Since the Bailout Bill was passed the Dow has dropped over 1000 points. The bailout was sold in part as a way to stabilize the stock market. By the standards of the Bush Administration itself, the bailout bill seems to have been irrelevant or even counterproductive. Under the bailout bill only two things are certain: Wall Street firms and executives will benefit, and our children will be stuck with an enormous debt. In fact when the Bailout Bill actually failed on September 29th Bush claimed the bill’s opponents were responsible for the decline in the Dow that followed. That decline was small and temporary compared to the decline that followed the bill’s passage.
Now it appears that Treasury and the Federal Reserve Board are looking at other more productive approaches. Today, Secretary Paulson is talking about investing in preferred stock of commercial banks, the same approach that the United Kingdom is taking. Paulson is also talking about unlimited insurance for depository institutions, which is the approach being taken by the Republic of Ireland and perhaps other European countries.
The actions now being discussed are consistent with the advice given to our Skeptics Caucus by William Isaac, former chair of the FDIC. I am glad to see that the Bush Administration appointees are talking about moving in a completely different direction than that suggested initially by Secretary Paulson, whose original 3 page proposal involved only the purchase of toxic mortgage-related assets by the Treasury. Only Democratic efforts to amend the Bush proposal lead to the inclusion of provisions allowing some of the $700 billion to go towards the purchase preferred stock.
The chief obstacle to pursuing these better alternatives may be that as much as $700 billion in federal assets might be committed to the wrong approach, namely the purchase of toxic assets by the Treasury Department.
The bailout bill and preexisting statues give enormous and unfettered power to the Bush Administration; we can only hope that they use it wisely, which means departing from the plans that they had in September.
