Democrats on Capitol Hill are claiming they have reached a deal with President Bush on a plan to cleanse the financial system of bad housing-related assets. So far, it doesn’t seem as though any conservatives have signed on. As lawmakers debate the merits of the sketchy plan, we have identified elements that any financial cleanup plan must have to win conservative support:
- Provide sufficient market liquidity to comprehensively resolve the financial situation. The nation faces a fast-spreading financial contagion and the risk threatens the economic security of Americans outside the financial industry. The way to minimize the amount of taxpayers’ money used is to maximize the amount of money available. The authorized investment must be sizable.
- Focus on a systemic approach that attacks the entire problem, instead of bailing out specific companies. The goal should not be to keep troubled enterprises in business, but to ensure they are restructured or wound down in a way that does not cause undue disruption in the financial system as a whole.
- Allow the Treasury Department to liquidate the investments in an orderly way. Any assets acquired should be disposed of as expeditiously as possible, but the government also should be allowed to hold assets until they can be sold for a better price. If it is essentially forced to dump securities into the market, this will force down prices — and further destabilize the market and increase any costs that would be borne by taxpayers.
- Return all proceeds from the sale of assets to the treasury. Over time, a substantial proportion of the assets held by the government likely would be sold at a higher price than what the agency paid for them. In such a case, profits should go to the taxpayers to reduce the overall cost of the bailout. Under no circumstances should any profits be used to finance other public policy objectives.
- Specify the types of markets where Treasury can act. The type of financial instruments or debt that the secretary can purchase, as well as the markets that he may purchase in, should be defined by statute carefully so as to limit the secretary’s discretion.
- Use objective criteria for how Treasury should price assets for purchase and sale. The legislation must provide an “intelligible principle” to guide government discretion on which assets to buy and at what prices. The criteria must actually operate to guide and sometimes limit the secretary’s exercise of discretion, and not merely serve as a perfunctory preamble for congressional action.
- Provide for meaningful judicial review. Citizens adversely affected by the government’s actions must be able to seek redress in the courts for fundamental constitutional violations or damages at law.
- Sunset all regulatory authority. All regulations promulgated under the authority of the emergency legislation should expire with the rest of the statute absent subsequent congressional action.
- Establish an oversight board. Congress should set up an independent council of financial professionals to provide regular oversight of the plan. To assure its independence, the oversight board should not include representatives of either Treasury or the Federal Reserve.
