We are being told that there's no agreement in Washington about the terms of the bailout, and huge debates are going on. But here's the nasty truth: There is no substantial debate among those in the Administration, those in the Senate, or those in the House committees about the bailout or the size and scope of it. Everyone that is currently involved in the process is committed to spending roughly a trillion dollars of American taxpayer money to buy terrible investments at above maket prices. The debate is all window-dressing. The debate is on three issues: 1. How much control Congress gets of the money flow, 2. Whether they will spend the money on stock of failing banks or near-worthless assets of those failing banks, and 3. Whether or not the government will get to set pay of the executives of the failing banks that they buy out.
Let's talk about these issues one by one:
1. Giving Congress more control over the money flow - In theory, I suppose this is marginally better than the original proposal. Congress would be able to cut the purse strings at $200 Billion or $350 Billion if they decided. And Congress is directly accountable to us and up for election really soon. The Department of the Treasury is only indirectly accountable to the voters, and the Federal Reserve isn't accountable at all. But I don't think it change the cost to the taxpayer at all. Congress almost never spends less than they can, and I don't think they'd start now.
2. Assets or Stock - This is a lose-lose situation. If the government just buys the assets of failing banks, they lose our money. If the government buys stock in the failing banks, they get all kinds of new control and they lose our money. It's a plan with Barney Marx Frank's fingerprints all over it.
3. Restricting Executive Pay - This has a nice populist appeal to it. Lets stick it to the criminals who did this to us. Of course, in the grand scheme of things, this amount of money is pennies, and all of these executives made tens of millions just 3 years ago when bank profits often exceeded 30%. I don't think they'd hurt much, and it certainly wouldn't help the taxpayer much.
The fact that there is vicious debate on window dressing while the substantive plan remains unchallenged brings me to an observation. This often happens. Remember when the FISA bill was passed, and no one debated whether we'd reauthorize the ability of the Justice Department to tap our lines with only ex post facto paperwork filed away in a secret court that it's illegal to talk about? The only debate about was whether or not we would provide immunity to telecom companies who obeyed orders from the DOJ. It reminds me of watching a cat hunt a squirrel. The squirrel will sit and eat, all fat and happy, his big bushy tail twitching away. The cat will very carefully stalk the squirrel, but when it gets close enough will get distracted and pounce on the tail. The squirrel will scamper away unscathed. Washington is full of squirrels.
And that gets us to the rhetoric. Anyone who is against this bailout plan is getting blasted by Paulson as wanting to do nothing, and anyone who suggests that we scale it back significantly is demonized by Bernanke as wanting the economy to fail. The same fear tactics who got us into war with Iraq are being used by the Fed and the Treasury to get Congress to agree to waste taxpayer money on the mistakes of bankers. Newt Gingrich and Ron Paul have proposed solutions based on sound, proven free-market principles. If we return to free market principles, the bubble will continue to deflate, and there will be pain. But the pain will be short, the plans will spur investment, the economy will recover, and the country will be stronger long-term. I somehow doubt it will happen. Because as we've been told by Paulson and Bernanke all week (I paraphrase):
"If we don't let the Federal Government buy the banks, the Communists Win!"
Thankfully, there may be one group left in Washington with some courage and concern for the taxpayers. Republicans in the House of Representatives are showing intelligence and resolve that is all too uncommon in Washington nowadays. They are committing some additional taxpayer money to the FDIC, but nothing close to the risk that the current Paulson proposal (or Barney Frank's "compromise"), and they are taking steps to encourage investment. With a little luck and our support, these brave men and women may help us avert disaster to the taxpayer. That would be a breath of fresh air.