Thumbs Up Or Thumbs Down?

It looks as though the Senate will enact the same bill that failed in the House on Monday, but with sweeteners added in the form of tax credits and with the FDIC insurance limit raised from $100,000 to $250,000. The theory is that these additions, especially the tax incentives for renewable energy, will sway 12 or more Congressmen to switch their votes. Perhaps they will, but should they?

I’ve said that if I were voting on Monday, I would have voted for the bailout package. This was based on the many predictions of doom that were coming from credible sources–Steve Forbes, to name just one–if such action were not taken. But a few days have now passed, and the roof has not fallen in. Yesterday the SEC took what I think will be very helpful action by revising (or, as they said, clarifying) the mark-to-market rule. This should help to free up liquidity.

There likely are better alternatives to the $700 billion bailout that is the essence of the Paulson Plan, as modified by the Democrats and then tweaked further in negotiations with the House Republican leadership. For example, the insurance approach that the Republicans have argued for, which was incorporated into the revised House bill, but in watered-down form. Or, why not structure the program as loans, rather than having taxpayers buy the distressed mortgage-backed instruments? If the federal government made loans with the devalued assets as collateral, wouldn’t that solve the liquidity problem as effectively as a purchase, without putting taxpayers on the hook for the entire lost value of the assets?

Maybe there are good reasons why only a bailout will work, but at present that seems far from clear. It appears that we have some breathing space to debate calmly, and not in an atmosphere of panic, the best way to solve the current financial crisis.

It is no doubt true, as so many have said, that doing nothing is not a viable option. But it is a big step from there to say that the only viable option begins with a $700 billion taxpayer commitment. The House should not be stampeded by today’s Senate action into going down that path.

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