Solidary Pt. 2
Consensus at last!
Just a brief swing around the blogospheric and journalistic circle reveals that everyone seems to hate the atrocious proposal that the administration has made for taxpayers to write it a blank check.
Krugman, Mallaby, Marshall, Bainbridge, Baker, Manzi, and RBC all hate the thing.
This, of course, strongly suggests that the Democrats will cave. If they do, Senator Obama, the ball is in your court.
FWIW, I hate it too. My bias, also FWIW, is to prefer sucking up one’s principles as to how an economy should be run and extending a safety net rather than allowing key elements of it to fail and going along for the resulting ride. Pace Ken from earlier, whatever risk there may be from going along with some sort of bailout, there’s also a risk from sticking to “principles” such as they may be.
Based on the leaked draft of the proposal from the administration, what we have is not only (or not just) a massive fund to bail out ‘too big’ (or ‘too interconnected‘) to fail institutions for which quick action may be needed, but rather authorization for authorization for mortgage market interventions anywhere the Secretary of the Treasury sees fit. However necessary some additional interventions may turn out to be in the end, not every mortgage-related loss in the financial system requires urgent action by Congress with such blank-check terms.
Here are a few notable features. First, the broad grant of authority:
(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
This is the essence of the blank check — the purchases would be “on such terms and conditions as determined by the Secretary” and SecTreas is empowered to purchase “mortgage-related assets” from “any” domestically-domiciled financial institution.” “On such terms” certainly can cut different ways: it could involve haircuts worthy of Sweeney Todd — but only if that’s how SecTreas exercises the available discretion. Authorizing purchases from “any” domestically-domiciled financial institution means that the provisions are not limited to institutions posing systemic risks to the integrity of the financial system. (Apparently “domestic-domiciled” is now optional, according to the NYT article linked by Ken.) Interestingly, “financial institution” is undefined, so while the NYT reports that Paulson doesn’t plan to use his authority to purchase hedge fund assets, it doesn’t seem that there’s anything in this language to prevent him from changing his mind. Last, the definition of “mortgage-related assets,” apart from being broad enough to apparently extend the Secretary’s authority to the foulest toxic waste, does at least ensure that they’ve covered any needed bailing-out related to busts in commercial mortgages.
What I’d like to see here at a minimum would be more specific language requiring Treasury and some other entities (i.e. including but not necessarily limited to the Fed) jointly certify that an action under this title would be in service of avoidance of financial-system failure. I’d also like to see a requirement that the terms of any purchase share any upside of the bailout for bailed-out firms with the public.
The features that look like they protect the public interest are weaker than they look:
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
I am not a lawyer, but as an occupational hazard have had occasion to learn a little about what this construction means. Directing agents to “take into consideration” things is not the same as “requiring” that they do specific things, not least when the factors to be considered are so vague. If an action taken under this act includes a statement explaining how those factors were considered, then good luck getting a court to find that discretion was abused. And if you were inclined otherwise, the belt-and-suspenders provision makes it clear that the intent of the draft legislation is to leave Treasury’s discretion unfettered:
Sec. 8. Review.
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.
Brad DeLong looks at that from the left-of-center position and says hell-no to giving this sort of discretion over $700 billion to Phil Gramm or anyone else who might be on John McCain’s shortlist for Treasury secretary; I’d have to wonder to what extent Republicans would want to hand the checkbook to one of the economists for Obama with so few strings attached. Reportedly Barney Frank is looking to give the Government Accountability Office audit and other oversight authority, and that would be one useful step towards proper oversight of the program.
Josh Marshall reports that banking lobbyists are already at work trying to get congressional Republicans to oppose the introduction of ancillary provisions, with giving bankruptcy judges the right to modify loan terms chief among those opposed. Yet the legislation does give Treasury the right to act as if it owns such mortgage rights as it may buy:
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
The “considerations” of draft Section 3 don’t particularly reach the level of establishing policies for how any such rights should be exercised. Obviously expanding this section to direct how Treasury exercises those rights is one of the ways the smarter Democrats are looking to improve the legislation.
Last, there’s what a cynic might consider the final enablement-of-kleptocracy provision, allowing the Secretary to:
[enter] into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
It’s not clear to me why the entirety of contracting law need be bypassed for this purpose; this seems to be a “stick it in your eye, Good Government” provision.
If there’s one proposal for improvement that I’d be disinclined to pursue, it would be general executive-pay reform. I like DeLong’s “note to self” on forcing pay above a threshold into restricted equity in principle, but this is not something for quick drafting, as otherwise the statute may just be an intellectual challenge for compensation consultants. I’d keep it simple for the purpose of this legislation (assuming it’s inevitable) and just claw back any incentive pay for some specific set of officers of any firm that sells assets to Treasury under the bailout on terms that ensure the clawback comes out of the officers’ personal wealth. I’d like to see them slip in a return to the 39.6% top income tax rate, but I don’t know that the Democratic leadership has the guts to do so and let the Bushies signal how important they really think the bailout legislation is.
BTW, our friends at Economists for Obama have the response from the Obama campaign.