The Wrong Emergency

What Washington doesn't understand about the financial crisis.

Roger Lowenstein, The New Republic Published: Tuesday, September 23, 2008

Congress should think long and hard before giving Hank Paulson $700 billion to buy fallen mortgage securities. Paulson has draped his bailout plan in the cloak of a national emergency. Much as George W. Bush demanded expedited action from Congress to help fight terrorism, the treasury secretary wants his war-chest pronto. And just as Dick Cheney and his minions argued that the terrorism threat was too grave for the White House to submit to the customary checks and balances, so Paulson wants an appropriation with no conditions, no terms--nothing written down about how he would spend the money.

All Paulson has said is that the Treasury (and not an independent agency, as was the case during the 1980s savings and loan crisis) needs the money to buy distressed mortgage paper. Since almost no restrictions govern the use of the bailout, money could be used to buy securities held by strong institutions as well as weak ones. What price they would pay, how that price would be set, and for what assets--all to be determined later. The Treasury's charter would turn every bank into the equivalent of the former Fannie Mae and Freddie Mac--a government sponsored (but now quite government owned) enterprise, a half-man, half-beast Centaur seeking profit for their shareholders and distributing their losses to taxpayers.