Guess Who's Paying For The Bailout

In the Houston Chronicle, Loren Steffy writes:

The Treasury Department's sweeping bailout effort is feeling like a $700 billion shakedown.

Congressional testimony continued this week, with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson urging rapid approval for their plan to buy up bad debt from financial firms and restore stability to the market.

Paulson's hurry-up offense isn't playing well with members of Congress, and it isn't faring any better with folks like Ed Schipul, who runs a Web design company in Houston. Schipul, who's raised a family, paid bills on time and made monthly mortgage payments for about 15 years, said he's outraged that his tax dollars will go to bail out the irresponsible lending on Wall Street.

"They're proposing that we pay for someone else's mistake, and at the same time they're not holding those people accountable," he said, reflecting an anger many Americans are feeling toward the bailout.

Fairness, though, was an early victim of this crisis. Taxpayers will get stuck with the bill because the cost of doing nothing outweighs the need for punishment.

"I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover," Bernanke told the Senate Banking Committee on Tuesday. "My interest is solely for the strength and recovery of the U.S. economy."

Too-powerful Paulson?

The Beltway Bailout Brigade says we have to move quickly because the markets won't wait. But as I noted on Sunday, several poor policy decisions helped get us into this mess, and before we make any more, we need to take a hard look at what Paulson and his posse are planning.

For starters, the proposal — which runs about 850 words — is short on specifics about what we'll be buying or how much we'll pay. Instead, it gives Paulson unlimited power to decide all that later:

"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."

If approved as stated, Paulson would preside over the biggest federal spending binge in history like some financial demigod, unanswerable and unassailable.

All hail King Henry.

"That's absolutely unacceptable," Schipul said. "I didn't elect Henry Paulson."

Changing the rules

Paulson's power grab, already under fire in Congress, probably won't survive. Lawmakers also hope to add some relief for homeowners, such as returning bankruptcy provisions for homeowners that were eliminated in the "reform" bill passed a few years ago at the behest of the credit industry.

But this bailout has to be about more than money, more than just sopping up the swill that is choking the financial sector. It has to be about changing the rules. This crisis grew to such large proportions because of the financial instruments that allowed risk from mortgages and other debt to be borne by one party, while giving the rewards to another.

That undermines the basic risk-reward principle of capitalism. Yet the Paulson Plan does the same thing, shifting the risk to U.S. taxpayers while rewarding the perpetrators on Wall Street.

In other words, we are rushing toward a system in which Wall Street, or what's left of it, has no accountability, where it could foist hundreds of billions of dollars of bad decisions on us, then go merrily on its way.

Need for transparency

For years, we've heard the cry from Paulson and his cronies that regulation kills competition and ultimately growth. Yet the absence of regulation did little more than give Wall Street a long rope with which it now strangles our economy.

No one knows if $700 billion will be enough to restore stability to the markets, but we can't put this crisis behind us until we adopt the checks and balances that allow the market to move forward with confidence.

In exchange for our "investment," as Paulson described it on Capitol Hill, we deserve accountability and transparency. The lack of those two elements were major contributors to the current crisis.

If the big banks want our help, we should demand stricter oversight, particularly of the unregulated derivatives markets. Our cash should come with a bright light. Otherwise, we'll just have more of the same: hundreds of billions of dollars passed in darkness.

That's not a bailout, and it's not an investment. It's a gift.