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The Paulson Plan announced last week was a spark for financial markets. There seemed to be hope that a fundamental solution to credit problems was at hand.
One of my themes has been a sort of blind spot for investors. We tend to take our experience in dealing with individuals in business situations -- rational motives, calculations, logical bargaining -- and use this simple model to predict the actions of government. (Interested readers can delve more deeply into this topic
on my blog.
In stark contrast, government does not behave like a unitary, logical chess player. Government actions are the result of many individual vectors of interest, both economic and political. There are Representatives who oppose any plan, perhaps because their constituents share this viewpoint.
The result? Treasury Secretary Paulson and
Chair Bernanke have collaborated upon a proposal. They have analyzed the issues and devised a plan that goes to the heart of the problem -- at least according to their analysis.
Now they have the mission of selling this viewpoint. In more normal times, this would have been a problem of Presidential leadership. These are not normal times.
Will Congress Accept the Vision?
The brief answer is that members of Congress are listening and are generally supportive. Even this level of acceptance is a major accomplishment. Various Senators and Representatives have stated that they were impressed by conference calls led by Paulson and Bernanke. Even those with ideological predispositions against action are willing to support a needed plan. Public interviews include those who have confessed that they are generalists who are relying upon the authoritative and impressive presentations. Translation: They were frightened by the picture painted for them.
Comparison to the Resolution Trust
While leaders like to invoke precedents, there are many differences from the Resolution Trust experience.
readers can get a good start by reading John Fout's excellent
FAQ on the subject by John Fout.
The Resolution Trust proposal was viewed as vital and the need was urgent. Despite this,
the legislation took six months from proposal to passage . It involved a complex package of regulatory changes, reforms in rules, the involvement of existing agencies, changing of agency responsibilities and a new Oversight Board.
Even if one accepts the RTC situation as a precedent, the many parallel issues raise questions.
There are several very significant differences between the Paulson Plan and the RTC.
. In the RTC the assets were known. The government took control of the portfolios and had only the problem of creating a market. The current problem is much more difficult. There is widespread disagreement about the value of the complex mortgage holdings. What price will be paid? Will it be a good deal for taxpayers, as some suggest? Or will it be a subsidy for financial institutions and mortgage holders?
. In the RTC, the budget was strictly supervised by Congress. In the current plan, a "blank check" authorization with a high limit is sought.
. In the RTC, there was supervision by a respected existing agency, the FDIC, and a general unwillingness
to grant a blank check.
Oversight is a Key Issue
Congress, as an institution, is reluctant to cede power to the Executive branch. This is a natural outgrowth of the Constitutional concept of separation of powers. The key power of Congress is the power of the purse. Congress preserves its power by control over appropriations. Even when a new agency is authorized, the continuing power comes from the need for regular application for appropriations. Many legislative ideas have been approved, but have not received adequate funding.
Special Oversight Issues in the Paulson Plan
The exigent circumstances create a unique challenge for Congressional oversight.
Should the Treasury Department have special powers? Let us suppose that Members of Congress have a special respect for Secretary Paulson. I believe that they should. He is showing exceptional leadership in a trying time. He also has deep experience in financial markets, including knowledge of the most obscure trading strategies.
? He will be leaving office in a few months, while the program will extend for years. No matter how much confidence one has in the incumbent, Congress does not know who will take over this plan.
Who will make trading decisions? In RTC and the Bear Stearns bailout, the government could outsource the trading decisions. This makes sense. Current government departments do not include trading specialists, and why should they?
? The government is not acquiring a portfolio of assets and trying to get the best price. It is both buying and selling. The purchase price is crucial. There is the possibility of favoritism in decisions, and the stakes are huge. This is precisely the reason that executive agencies are held accountable by those facing elections.
What will be the cost? We do not really know. If a large blank check is authorized, Congress will have no continuing oversight authority. The power of the purse is lost.
I would really like to be optimistic about the Paulson Plan. I think that strong government action is needed, and would be in the public interest. It should have started many months ago.
Trying to solve all of the problems on a short deadline is a challenge. FDR's speech after Pearl Harbor comes to mind. Congress could immediately agree on a Declaration of War. How much traditional power will Congress cede in order to meet this dramatic threat to our economy?
These many questions trouble the financial markets and help to explain the pressure on financial stocks.
We have a lame-duck President and Treasury Secretary -- and perhaps soon after the Fed Chair -- what is the role of the candidates? We know that one of them will be President. Should they have a voice in this process?
This would be unprecedented, but is most relevant. It is a subject for a future article.
Jeffrey Miller is president and CEO of NewArc Investments, a registered investment adviser, and Capital Markets Research.
Miller writes about the market, interpreting data, and finding the right expert at his blog, "
. He is writing about the 2008 presidential campaign and the implications for individual stocks and the market at
. His investment company, with programs for both individual and institutional investors, is
Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Miller appreciates your feedback;
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