Bush, Congress Must Examine Bailout Details

Last week, we applauded Treasury Secretary Henry Paulson's dramatic announcement that the Bush administration would work with Congress to prevent an economic meltdown caused by hundreds of billions of dollars in bad debt stemming from the subprime mortgage fiasco. The move may have headed off a run on banks without modern precedent, a mass panic by investors at the worst possible time, when the cupboards were already close to bare at U.S. financial institutions. This shortage of capital, Federal Reserve Board Chairman Ben Bernanke warned, has the potential to cripple the economy.

This week, Wall Street has continued to ebb and flow in dramatic ways. But investors' awareness that something big is coming out of Washington has made fears of a looming cataclysm far less plausible. For this reason, we simply do not understand the demand from Paulson, Bernanke, President George Bush and Democratic congressional leaders that the complex $700 billion bailout program cobbled together over the past nine days must be approved as soon as possible.

The more the Paulson plan has been scrutinized, the better the measure has gotten. Instead of the Treasury chief's original notion of buying bad debt from financial firms at inflated prices, the proposal now mandates that the government get an ownership stake in companies it rescues. Paulson's extraordinary demand that the Treasury secretary be allowed to use the $700 billion fund virtually without limitation also has been rejected in favor of appropriate oversight.

Nevertheless, the proposal that Bush and Democratic congressional leaders endorsed Thursday deserves still more scrutiny and refinement — not quick approval.

For one example, the executive summary of the draft proposal released Thursday suggests the buyout of distressed assets would not be limited to mortgage-related securities. The upshot: This proposal could be a way for corporations to offload most or all of their bad debt onto taxpayers — not just the toxic debt related to the subprime loan fiasco.

This was one of three reasons that more than 100 distinguished U.S. economists issued a joint letter objecting to the Paulson plan. Their other two criticisms also bear consideration: The plan gives up from the start on trying to hold anyone in the private sector accountable in favor of a blanket amnesty for irresponsibility; and the plan may be unnecessarily broad and prove so sweeping that it disrupts and weakens private capital markets for a generation.

The sky won't fall if Congress spends another week or two seriously examining these issues — especially if congressional Republicans who now balk at the Paulson plan reassure the stock market that relief is still on the way.

These Republicans say there are just too many unanswered questions about the present version of the plan. They're absolutely right.

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