Bailout Breakdown

Thursday, September 25, 2008

IT HAS BEEN a week since President Bush's economic team rushed to Congress to warn that the country was within days of financial collapse -- and to urge lawmakers to adopt a drastic bailout plan to prevent it. A bipartisan consensus in favor of action quickly formed, but as the president addressed the nation last night, that cooperative spirit seemed to be giving way to conflict. Congress and the administration were struggling to resolve legitimate questions, such as the true cost to taxpayers of the plan, estimated at up to $700 billion, and less central concerns, such as whether regulatory and legal reforms should be linked to it. As a day of gloom and high political drama wore on, the Republican and Democratic nominees jumped in: Sen. John McCain announced he was suspending his campaign to join the negotiations, and after a call from Mr. Bush, Sen. Barack Obama also agreed to join the talks with congressional leaders at the White House today.

The stakes could not be higher: The president laid out in far more graphic terms than ever before just what the country is facing. He spoke of "danger" to the entire national economy and the potential loss of "millions" of jobs. It is a scenario not contemplated since 1929. This catastrophe can be avoided, and it will be if government promptly and effectively addresses the immediate cause of financial distress -- the toxic build-up in unmarketable mortgage-backed securities on bank balance sheets. Treasury Secretary Henry M. Paulson Jr. has suggested a program to buy the distressed mortgage-related securities. Alternatives are imaginable, but this is the one on the table, and it is conceptually credible. Treasury could recoup much of the cost as the market recovers; indeed, by jump-starting a market, the plan could draw private capital into distressed securities.

Beyond its price tag, there are two legitimate concerns about the plan, both amenable to compromise at the White House talks. The first issue is ensuring that taxpayers do not get fleeced. By its nature, the plan asks government to pay above-market prices; the whole point is that no market exists for most of these securities at the moment. Congress and the Bush administration should create an option for the Treasury to take equity in institutions to ensure more taxpayer protection.

The second issue is oversight and accountability. Seeking maximum flexibility, Mr. Paulson asked for all-but-unreviewable power; Congress rightly recoiled. But there are other ways of making sure that the program runs honestly and efficiently without subjecting it to lawsuits or microscopic review by multiple federal agencies. As the president hinted last night, a control board, with full access to Treasury's books and chaired by a figure of unquestioned integrity such as former Federal Reserve chairman Paul A. Volcker, could do the job. Many in Congress, along with the presidential candidates, want to limit the pay of executives whose institutions get federal relief, and Mr. Paulson yesterday agreed that "we must find a way to address this."

These are the essentials. On other matters -- relief for mortgage holders, regulatory and bankruptcy reform -- there will be plenty of time later for debate, and, if necessary, additional legislation. But for now, the president, Congress and the candidates need to stay focused on what's really important: preventing financial Armageddon.

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