Time Is Short and Congress Needs to Act

The News & Advance
Published: September 25, 2008

Sometimes, when confronted with adversity and challenges, all the options available are bad ones. You just have to choose which poison you prefer.

That’s the situation confronting the federal government, President Bush and the U.S. Congress over how to deal with the financial crisis confronting the nation’s financial sector. Defaults by homeowners on their risky and expensive subprime mortgages have triggered a financial tsunami on Wall Street, sweeping away billions in assets in investment vehicles based on those mortgages, drowning banks and other issuers of those funds and dragging down one institution after another.

Last week, as the crisis deepened, experts were seeing, not just a tightening of the credit markets, but an actual freezing of the availability of credit. Banks weren’t just balking at making loans to individuals, small businesses and companies but to each other, in the so-called overnight markets. We all know what happens when an automobile engine locks and throws a rod; imagine that happening to a national economy.

Experts put forth a variety of dramatic options to deal with the crisis. They’ve ranged from a totally market-driven approach of letting the market itself decide which firms live and which die to the federal government taking direct equity stakes in hundreds and thousands of institutions across the country.

Federal Reserve Chairman Ben Bernanke, formerly an economics professor at Princeton University, is one of the world’s leading experts on economic crises and cut his teeth studying Japan’s half-hearted attempts in the early 1990s to deal with the bursting of its own real estate bubble. He understood that a government would need to take immediate and decisive steps to staunch the fiscal bleeding and, indeed, had been planning such a large-scale intervention should the need arise in the United States.

Well, it has, and the quickest, most straightforward approach is the plan he and Treasury Secretary Henry Paulson have devised: the purchase of financial institutions’ bad mortgage assets for their eventual liquidation. The estimated cost of $700 billion is mindboggling. The enormity of the powers the program would convey to the Treasury secretary is equally great.

Midday Thursday, the congressional leadership reached a tentative deal on the bailout. President Bush compromised with Democrats on limiting pay for executives of financial institutions taking part in the program and on giving taxpayers an equity stake in the bailed-out firms.

Some House Republicans, troubled by the philosophical implications of the bailout, are still pushing for a different plan, one under which the federal government essentially would provide insurance for private firms that would purchase the soured assets from the troubled financial institutions.

Would it work? Would it be big enough and quick enough to save the pillars of the national financial infrastructure and to stave off a deep recession? No one, not even its House backers, knows.

Speaking to the nation from the White House on Wednesday night, President Bush laid out in stark terms the dangers the nation faces if government doesn’t act swiftly and decisively. “America could slip into a financial panic, and a distressing scenario would unfold,” the president said. “Our entire economy is in danger.”

During the Civil War, President Abraham Lincoln, the “Great Emancipator,” did all he could to preserve the Union. On three occasions, he went so far as to suspend the basic Constitutional principle of habeas corpus for the greater goal of preserving the nation.

This crisis is one of those times when ideological purists need to set aside their embrace of free-market philosophy to preserve free markets themselves.