Pedestrian Observer GB: Will the Bush Bailout Proposal Solve the Problem?

The Bush bailout proposal plan to the tune of US$700B submitted to the US Congress will allow the Treasury Secretary to set up government investment bank to buy up the mortgage-backed securities clogging the banking industries.

We are definitely in a dire economic situation and many economists are skeptical of the proposed bailout. Politico cites Paul Krugman a Princeton University economist and liberal columnist for The New York Times who had until now been cautiously supportive of Paulson's and Federal Reserve Chairman Ben Bernanke’s efforts to prop up the system, wrote that the new plan would be a taxpayer rip-off:

As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?

Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

Lack of transparency in the bailout plan concerns Adam Davidson citing the provision below:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Now, what’s up with blanket authority nowadays, here is Adam Davidson take on the provision:

Whoa.

So, for the next three months, and then an additional six months after that, the Treasury Secretary can do anything he deems appropriate without anybody anywhere looking it over.

That seems like an awful lot of absolute power. Am I wrong? Is this typical bureaucratic language? Or is this as strange as it seems?

Paul Abram at Huffington Post proposed additional "considerations" and "requirements" under the bailout plan that he described as Zero pain for the perpetrators and Toxic to taxpayers, states the obvious:

If this bailout is to be successful, and there are many other reasons to think it may not, it must at least have the sustained support of the American people who, after all, are paying for it not only in cash, but in lost opportunities. Old-boy networking among financial institutions, and high compensation for the perpetrators of this fiasco, will kill it before it gets off the ground.

It just may not fly especially with this report by LA Times that is hopefully just a speculation which I quote:

The language of the new plan suggests that Paulson intends to set up an investment bank inside Treasury and perhaps hire outside firms such as Goldman Sachs Group Inc., which he headed before becoming Treasury secretary.

Sounds like a cash strapped homeowner that got entangled in a predatory teaser rate mortgage that is due desperately out to refinance a home whose value just plummeted down the drain. I don’t understand why the big boys network get the bailout when they profited enormously from buying out of control mortgage-back securities when property values plummeted rendering their MBS into a worthless scrap of paper. They definitely made a killing and should they not suffer the consequence of their action and not let the taxpaying public bear the brunt of their follies? Now that they got themselves so deep it is now the very same victims of the predatory loan practices that will bail them out while losing their homes and worse there is no guarantee of profit.

What is puzzling is this, while mortgage lenders and those in the real estate industry made a killing on the sub-prime market and the financial institutions got their share of the big chunk of profit that was caused by easing of the requirements or deregulation they are being bailed out. Where is accountability? Should they just go walk out of this without repercussion and let the taxpaying public shoulder the cost of the debacle?

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