Treasury Secretary Henry Paulson went to Capitol Hill seeking $700 billion. He got an earful. Now, $700 billion is a serious sum, and Congress has the fiduciary responsibility to make sure the money it appropriates goes for a good cause. But from the indignant congressional demands for a laundry list of quid pro quos, you would have thought Paulson wanted it for his personal use.
In fact, Paulson is a lame duck. In four months, he's gone. Paulson is asking for the money for the same reason Fed Chairman Ben Bernanke and the markets are asking for it: to prevent the American economy from going over a cliff.
The stock market dive and the seizing up of the credit markets convinced them that their ad hoc Bear-yes, Lehman-no rescue of investment firms had not only reached a dead end, but was actually making things worse. It had added uncertainty to a situation in which pre-existing uncertainty was already causing panic.
Hence the need to go below the institutional superstructure to the underlying toxic assets, which Paulson proposes to take off the private sector's books by having the government buy them for, yes, $700 billion.
Assuaging public rage
Congress has every duty to be careful with taxpayers' money and to suggest improvements in the administration plan. But part of Congress' reaction has nothing to do with improving the proposal and everything to do with assuaging the rage of constituents – even if it jeopardizes the package's chances of success, either by weakening it or by larding it up with useless complicating provisions designed solely to give the appearance of sticking it to the rich.
One example: Window dressing such as capping pay packages, which the Bush administration has already caved in to. I've got nothing against withholding golden parachutes from failed executives. But artificially capping the pay of people brought in to lead these wobbly companies back to health is a fine way to tell talented executives to look elsewhere for a job. It is a prescription for outsourcing our best financial minds to London and Dubai.
The mob is agitated, but hardly blameless. While the punch bowl – Alan Greenspan's extremely low post-9-11 interest rates – was being held out, few complained about cheap loans and doubling home values. Now all of a sudden everything is the fault of Wall Street malfeasance.
I have little doubt that some, if not many, cases of malfeasance will emerge. But what we conveniently neglect is the fact that much of this crisis was brought upon us by the good intentions of good people.
For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac – who in turn pressured banks and other lenders – to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity.
Were there some predatory lenders? Of course. But only a fool or a demagogue – i.e., a presidential candidate – would suggest that this is a major part of the problem.
Was there misbehavior on Wall Street? The wheels of justice will grind. But why wait for justice? If a really good catharsis will allow a return of rationality to Capitol Hill – yielding a rescue package that will actually save the economy – go for it.
Capping executive pay is piffle. What we need are a few exemplary hangings. Pick a few failed investment firms, lead their CEOs in chains through the canyons of Manhattan and give the mob satisfaction.