ones where the necessity was more political, they were:
- Institutionalized oversight of the Treasury, which had previously been startlingly absent.
- Provisions so that the taxpayer would share in the upside potential of banks and other financial institutions, rather than just socializing the losses. These provisions should allow the possibility that the government could recoup most or all of its short-term losses as has often ultimately been true in past unpopular bailouts.
- First, by giving the government equity stakes in the banks that sell their bad loans to the Treasury.
- Second, by having the president in five years submit legislation to recoup the cost from the financial sector if the taxpayer is still in the red at that point.
- Limits on executive compensation, especially golden parachutes, at banks taking advantage of the opportunity to dump their bad loans on the Treasury.
- Dividing the $750 billion into three slices over time, which at least offers the congressional negotiators a little bit of cover.
- A provision for possible government insurance of mortgages instead of acquisition of them. This was a bone thrown to the Congressional Republicans who had blocked the plan several days ago; I don’t know why they would want this provision, but at least it can’t do much harm.
Some other proposed provisions, from both the right and left, were left out, and for good reason in most cases.
The plan (TARP for Troubled Asset Recovery Plan) would still be unprecedented in magnitude and in the discretion it gives the Treasury Secretary. Even if the Congress had passed it today, it would not have guaranteed an end to the financial crisis, let alone averting the recession that is probably already inevitable at this point. Furthermore it does little to begin the reforms in regulation that our financial system now clearly needs.
Nevertheless, and as distasteful as it is to be “bailing out” Wall Street, or even bailing out those homeowners who took out loans that they shouldn’t have, let alone bailing out policymakers who were asleep at the switch, my view is that the program is necessary. It is better than the alternatives:
- better than the Treasury proposal of 9/22,
- much better than the proposal we would have gotten from a pre-Paulson Bush Administration,
- better than the alternative that the House Republicans are offering, and (most important of all)
- better than the alternative of doing nothing, which would (will?) quite likely mean a severe recession.
I suppose it is not surprising that Congressmen facing elections in 5 weeks don’t want to go on record supporting something so unpopular. What will happen now that the House rejected the deal in its vote today? Most likely the stock market and real economy will plummet, until the pain gets so bad that a bailout package like this one accumulates more support.
Originally published September 29, 2008 at Jeff Frankel’s Weblog and reproduced here with the author’s permission.
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3 Responses to “The Revised Troubled Asset Relief Plan Should Have Passed”
The families that own the FRB rake in 1 trillion dollars a year TAX FREE and they are responsible to monitor the health of the banks. Therefore THEY should pay for the bailout.
It is better than doing nothing however it still does nothing for the further decline of home prices. Also less banks will want to participate in this plan given the constraints related to it. Banks that are distressed (but less so than others) may try to hold on long enough in hopes that the market will turn around. Also with the government buying some of these assets they may hope the value of theirs will rise. This in turn will prolong the inevitable and does not address the underlying issue of falling home prices and the lack of credit.
Are U a Moron? The bill is so full of loopholes that little if any taxpayer protection will occur if it is passed. Read the detail, chat with some traders, and then come back to the web with a little more awareness. What a Moron.