A Bill That Deserves to Fail
Thursday, October 2, 2008
Within the next 24 hours, House members will get another chance to vote on financial bailout legislation. They rejected the first bailout bill on Monday, and they should reject the second version, too.
The new legislation would not fix our economic problems. It contains a slew of extraneous and irrelevant provisions, such as increased spending on alternative energy and rural schools and mandates for mental health parity in health insurance.
To be sure, the second bailout bill is better than the first one, since it would raise the level of bank deposits insured by the Federal Deposit Insurance Corporation (FDIC) from $100,000 to $250,000 and thus give Americans more confidence in the banking system. Yet Congress could pass this measure on its own, rather than rush through complex and misguided legislation.
Congress is hurrying because President Bush, Treasury Secretary Paulson, and Senators McCain and Obama are telling Americans that the sky will fall if members don’t act. This fear-mongering has forced Congress to vote on poorly-considered legislation. Our leaders are like the two-year-old who says, “If I don’t have my way, I won’t breathe.” We should hold them to their idle threats.
The bill has no restrictions on what funds could be purchased, no mechanism for pricing the assets of failed institutions, and no constraints on managing the assets.
In his address to the nation last week, Bush warned of dire consequences if a bailout bill did not pass: “More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically…. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college.”
Unfortunately, the pending bailout legislation does not offer realistic solutions to our current financial problems. Indeed, it promises more than it can deliver.
First, it contains no specific plan for how to use the $700 billion. The bill has no restrictions on what funds could be purchased, no mechanism for pricing the assets of failed institutions, and no constraints on managing the assets.
By taking the assets onto Treasury’s books and managing and disbursing the accounts, Paulson would be turning Treasury into an investment bank, in the mold of Goldman Sachs, his former employer. Treasury employees would have vast latitude in managing these assets, increasing the agency’s prestige and power. No wonder Paulson is pushing for the bill.
It’s not clear that we want taxpayers owning these assets at all. It might be better to inject capital into firms, as Warren Buffett is doing with his $5 billion investment in Goldman Sachs and his $3 billion investment in General Electric.
Second, the bill would not protect taxpayers, even though on Monday House Speaker Nancy Pelosi declared that “we have it at a place where the taxpayer is going to be made whole.”
She was referring to a provision that would require taxes to be raised on financial institutions if the government does not get back all $700 billion within five years. But that would take us to 2013, which means the responsibility for enacting those future tax hikes would fall on a different Congress and a different president.
Third, the legislation would not bring about “an end to golden parachutes.” Firms that did not participate in the bailout could continue offering golden parachutes (or any other compensation scheme).
Meanwhile, the rescued firms would have to impose compensation limits on only their top five executives. Annual compensation above $500,000 per executive would no longer be tax deductible, but since the distressed firms would likely have no tax liability, this point would be moot. Firms would be charged a 20 percent excise tax on certain golden parachutes, but they would not be prohibited from offering those golden parachutes.
Congressman Joe Barton (R-TX), ranking member of the House Energy and Commerce Committee, has proposed several changes to the bailout bill, including the following:
(1). Before Treasury is allowed to spend the $700 billion, financial institutions should be required to buy private insurance on their portfolios of mortgage-backed securities through the FDIC. In addition, the FDIC should have to buy more than $800 billion in debt or preferred stock from the troubled firms.
(2). The top five employees of any financial institution assisted by the government should have their annual compensation limited to $400,000—the president’s salary—and should be forced to give up their stock options.
(3). The Securities and Exchange Commission should change its system of mark-to-market accounting, which many believe has contributed to the financial mess.
(4). The federal debt limit should be increased by $500 billion.
(5). All holders of mortgage-backed securities should be able to obtain certain information about the underlying mortgages from the servicers of those securities. This information should include the mortgage payment history, the type of mortgage, the interest rate, the size of the loan, and the borrower’s initial credit rating (but not his or her name).
These are only some of the ideas worth considering in this time of financial turmoil. A responsible Congress would stay in town, hold hearings, and put together thoughtful legislation that would actually work.
Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.
Image by Shutterstock/The Bergman Group/Darren Wamboldt.