In the previous post we enumerated what any financial clean up legislation must have to earn conservative support. But as important as federal action is, there is a strong possibility that further government intervention will only make the situation worse. To make sure this does not happen, and deal must not:

  1. Give the Treasury unbridled discretion to intervene in the economy. – For far too long our nation’s courts have been only to eager to rubber stamp Congressional grants of sweeping and seemingly standardless delegations of discretion to the executive branch. Yet even under the courts’ permissive, modern approach to such delegations, the delegation of authority under early versions of the Treasury’s plan is questionable. Congress should not pass a bill that what fail constitutional muster.
  2. Turn the government into the nation’s largest landlord. – Some alternatives in discussion include a government purchase of the distressed mortgages themselves so families are not forced from foreclosed homes. Not only would this bailout individuals that made bad real estate decisions, it would turn the federal government into the nation’s largest landlord. The government is not equipped to decide how much rent to charge thousands of families across the country or to manage those properties.
  3. Give the government the power to rewrite contracts. – Legislation must not grant bankruptcy judges new powers to arbitrarily reduce mortgage payments. Such a move would only add more uncertainty into a financial system already plagued by it. Any such policy would also make it harder for new or low-income homebuyers to find mortgages, and all homebuyers will find it more expensive to get a mortgage.
  4. Make government an equity owner of Wall Street. – Treasury should not be allowed to take equity stakes in the institutions they buy troubled assets from. Government ownership of financial institutions should be avoided, and bureaucrats should not have a say in the management of any firm.
  5. Divert revenues from taxpayers into other purposes, especially to housing slush funds. – The left is still desperate to find a funding source for their National Housing Trust Fund. One provision being negotiated would require that 20 percent of any profitable transaction would be deposited into this ‘special fund’ for low-income housing. This provision would only increase the cost to the taxpayer. In addition, it circumvents the usual appropriations process, thus making it harder to keep track of spending.
  6. Dictate the terms of employment for private sector businesses. – While legislators and others are understandably angry at the financial executives who caused the problem, a pay cap will be counterproductive by driving the most talented executives to companies not affected by the proposed bailout. Pay should be decided by the company, its shareholders, and the executive, not managed by a congressman or a bureaucrat.
  7. Impose new regulations on the financial industry. – While the current financial regulatory structure is archaic and needs to better reflect the current state of the industry, this should be done through considered, well-reasoned effort, not as a knee-jerk reaction to the current financial situation. The financial industry should not be “Sarboxed” in the same way that the accounting industry was damaged by Sarbanes-Oxley.
  8. Require firms to raise capital. – A number of firms have already fallen short in their attempts to raise new capital, and this approach is unlikely to have much impact as a stand-alone reform. Instead, it would be likely to force yet more firms into cut-rate mergers.
  9. Ease capital standards. – The major problem today is the loss of confidence in financial institutions, not their capital levels. Lowering capital standards and hoping firms will grow out of the problem did not work for S&Ls in the 80s and it will not work now.