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Eye on the News

John P. Avlon
Questioning King Henry
The rush to pass the government’s bailout plan will cause more problems than it will solve.
23 September 2008

The eyes of an anxious nation—and of plenty of panicked plutocrats—are focused on Treasury secretary Hank Paulson, whom Newsweek has dubbed “King Henry.” The bailout plan that he’s pitching—initially drafted on three pages over 18 hours and now pegged at $700 billion—is evolving almost hourly. Recent behind-the-scenes drafts have extended its scope to individual credit-card debt, car loans, and student loans. Foreign owners of distressed mortgage debt are demanding that they be included in the bailout, with the implicit threat that their ownership of American debt in the form of treasury bonds gives them effective extortion power over the United States. Absent from the plan so far are accountability, oversight, reasonable restrictions, and transparency. It’s becoming a grab-bag bailout and a blank check, propelled through Congress by the urgent desire to “do something”—anything—to stabilize capital markets or risk further catastrophe.

While a sense of crisis is often the only way large-scale legislation is passed in Congress, it’s also how epic mistakes are made. In our panic and desire for protection, we are in danger of forgetting that it’s both right and reasonable to question King Henry—especially with the looming threat of saddling future generations with unprecedented debt. With every day marking a new economic milestone, it’s easy to overlook the fact that the scale of the bailout dwarfs anything in the history of printed money. Here’s a reality check: the current (conservative) $700 billion price tag is larger than those of the federal departments of defense, homeland security, and justice—combined.

What is clear is that taxpayers will be left to foot the bill for decades to come as Main Street bails out Wall Street—all while the nation is at war, facing record deficits, and preparing for a demographic tsunami of rising entitlements with the approaching retirement of the baby boomers. The S&L bailout of 20 years ago pales in comparison, not only because of its comparatively modest taxpayer price tag ($124 billion), but also because in that case the U.S. retained companywide assets that were later auctioned off. In this case, taxpayers are being asked to assume all of the risk and none of the positive underlying assets. It’s a lose-lose deal.

Fortunately, some fiscal conservatives in Congress are skeptical of the proposed bailout. Republican senator Jim DeMint of South Carolina has said that it would “not only cause our nation to fall off the debt cliff, it could send the value of the dollar into a free-fall. . . . This plan may make things look better for Wall Street in the next couple months, but the long-term consequences to our economy could be disastrous. There are much better ways of dealing with this problem than forcing American taxpayers to pay for every asset some investor doesn’t want anymore.”

Those better ways include making secure loans to the afflicted organizations, protecting taxpayers, and holding firms’ management accountable for their mistakes. This will stop the asset run and require the companies to sell their remaining assets at market prices, instead of holding out for a better payday at taxpayer expense. And reasonable restrictions are needed to ensure that not one cent of taxpayer money goes to executives at the companies we are bailing out in the form of bonuses or any other type of compensation. Their greed or mismanagement drove these companies into the ground, and American taxpayers should not subsidize their newest house in the Hamptons.

Make no mistake: the fiscal crisis is broad and real and needs to be addressed comprehensively. Paulson might yet prove to be one of the greatest Treasury secretaries in American history—the right man at the right time. But rushing to enact the wrong bailout plan will compound the problem and restrict government’s ability to deal with the looming recession. A blank-check bailout will be quickly characterized as a lifeline for billionaires. Deliberation is not the same thing as delay, and dissent is not disloyal.

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