On September 19, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asked Congress for permission to spend up to $700 billion to purchase bad debts from banks, ease the credit crunch, and ensure liquidity of the US financial system.
Yesterday, ten days later, the House of Representatives rejected the measure. Permission denied.
Some Members believed free markets should be allowed to operate without government intrusion, overlooking the fact that that is how much of the present mess was created in the first place.
Others felt the taxpayers should not be on the hook for $700 billion which, whether we like it or not, only places us on the hook for that much and billions more.
Still others invoked 2008’s most overwrought metaphor to say that “Main Street should not bail out Wall Street,” as though there were any meaningful distinction between the two.
Some wanted to punish “Wall Street’s” unrepentant greed, arrogance, and incompetence. Presumably, these same people would have let the Titanic sink because the captain refused to admit he was a fool. “Serves him right,” they would say.
And, with the election just five weeks away, more that a few worried that a ‘Yea’ vote would be their last-ever vote in the House. (Hey, with unemployment already high, why make it worse, right guys?)
Whatever the reasons, the Paulson Plan was shot down. Yet Paulson’s and Bernanke’s mistake was not in the way they sized up the impending crisis, the way they conceived the plan, nor in the way they negotiated the final bill with Congress.
Their mistake was that they presented any plan at all. They overlooked an axiom that many of us learned as teenagers: It’s easier to ask forgiveness than permission.
So what will happen now that permission has been denied? They will spend the money anyway. In fact, they are already doing it. Just yesterday, the FDIC assumed the risk of some $312 billion in potential losses related to Citigroup’s acquisition of Wachovia. And the Fed injected another $630 billion into the financial system. In taking these steps, Paulson and Bernanke did not flout the will of the Congress; they already had the authority to do both.
But now they do it ad hoc, without any plan either to spend or to recoup the money; without taking an equity stake in any of the affected companies or placing any restrictions on how they use their available capital; without any new federal regulation or oversight; without any payback from “Wall Street”; without any limitations on executive pay and perks; and without any relief for homeowners.
Paulson and Bernanke may have forgotten what many kids learn, that it’s easier to ask forgiveness than permission. But then Congress failed to realize what many parents know: sometimes it makes more sense to grant permission and manage risk than to listen to excuses and manage fallout.
It’s hard to sort out the winners and losers after yesterday’s vote. As I see it, the only sure winners were the status quo and a few politicians running for re-election. The only sure losers were the rest of us.