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Required Reading: A Blank Check for Hank?

9:41 AM, Sep 22, 2008 • By DEAN BARNETT
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1) From the New York Times, "A Fine Mess" by William Kristol

2) From the American Scene, "Welcome to History" by Jim Manzi

Is it a sign that we truly are approaching the End Times that the Boss and John Conyers agree on something of vital importance? Both find the administration's plan to give Henry Paulson a $700 billion blank check to buy up all the country's bad mortgage debt in all of its many guises profoundly disturbing. Kristol writes:

Everyone seems to agree on the need for a big and comprehensive plan, and that the markets have to have some confidence that help is on the way. Funds need to be supplied, trading markets need to be stabilized, solvent institutions needs to be protected, and insolvent institutions need to be put on the path to a deliberate liquidation or reorganization.

But is the administration's proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for - or even promises of - disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.

The Wall Street Journal finds Conyers concurring:

Draft legislation proposes sweeping powers for Treasury Secretary Henry Paulson to buy and sell mortgage-related securities however he sees fit. Aside from requiring periodic reports to Congress, the bill provides no oversight of the bailout's management -- and specifically bars any court or agency from reviewing it.

Congressional Democrats said they were wary of handing a lame-duck administration what one aide called a "blank check."

House Judiciary Committee Chairman John Conyers Jr. (D., Mich.) "is very concerned about the breadth of the draft language, and we are working to insure that reasonable limits are included," a committee staffer said.

One must ask precisely what the administration is up to here. Was the initial deal sheet that granted Paulson such sweeping powers a mere "jumping off point" from which the administration could begin wrangling with Congress? Or did the administration sense Congress' collective terror and figure individual Congressmen would just go along with whatever Treasury proposed? After all, Barack Obama hasn't exactly led from the front on this matter (he's still trying to decide what he thinks about last week's AIG bailout), and John McCain's clumsy efforts to offer anything substantive last week were disastrous. The typical, cautious senator has probably decided it's in his best interest just to stay out of the way of this particular locomotive and rejoin the fray once the blame game has commenced.

So what tweaks does the Paulson "plan" cry out for? The always insightful Jim Manzi puts it plainly and simply:

What will be essential is that:

1. These (Treasury "purchases") are temporary, and these positions be unwound as rapidly as possible. This includes not just the actions of the past two days, but also getting the federal government out of the insurance business (AIG) and the home lending business (Freddie and Fannie) as rapidly as is consistent with orderly unwinding of these positions.

2. The ultimate resolution assures that prior investors in these financial institutions and their executives bear very large financial penalties. Irresponsible homeowners should as well. Expect big political battles over the definition of "irresponsible".

If done in this way, we can (in the hopeful case) work through the problem with limited actual costs to the taxpayers as assets are sold off, while limiting moral hazard and long-run government control of financial assets. But there are many very bad downside cases.

Add proper oversight to make sure Treasury is disposing of its responsibilities in a capable manner, and we've got ourselves a plan.