For the first time in my memory, Paul Krugman and William Kristol, the left and right pillars of the New York Times Op-Ed pages are agreeing on something–The current Bailout plan is a bad deal.
I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.
But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.
But is the administration’s proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for — or even promises of — disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.
And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right — or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.
When both sides of the political spectrum can come together to say this rush to rescue is fatally flawed, surely we can slow down a bit and make a reasoned compromise.
One of the big issues that no one seems to want to deal with is that there is massive overcapacity on Wall Street. According to Merrill Lynch, during the 1989-91 down cycle, 25% of the publicly traded financial companies “went away” either by merger, acquisition or bankruptcy. So far in this cycle that figure is only 8% . The biggest mistake we could make as a country would be to repeat the Japanese error of keeping banks on life support with government bailouts. Merrill suggests that if the market worked it’s creative destruction mechanism, some 280 banks and thrifts could fail in the next 18 months. That would still leave lots of capacity.