Letting the bottom fall out of the economy is a worse idea, but quickly passing a colossal $700B+ economic bailout package as currently drafted is also a big mistake.
A few quick reasons why:
1. No one knows exactly how large the bailout package will ultimately be. $700B?Don't believe anyone who tells you they know what it will cost. And this administration has historic problems with math. They originally calculated the cost of the Iraq War at $50B, and we know now it's closer to $1T. Whatever they predict now, make sure to multiply it times 2 or 3 to be safe.
2. This is the administration that relaxed regulations and got us into this mess, and now they want emergency powers to assume $700B - $2T of toxic debt and put it on the US Government balance sheet. The last time they wanted emergency powers, we got The Patriot Act.
3. The current proposal from Hank Paulsen concentrates all power over this extraordinary bailout into the sole hands of the Secretary of the Treasury, with minimal oversight from Congress. It doesn't require even a report to Congress on the status of the bad debt and program function until three months after the start of the program - read, post election.
Now I don't think Congress knows much about how the US economy functions, but they have good staff and the GAO reports to Congress. Giving this much power to a power-hungry and secretive Administration just seems to me to be a bad idea.
I'd recommend a few Data Governance additions to the current legislative proposal:
1. Audit & Reporting - The assumption of whatever trillion dollars of toxic mortgage content should be done with full market transparency. The administration should be required by law to publish each mortgage transaction to a public trust website where everyone can see all the details of each transaction. The GAO should be required to audit the process on a quarterly basis, and Treasury should be reporting on progress to Congress bi-yearly.
2. Governance - A bi-partisan commission of Senate and House members should provide policy oversight on the program, with the Secretary of the Treasury acting as Chairman of the Board.
3. Stewardship - A special office within Treasury should be setup to manage the operation of the program, accepting policy leadership from the Governance Committee.
4. Data Quality and Provenance - These toxic mortgages are extremely complex to understand en masse, but individually each has a story to tell about underwriting incompetence, business negligence, homeowner fraud or ignorance. Those stories should be told because this unraveling of what went wrong is potentially the largest database of credit losses in the world. Each case should be researched and the debt narratives preserved.
5. Risk Calculation - The aggregate losses here should be profiled in a database and preserved as an historic repository of credit risk and loss - available to every lending institution in America to benchmark and calculate their own risks.
6. Value Creation - each MBS and CDO purchased at below-market rates should be monitored to determine how much ROI they return when market conditions return to normal. The American people have a right to learn that information, and Congress has a right to determine how those proceeds should be used - hopefully to pay down the US National Debt which will soar well above $11T thanks to this bailout!
These Six Things are not in the current legislation Hank Paulson sent to Congress today, but I do hope someone from Chris Dodd's or Barney Frank's committees are reading my blog and take note.
If we don't take this opportunity to make this bailout process transparent, we will have another mess to clean up later. Human beings are like that - they don't behave correctly when there is no accountability. That's exactly the lesson learned from this crisis - so why would Treasury repeat that mistake in this bad bailout legislation?!
Answer: because people never think it will happen to them.