Monday, September 22, 2008

Open Letter: Bailout Bill

Dear Senators and Representatives,

I am writing today to urge you to oppose the ridiculous financial bailout bill proposed by the Bush Administration and Secretary of the Treasury (and former Goldman Sachs CEO) Hank Paulson. It is easily the most naked power grab in the past quarter century, and if passed as-is, it will go down as the Bush Administration's third biggest screw-up (after Iraq/Afghanistan and Katrina). The plan is undemocratic, unaccountable, and fundamentally unwise. The rush to get it passed is a scare tactic aimed at bullying Congress into passing something that favors Wall Street. We saw something similar before the Iraq war, and we know how that turned out.

The plan as currently proposed almost certainly won't work. Buying the various CDOs, MBSs, and other financial instruments at “market value” would still leave many banks under-capitalized and thus insolvent. But buying the financial instruments at face value would be a huge give-away to Wall Street and other financial gamblers. The only way to avoid a huge giveaway, eliminate the moral hazard, and keep the system functioning is to take over every institution with a whiff insolvency, recapitalize them directly, and manage them until the financial instruments mature and the firms are solvent. It would be ugly, but the American financial system is broken. But so is the idea that unfettered free market capitalism exists in American, or that it works. That has been proven false by very people who most support it – Republicans and Wall Street.

Here are the conditions that I think should be attached to any bill, no matter the details of how the “bailout” is implemented:

  1. It should include a way of at least partially paying for the huge bill the taxpayers will inevitably shoulder. I suggest a) repealing the Bush tax cuts, b) resetting the capital gains tax to the pre-1997 levels, and c) implementing a low (0.01% to 0.05%) transaction tax on all stock, bond, option, future, etc. sales (the UK already has a sales tax on stocks and it hasn't harmed the London stock market).
  2. It should include a provision to break up anything that is too big to fail.
  3. It should include a provision to regulate anything that functions like a bank as a bank.
  4. It should be completely transparent and have accountability. All transactions should be posted on the web immediately. Congress should get weekly reports on what has happened, why, and what the next week's plan is.

Talk about limiting CEO compensation may feel good, but is basically irrelevant at this point, as is talk about “claw-backs” - recovering past unwarranted compensation. Helping homeowners should also be separated as it muddles the issues. The focus needs to be on rebuilding the financial system from the top down with a more small-c conservative culture. Thank you for your time, and I look forward to rational action on your part.