This bailout is potentially the greatest robbery ever attempted.
It will funnel hundreds of billions of American taxpayer wealth to private corporations. The way it does that is this. The value of the assets is unknowable, because that depends on how much housing prices fall. The price of the assets is what somebody is willing to pay for them. That somebody is going to be the Treasury Secretary. By setting a high price for the assets, he will be able to funnel hundreds of billions to his former colleagues in the banking industry.
The proposed legislation gives Paulson absolute power over huge amounts of wealth. He will only give a report once every SIX MONTHS. Section 8, shown below, appears to place him above the law.
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.
This gives far too much power to one guy.
So what’s the alternative?
One alternative is to focus not on bailing out the banks but to bail out their creditors when the banks fail. The government would take control of the bank and all its assets in return for taking on all the the liabilities. The bank would continue to run on in a kind of Chapter 11 bankruptcy situation as its non-profitable operations were liquidated and its profitable operations were sold. Operations that are essential to the wider economy could continue to be run under government supervision until buyers were found.
This is a better solution because it doesn’t help the bankers who created the mess. They either get sold or laid off. It bails out people who had faith in the American financial system and who thought that they were safe doing business with blue chip companies like Lehman Brothers and AIG. If our present difficulty is a liquidity problem rather than a solvency problem, the government may even make a profit on the bailout.
The second alternative is to go to the root of the crisis, which is the people struggling with mortgages they can’t afford. By bailing out the homeowner, you also bail out the bank that owns the mortgage and the people doing business with the struggling banks.
One way this could work is for the government to take a stake in people’s homes in return for paying part of the mortgage. If the homeowner could afford to pay 60% of the current mortgage, Uncle Sam takes on the other 40%. The homeowner would be able to stay where they are for up to 10 years. At that time the government would require the house be sold in order to get its money out.
This solution would help to support the housing market, and avoid the disruption that the foreclosures are causing. This is a better solution than Paulson’s plan because it bails out everybody. Communities and local governments benefit, as well as the homeowners, the banks and the people who do business with them.