Support for Treasury Secretary Hank Paulson's $700 billion rescue plan is slipping away among both liberal Democrats and conservative Republicans — as well it should. The plan tries to bail out Wall Street, and does nothing for Main Street. Both Barack Obama and John McCain have expressed skepticism.
The Democrats will try to force the Bush Administration to accept a more fair and balanced plan, as they say over at Fox. So, all week, as Paulson presents his badly flawed proposal to Congress, warning of catastrophe if Congress fails to take it as written, there will be more drama on Wall Street. The Dow rebounded by something like a thousand points, on the strength of Paulson's promised bailout. As the Democrats and some Republicans express second thoughts, doubts are likely to infect financial markets as well, where the solvency of the system has been a day-to-day affair.
It adds up to a very high-stakes game of chicken. And critics of Paulson should not be afraid to insist that if a trillion dollars of taxpayer money are put on the line, we should damn well do it right. What does that mean? Here is the Kuttner plan:
- Government gets equity in firms receiving assistance, in rough proportion to the amount of aid extended. That's what Franklin Roosevelt insisted on, when the Reconstruction Finance Corporation of the 1930s pumped taxpayer money into private firms receiving taxpayer funds.
- Limits on executive compensation paid by any firm receiving the public aid. Nobody should get filthy rich on the backs of a taxpayer bailout.
- A payback of the cost to the government, to be extracted from the firm's future profits over a ten year period.
- Time-limited authority, so that the Treasury Secretary's emergency powers expire by next April 1. Any extension would be conditional on across-the-board re-regulation of financial institutions of all types.
- Creation of a small independent board, which must review and approve Paulson's proposed deals. Paulson should not be granted these dictatorial powers.
- A parallel program to refinance subprime mortgage loans, so that homeowners get direct relief. That's what Roosevelt did with the Home Owners Loan Corporation of the 1930s, which eventually refinanced one mortgage in five at low interest rates. Money should also go to municipalities and community-based nonprofits to acquire, restore, and repopulate foreclosed properties.
- At least $200 billion of new economic stimulus, in the form of aid to states, cities, and towns, for infrastructure rebuilding, more generous unemployment compensation, and retraining benefits.
As the week wears on, watch support build for measures like these. Paulson faces very rough going as he prepares to testify. His "grilling" on the Sunday morning talk shows was a picnic compared to what's coming.
Hank Paulson, who came to Washington intending to push for even deeper re-regulation, is about the last person in America to be entrusted with the Roosevelt-scale reversal that the economy needs. He's still operating like the private investment banker he was for his entire career until 2006: big payoffs for his Wall Street chums, and tough luck for Main Street. Shame on Congress if it doesn't insist on something better. My bet is that Congress will.
Politically, this has to play to the advantage of Obama, no matter how much McCain tries to reposition himself as a born-again populist regulator. This month's events are nothing less than a complete repudiation of the ideology that claimed financial markets could regulate themselves. McCain is on the record too many times over the years insisting that governments leave markets alone.