By W. Sherman
At about 4:00pm yesterday, I sat down at the Village Bean, a coffee shop in Des Moines’ East Village, to type up this point. Reading the Wall Street Journal, this is what I learned that Congress had reached an agreement on what is now, the infamous bail-out. I learned that Treasury would get $250 billion immediately, and an additional $100 billion if necessary. I learned that the Treasury would get the remaining $350 billion upon Congressional approval. Finally, I learned that companies receiving these funds would be forced a host of provisions, including restrictions on executive compensation and allowing the federal government to take an equity interest in such companies.
And then things blew up.
The Journal reports that throughout the day, Congressional Republicans devised a plan that would create a government-sponsored insurance program for mortgage-backed securities. Under the plan, banks would pay a premium to the Treasury Department to insure the investments. Additionally, Senator Richard Shelby, an Alabama Republican, proposed allowing the Treasury to make loans to the banks, rather than buying up the bad debt on the banks’ books.
Like many conservatives, I believe that House Republicans were right to oppose this bail-out. First, the government is freeing these failed banks from owning up to their bad decisions, by putting the taxpayers on the hook for the losses. As Steve Chapman stated in his Chicago Tribune column, the plan “nationaliz[es] the money-losing part of the financial sector, to the benefit of capitalists who have made spectacularly bad decisions—fostering more bad decisions in the future.”
Second, the bail-out will put too much discretion in the hands of the government. John Paulson, in his column in today’s Wall Street Journal, poses shows that the bail-out leaves unresolved the questions of who will receive the taxpayer subsidies and at what price.
Third, accepting the bail-out means accepting legislation packed with tons of election-year gimmicks. The most widely reported gimmick, of course, is the cap on executive compensation. Regardless of what one may think regarding the reasonableness of CEO pay in this country, the government should not be setting the compensation of executives in private companies. Additionally, as Charles Krauthammer states in his column, “artificially capping the pay of people brought in to lead these wobbly companies back to health is a fine way to tell talented executives to look elsewhere for a job.”
During 2008, we have seen several investment banks, their insurer (AIG), and two mortgage giants fall. For all of their financial woes, an injection of $700 billion in taxpayer funds is not warranted. When banks make bad decisions, they need to take responsibility for those decisions—even during election years.