The Blank Check Bailout
The Bush Administration has asked Congress to write the biggest blank check in the history of the planet. And Congress may very well do it.
The Administration’s proposal requires only semi-annual reports to congressional committees and explicitly exempts any bailout-related actions from judicial review. This has a whiff of the war on terror about it. “We are in a crisis,” the Administration cries, “and you must act now. Do not stop and think. Do not amend. Just approve what we say or we will blame you for what happens next.”
The bailout also leaves entirely unresolved the pressing issue of regulatory reform. The White House’s plan requires no action to avoid a repeat of this catastrophe. That will be left to another day. Left to another year, in fact, since there is zero chance any reforms will be enacted during the remaining months of the Bush presidency. And, in the way of Washington, chances are excellent that today’s zeal for reform will wane in the face of massive industry lobbying and Congress’ chronically short attention span.
Democrats and Republicans need to think hard about how to respond to the White House’s demands. This process will be begun by a Republican Secretary of the Treasury, but there is at least an even chance it will be completed by a Democrat. So there is an opportunity here for politicians to consider this in a bipartisan manner.
What Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke want to do is very hard. The questions have all been asked by others over the weekend. What securities will be subject to this bailout? Just mortgages, or other trash investments as well? Will the U.S. clean up the portfolios of foreign firms, as well as those based at home? How will these securities be priced? How will they be disposed of? The proposal is silent on all of it. Trust us, it says.
Doug Elmendorf at Brookings has described many of these issues in a nice, brief summary. He raises the important question of whether the government should be pumping liquidity into banks by buying their bad debt, or, alternatively, by acquiring a piece of their equity. It is an extremely important question, but Treasury’s proposal leaves no room for it to be even considered.
Now, you may say, this is not a blank check. It is, rather, a check for $700 billion. Big, for sure, but not blank. But, of course, it is an open-ended obligation. If the cost turns out to be higher, there is no chance Congress would stop writing checks. No more than it has for the Iraq war and no more than it has when given the opportunity to constrain the Administration’s “harsh interrogation” techniques.
The odds are high, in fact, that government will overpay for many of these securities to the detriment of taxpayers and the advantage of the same financial sharpies who created this mess in the first place. It will be hard to know because pricing this paper is so difficult. But a bit of oversight would not hurt.
More important, though, is the principle at stake. Over the past eight years Congress has already conceded much of its power to make war to the president. Now, it may be about to abrogate its own power of the purse. Whatever your political persuasion, this is a very dangerous step.