Bailout Dangerously Concentrates Power, Harms Economy

The $700 billion financial-system bailout was billed as a miracle cure for the economy, but the stock market dropped dramatically after it was enacted, falling more than 500 points.  In the Washington Post, the liberal journalist Sebastian Mallaby points out that “blaming deregulation” for the financial crisis makes no sense.   He puts some of the blame for the crisis on the Fed’s easy-money policy — an argument made by commentators across the political spectrum, including the conservative Wall Street Journal, and international investors.  He also notes that “the appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies,” which bought perhaps “a third of the $3 trillion in junk mortgages created during the bubble,” in large part  “because heavy government oversight obliged them to push money toward marginal home purchasers.”   Both the liberal Village Voice and conservative economist John Lott have made the same point. 

The bailout may be an economic failure that generates inflation, explodes the national debt, and eventually spawns future asset bubbles, but it may simultaneously be a political success.  Many people thought the bailout must be a good idea if both presidential candidates endorsed it.  But by giving the Treasury Secretary enormous discretion to buy, or not buy, bad loans from Wall Street at either high or low prices, the bailout concentrates enormous power in the hands of the president and his treasury secretary, to extort money from Wall Street for his reelection bid.  As a result, experts cited in the Washington Times worried it could lead to a “financial dictatorship.”  No wonder both Obama and McCain voted for it.  Each of them expects to win the election, and end up controlling a $700 billion slush fund that they can use to ensure their own re-election.

As reporter Jon Ward noted Friday in the Washington Times, “In all of American history, it is likely that no government official besides a wartime president has ever been given as much power over taxpayer money as Treasury Secretary Henry M. Paulson Jr. would receive under the $700 billion financial rescue plan. . . the Treasury secretary will acquire broad authority to buy and then dispose of hundreds of billions of dollars in mortgages and mortgage-backed securities at his sole discretion.  ‘They’re appointing a financial dictator,’ said Ryan Ellis, tax policy director at Americans for Tax Reform. ‘Congress is giving a member of the executive branch virtually unlimited power for the entire economy.'”