This has not been an uneventful week in the news. Unprecedented actions are being urged upon us by a Republican administration. While I am generally pleased to see bipartisan support for almost anything in Washington – I am getting a gag reflex from this proposal that I cannot ignore. I have spend several days trying to get my own hands around the nature of the problem. I have listened to commentators and politicians on the right and the left (and Dr Ron Paul who may not fit either description). I had the pleasure of participating in an excellent conference call this morning with AR member Mike Morgan presenting his views.
I have seen several threats to our way of life in the last decade. I support the war on terror – but my first reaction to the 9–11 attacks was that we would lose civil rights in an effort to seek security and that, once lost, we would never get them back. I have been concerned at some of the provisions of the Patriot Act, but compared with the intrusions into our lives by technology and routine business practices, the intrusion of government surveillance is almost insignificant.
And now, Treasury Secretary Paulson, Federal Reserve Chairman Bernanke and SEC Chairman Cox have come before the American public with an urgent proposal of such far reaching significance as to challenge our basic definitions of governance.
First, let me look at Secretary Paulson as he is the point man for the administration in this matter. Henry Paulson has government experience in the Nixon administration and a strong career at Goldman Sachs. On the plus side, he is experienced and well respected by the financial markets. On the negative side, Paulson is a part of the financial market structure that brought us to this point. Despite his repeated assurances that there was no immediate structural dangers and 300 billion dollars pledged to support the secondary mortgage markets by propping up FNMA and FHMC (Fannie Mae and Freddie Mac), Secretary Paulson comes to Congress with the most urgent message since Chicken Little cried out that the sky is falling. The sub-prime mortgage problem has been on the table for several years now. The mortgage backed securities and financial products that have carried the infection into other segments of the financial markets were created during Paulson’s time at Goldman Sachs so he should be completely familiar with the dangers that lurked below the surface. Warren Buffet warned more than five years ago that derivatives and other sophisticated financial instruments were a danger in that neither investment banks nor regulators understood the workings of the products nor their impact on the financial markets.
How can Secretary Paulson bring a plan for a trillion dollar reorganization of the financial markets to Congress and tell them he needs to have emergency powers authorization passed within a week. How could a situation of such enormity (and I use the word intentionally) be brought forth from the administration without warning in the last six weeks before a Presidential election.
I have read the legislative proposal for Treasury authority to purchase mortgage related assets vesting unprecedented power in the hands of the Secretary of the Treasury for a two year period. Section 8 of the proposal reads, “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” There is that gag reflex again.
I understand (that may be slightly overstated) the delicate balance in which financial institutions operate. The public confidence is an essential part of their operating environment. As I have commented previously in these pages, no bank in our system carries sufficient reserves to sustain the bank against a prolonged run on the bank – or the banking system. But I am not sure why the guarantee of the stability of the secondary market for mortgages by the federal takeover of Freddie and Fannie is not stabilizing to the markets. If the Federal government is providing adequate liquidity to the mortgage market and assuming responsibility for the half of the home mortgages already held by Freddie and Fannie – why doesn’t that buy us time to take a better look at the problem. How many times are we required to purchase the same piece of paper (the underlying mortgages).
Our system of government is not designed to commit a trillion dollars of tax dollars to the unsupervised control of a single un-elected official on unbelievably short notice. While I am not a fan of endless Congressional hearings, the Congress should receive the opinions of government and non-government experts to define the problems so that a reasonable solution can be enacted into law. With all due respect to Secretary Paulson, there is concern that the beneficiaries of this program are the old boy network in financial services of which Secretary Paulson is a member. If the forces that precipitated this situation really was not visible to Secretary Paulson until we were at the abyss, then perhaps he is not the appropriate soldier to lead us out of the forest.
On balance, I urge caution and restraint in moving forward. I understand that decisive government action may be called for to reassure the world wide financial markets. But prompt and decisive is not a replacement for reasoned and correct. This situation calls for protection of the public interest and an accounting for the apparent lack of concern for common sense and the public interest up to this point. Whatever solution is enacted by the Congress must include accountability and oversight to prevent a deepening of the crisis. The public will not stand for protection of the financial houses without assurance that the plan provides protection for the taxpayers who are becoming victims of every action taken by government lately. Further, the plan will not pass the smell test with the public if some action is not taken to prevent golden parachute compensation packages to the executives who have piloted the financial ship onto the rocks.
It is likely that the political forces at work will turn Secretary Paulson’s sleek race horse into a camel before any substantive bill is passed. Perhaps distaste for the outcome of the legislative process will cause the Congress to look more carefully at the desired results and the means to attain them. I would like to be reassured that there is not another alternative course of action before I support this legislation. If time permits, I would like to withhold action until the next President is at least identified by election, if not sworn in on January 20. Unless absolutely necessary, it may not be reasonable to bind the next president in such a way as to prevent his input now.
I welcome your comments.
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