Putting the taxpayers on the hook for $700 billion

What happened

The Bush administration this week proposed buying $700 billion of distressed securities from financial firms, urging Congress to act quickly to prevent paralysis in the credit markets and a deep U.S. recession. But in trying to rush the proposal through in a matter of days, Treasury Secretary Henry Paulson hit stiff resistance from lawmakers of both parties, who demanded that the bailout include protection for home­owners facing default, limits on financial executives’ salaries, and greater oversight of the financial system. Paulson’s proposal—which had not been passed as The Week went to press—would give the treasury secretary virtually unlimited authority to buy up mortgage-backed bonds and other securities to keep financial firms afloat.

In contentious hearings on Capitol Hill, Republican and Democratic lawmakers scolded Paulson and Federal Reserve Chairman Ben Bernanke for trying to pressure them into passing the unprecedented bailout hastily and with no strings attached. Conservatives echoed Kentucky Rep. Jim Bunning’s angry complaint that the bailout was “financial socialism,” while Democrats demanded that any plan include a ceiling on the pay of financial executives benefiting from taxpayer dollars. A defensive Paulson said there was simply no choice but to come to the rescue of the financial industry, or risk an economic meltdown on the scale of the Great Depression. “I share the outrage that people have,” Paulson said. “It’s embarrassing for the United States of America.”

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What the editorials said

Here we go again, said The New York Times. Time and again, the Bush administration “has usurped far too many powers under a banner of urgency” and then abused them. This time, the White House wants nearly unlimited power to bail out the financial sector, with no judicial or congressional review. “Even if this administration weren’t so untrustworthy, rushing ahead would be a bad idea.”

If Paulson hadn’t addressed this “panic” so quickly, said The Wall Street Journal, there would be “terrible economic consequences.” His plan would create a market for the “toxic securities” no one wants, with the federal Treasury having the luxury of holding onto this debt until home prices stabilize or begin rising again. That plan is not without risk to taxpayers, but if the $700 billion heads off a crash of the entire economy, it “will be the best money Congress appropriates this year.””

What the columnists said

It’s true that there’s no alternative, said E.J. Dionne in The Washington Post, but Congress is right to slow this train down. Taxpayers would get “a bag of dreadful investments” while the “reckless financial mavens” who wrecked the system by hiding bad loans inside impossibly complex securities get to keep “their houses in the Hamptons.” If Americans have to take on Wall Street’s debt, we should also get stock in the rescued companies, so that taxpayers would “share in the gain if the industry recovered.”

This much is sure: “Capitalism as we know it is no more,” said Irwin Stelzer in The New Republic. We’re being treated to the “remarkable” sight of President Bush, “a longtime and vocal defender of free-market capitalism,” essentially nationalizing the financial industry. In the “New Capitalism,” government and private companies will work hand in hand to avoid the brutal vagaries of the free market.

Abandoning the free market represents an almost shocking change in philosophy, said Eamon Javers in Politico.com, but “what if it doesn’t work?” If Paulson’s plan fails to reverse the crisis in confidence and keep credit markets from seizing up, the only possible next step is even more dramatic: Nationalizing the banking system outright, with the government assuming responsibility for nearly all the debt on the books. “A few months ago, that idea would have been laughed out of the room. But no one’s laughing anymore.”

What next?

With prodding from Congress, the FBI has launched investigations into four firms at the center of the credit storm—Lehman Brothers, AIG, and Fannie Mae and Freddie Mac. The agency is looking for evidence of fraud that might have contributed to their failures. “If people were cooking the books, manipulating, doing things they were not supposed to do,” said Democratic Sen. Patrick Leahy of Vermont, “I want people held responsible.”