Tuesday, September 23, 2008

Does the Wall Street bailout need a second opinion?

Democratic Senators including Christopher Dodd (CT) and Jon Tester (MT) quizzed Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, on the question, “why now?” Why can’t we take some time, get some second opinions? Why didn’t anybody see this coming?

The answers seemed to be, the $700 billion bailout is needed to keep ordinary credit markets flowing for non-financial businesses, to keep people at work. Maybe even to keep ATM’s working. Another part of the answer is that the taxpayers will own liens on the debt. When the assets are sold, eventually the taxpayers are paid back. This has happened before.

The “second opinion” comes up in helping all the other main street interests: first of all, homeowners hit by escalating contracts and facing foreclosure, and students with loans. The theory is that if they can be helped, then other financial assets themselves don’t have to keep crumbling into fairy dust.

But the main problem is obvious a loss of trust and confidence.

The administration seems to be against this; it seems to be arguing for an “operational” solution to keep the economy running. It’s understandable not to want to get into the game of playing Robin Hood. That leads to deciding who “deserves” what. That gets back to “cultural war” questions, ultimately. What happened on Wall Street seems to be a simpler question of knowing “right from wrong”. It’s wrong to make money off of something one takes no responsibility for, and may have a “conflict of interest” problem with, and incentive to destroy. Ponzi schemes (“get something for nothing”) are simply wrong for everyone, regardless of social circumstances. And its wrong to throw OPM (“other people’s money”) into a toilet without their knowledge.

The safest course may indeed be for Congress to do what the Bush administration and Fed ask, and pass a relatively “simple” bill. I know I sound like a Republicrat (not quite a Log Cabin Republican here). The problem is the big, bad “R” word – regulation. The temptation to regulate can spread to other, non-financial areas (like the Internet) that also prosper with asymmetry and face unpredictable risks (like litigation or downstream liability) all too quickly.

A good story on this mornings hearings in the Senate appears on CNN, written by Chris Isidore, CNN Money Senior Editor, “Urgent call for bailout: Paulson, Bernanke: Immediate action needed on $700B plan to prevent meltdown, link here.

Bob Herbert has an op-ed "A Second Opinion" in The New York Times, today, link here.

Henry Paulson's Testimony is available at the United States Department of the Treasury website, as press release 1153, link here. The Fact Sheet, "Proposed Treasury Authority to Purchase Troubled Assets." is release 1150, Sept. 19, link here.

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