Here are the issues as I see them in the bailout:
- The Treasury can’t do it as if they are autocrats. The powers of the other branches of our government should not be curtailed here. The Treasury should submit to oversight from Congress and be subject to the Judiciary. Fortunately, it seems like that is happening.
- Second, if you are going to bail out firms that are still alive, you must ask them for equity stakes that are somewhat punitive. The Dodd bill does that, and though there are areas where I might disagree, it is a lot fairer to the American taxpayer than the original Treasury proposal. Bailouts should always be painful, making the rescue a last resort. (Note, in the Dodd plan, the key weakness is that the finances of the firm selling distressed assets to the government might will likely see its stock price weaken after the purchase, leaving not enough protection by the time of sale. But it is better than the Treasury proposal.)
- Third, the bailout still needs a way to deal with insolvent institutions. The Resolution Trust Corporation was a way to deal with those problems. It’s possible that a new entity could absorb the assets of failed financial institutions, but given the nature of regulated companies, deciding on the proper transfer price is difficult.
We are on slippery ground here, and I’m not sure that the market would react badly if no plan were put in place. A bad plan is worse than no plan, and I believe the market fell on Monday because the original Treasury plan was horrid. If something like Dodd’s plan were enacted, I think the market would rally, even with its deficiencies. We need oversight, and compensation to the taxpayers.
To all my readers, I still say, contact your Congressmen and Senators, and tell them to stand up to the Treasury, and demand compensation for any bailout, and if no compensation, we only bail out insolvent firms. Bailouts must hurt.
PS — For an entertaining view of one possible future as we socialize the financial system, read this piece from the ever-wise Caroline Baum.