Consumer Law

Paulson's Breathtaking Power Grab

By Alan White

By Alan White

The New York Times has posted a draft of the bill Treasury Secretary Paulson wants Congress to pass next week, handing over the Constitutional appropriation power to him, to the tune of $700 billion. The bill would allow Paulson to purchase any mortgage-related assets (mortgages, securities, real estate) with only two objectives in mind: financial stability and protecting taxpayers. Notably absent from the considerations (which are not enforceable by Congress or the Courts in any case) is protecting homeowners from foreclosure.

The problems with this are too numerous to catalog. While making loans and accepting questionable mortgage assets as collateral is one thing, buying the assets is something else entirely. Treasury bureaucrats will be deciding once and for all how much of a loss (if any: perhaps we'll pay 100 cents on the dollar) investors must absorb. The rest will fall on the taxpayer.

True, the one-step-at-a-time method used in prior weeks may not have satisfied Wall Street, but this new approach is little more than capitulating to Wall Street extortion. If there is a run on money market accounts, by all means provide some (temporary) deposit insurance. If there is a major bank or insurance company going under, by all means arrange an orderly takeover of its assets and back up essential obligations.

Taxpayers bailed out all the savings and loans depositors because we had no choice - their deposits were insured by law. The investors in CDOs and CDOs squared are not entitled to a bailout, and we should not empower the Treasury to provide them with one. Congress should insist that Treasury come back with a more measured approach focusing on the immediate needs of American consumers and businesses, hedge funds excepted.

Full post as published by CL&P Blog on September 20, 2008 (boomark / email).