THE $700 BILLION federal bailout package for Wall Street is historic on many counts.
We hope it doesn't also make history for being the largest subprime loan in history.
Reviewing the early and sketchy details of the Bush administration plan - which is designed to stabilize the markets and restore confidence by allowing the government to buy up billions of dollars in worthless mortgage-based investments from banks and financial institutions - we are struck by some troubling similarities between the plan and the mess it is designed to get us out of.
It rewards irresponsible behavior: The markets flirted with the apocalypse because of the subprime mortgage crisis, which granted unqualified people with low income or low credit scores mortgage loans that they couldn't hope to afford, and when housing prices nosedived from their bubbly highs, equity was wiped out. The bailout package similiarly rewards the undeserving, by letting Wall Street walk away from its mistakes. For example, the brief document that outlines the bailout plan makes no provision for penalties for those responsible, no prohibition against obscene multi-million-dollar compensation, stock or severance packages given to those who orchestrated this disaster. That money should be subject to 100 percent tax. And those responsible, although what they did was "legal," should write those checks from jail.
It lacks oversight and accountability: The first draft of the rescue package has a clause that gives the Treasury secretary unlimited power, and his actions "may not be reviewed by any court of law or any administrative agency."
Isn't this lack of oversight and monitoring exactly what got us into so much trouble in the first place? It's time to establish these oversights, not eliminate them. The government's temporary ban on short selling is not enough of a start.
It puts too much faith in an inflated market. The government's action will clean up the books of the big banks so they'll feel confident about lending; it essentially gets the stuck financial gears rolling again. But when is a plan to buy worthless securities ever a good thing?
The government is banking on the value of worthless mortgage loans slowly regaining their value. But if taxpayers are to recoup any of their $700 billion "investment," won't real-estate values will have to rise back up to their bubble-like levels? And keep in mind: in some places, real estate was valued from 50-80 percent above what it should have been.
No one is calling the $700 billion plan ideal; most think it is a necessary action to forestall a complete meltdown of the financial markets. That doesn't mean it should not be crafted carefully. Congress needs to work quickly, but also should stand firm to make sure that the plan doesn't become a larger folly than the disaster it is designed to avoid.
For example, the plan completely cuts the consumer out of the equation. Where is the plan to deal with the millions of people in or facing foreclosure? The current bankruptcy law doesn't even allow borrowers to modify the terms of their mortgages under court protection; this is something Congress can and should fix. And the giant financial package that Congress passed in July that was to help homeowners was to be financed in part from Fannie Mae and Freddie Mac; today, that's a dim prospect at best.
This plan feels especially risky because the Bush administration is on its way out the door. It means no one's head is on the line for ensuring that the plan not only accomplishes its task but also provides a stimulus for other needed reforms.
The two presidential candidates need to sharpen their message for how this country will stay sound after its taxpayers have granted the mother of all bailout loans. *