Legal Commentary

Yes To The Dem Plan, No To The Paulson Plan

By Big Tent Democrat

I think there is absolutely no doubt that Congress will act in some way to address the credit/mortgage crisis Wall Street now faces. The question is HOW do they act. Matt Yglesias writes about the false presentation of the options that proponents of the Paulson proposal are trying to force upon the country:

1. [D]o absolutely nothing in response to the current situation . . . 2. [W]e do exactly what Hank Paulson proposed over the weekend. . . . [P]roponents of the Paulson Plan have an obligation to either make the case for (2), or else to canvass some alternative ways of doing (1) and explain in clear terms why the Paulson Plan is superior to other alternatives. Merely citing the urgent need for action is a transparent effort to foreclose debate.

That transparent effort failed. The Paulson plan is dead imo. In the NYTimes, David Leonhardt writes:

So are you for the bailout or against it? Many people, I’m guessing, don’t have an immediate answer to the question. They understand that the financial crisis is serious enough to require a big response from the government. But they also hate the idea of rewarding Wall Street for its failures and are wary of yet another assurance from the Bush administration that this step will be the one that contains the crisis.

. . . [Congress'] best shot at success depends on keeping the debate tightly focused on the questions that matter most. There are really only two: What steps are most likely to solve the immediate crisis? And how can the long-term cost to taxpayers be minimized?

Over the last few days, Congress has done a pretty good job of identifying the biggest weaknesses in the Paulson plan, like its vagueness. . . . The first thing to understand is that a bailout plan doesn’t have to cost anywhere close to $700 billion, so long as it’s designed well. . . .

Figuring out how much to pay for the assets is the first problem. The drop in house prices and rise in foreclosures have made it clear that these securities are worth considerably less than banks expected. But there is enormous uncertainty about how much less. . . . Which price is the government going to pay? As Mr. Colander puts it, that’s where the action is.

It clearly shouldn’t pay 75 cents on the dollar, or anything close to it. That would mean the Treasury Department — which, in the end, is really you and me — was assuming nearly all the risk. But it probably can’t pay 25 cents. That might fail to fix the credit markets, because it would do relatively little to improve financial firms’ balance sheets. . . . The most obvious solution is to pay more than 25 cents on the dollar and then demand something in return for the premium — namely, a stake in any firm that participates in the bailout. Congressional Democrats have been pushing for such a provision this week, and it’s one of the most important things they have done.

The government would then be accomplishing three things at once. First, it would take possession of the bad assets now causing a panic on Wall Street. Second, it would inject cash into the financial system and help shore up firms’ balance sheets (which some economists think is actually a bigger problem than the bad assets). And, third, it would go a long way toward minimizing the ultimate cost to taxpayers.

(Emphasis supplied.) Leonhardt is, in essence, endorsing the Dodd/Democratic Plan. While he does not want to talk about mortgage relief for Main Street, that does not mean it can not be a part of the deal. Indeed, to make this work politically, it has to be. And I think it will be.

This is where the fight is now, imo.

By Big Tent Democrat, speaking for me only

Full post as published by TalkLeft on September 24, 2008 (boomark / email).