Law Professor Ilya Somin and economist Steven Landsburg question the need for a bailout. Sebastian Mallaby, a supporter of past bailouts, balks at this one, comparing it to “wandering into a bad-loan bazaar and being ripped off by every merchant.”
As more details of the bailout become available, investors grew alarmed. “Peter Schiff, president of Euro Pacific Capital, said the fear of inflation provoked by the $700 billion plan — without figuring out a way to pay for it — was behind the market’s dramatic movement. ‘Where’s the tax increase to fund this bailout? Where is the cut in programs? The government’s not doing either — they’re just going to print money,’ he said. And if you think inflation is the answer, take a trip to Zimbabwe and see how it’s working for them.” (The economy is already at serious risk from the Fed’s inflationary easy-money policy, which helped spawn the mortgage crisis. The bailout will also increase the risk of future bubbles).
The bailout may yet grow more expensive, since Congressional leaders are demanding lots of additional costly give-aways at taxpayer expense. Yesterday, we reported that the Administration had agreed with Congressional leaders to expand the bailout “to add more costly give-aways, like â€˜systematic‘ limits on foreclosure, that would allow irresponsible borrowers to remain in their homes at taxpayer expense.” The liberal Congressman who said such an agreement had been reached — House banking committee chairman Barney Frank — “backtracked” late yesterday, saying that while he was seeking such additional give-aways, he had “overstated the agreement” by saying that the Bush Administration had agreed to them already. Today, however, the Los Angeles Times quotes Frank as saying that “agreement had been reached in several broad areas, among them . . . a requirement that the department seek to minimize home foreclosures by slicing the interest rate and even the outstanding loan amount of many of the troubled mortgages it buys.” Such a requirement would be unfair and very costly for taxpayers, and any bill that includes such give-aways should be filibustered.
The versions of the bailout bill that I have seen are so sweeping and standardless that they constitute unconstitutional delegations of power. They give Treasury Secretary Henry Paulson extraordinarily broad powers to buy bad loans throughout the economy, without any meaningful standards, barring any judicial oversight of even patent misconduct. But vast grants of authority are only allowed when government officials are subject to judicial review, as the courts made clear in the broadest peacetime delegation of power they ever upheld (the Nixon-era price controls upheld in the Amalgamated Meat Cutters case).
Government officials like Paulson claim that we should trust them to exercise their powers wisely. But government officials spawned the mortgage meltdown and financial crisis through their incompetence, such as mandating risky loans to promote “affordable housing.” And Paulson himself failed to see it coming even when the warning signs were obvious. Not long before taxpayers ended up bailing out mortgage giant Fannie Mae, Paulson claimed it was in good health, and for political reasons, he ignored warnings to the contrary from conservatives. His arguments for the bailout are internally inconsistent, and disregard the lessons of history. There is no reason why taxpayers should trust him with $700 billion and no strings attached, especially given his conflicts-of-interest in doling out the money.
Many commentators are now calling for relaxation of federal regulations mandating “mark-to-market” accounting (which requires assets to be valued at current fire-sale prices), in order to stem the financial crisis, including the Republican Study Committee, former FDIC Chairman William Isaac, the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, and Newt Gingrich. The government insists that private banks use it, but hypocritically refuses to use this method of accounting itself.