Bush Brings WMD Line to Wall Street

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By Dean Baker

Remember how President Bush got Condoleezza Rice and Colin Powell to run around warning about Saddam Hussein's nuclear bombs? This phony scare tactic got Congress to give him the authorization he needed to start the Iraq war.

Even though his credibility has vanished, in large part because of the Iraq war, President Bush is again using a lie to cow Congress into giving him a huge blank check. This time, the check is for $700 billion, to be handed over to Treasury Secretary Henry Paulson, to spend pretty much as he wants.

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Dean Baker | Progressive Conditions for a Bailout •

The lie in this case is that if Congress doesn't cough up the money immediately, the banking system will collapse and the economy will fall into depression. To be fair, there is more truth to this story than the Iraq WMD line.

The policies of President Bush and the recklessness of the Wall Street crew really have brought the financial system to the edge of an abyss. There was a near meltdown last week as Lehman Brothers, the huge investment bank, collapsed; and AIG, the nation's largest insurer, followed suit. Banks stopped lending to each other, creating a situation in which our system of payments (e.g. checks and electronic transfers) stopped functioning.

The Federal Reserve Board and the Treasury then took a variety of extraordinary measures to patch things together and get the financial system working again. Nonetheless, there is no doubt that the system really is on edge at the moment and that the collapse of another giant financial institution can set off another panic. Still, Congress has some time in this story to deliberate about how a bailout should be structured rather than just handing over a blank $700 billion check to Henry Paulson, as the administration requested.

Just to be clear, we are in this mess for two reasons. First, the financial regulators, both in the Bush administration and more importantly at the Fed, were completely asleep for most of the decade. As the housing bubble grew to ever more dangerous proportions, and lenders adopted increasingly questionable lending practices, the regulators did nothing.

The other reason we are in this mess is that the Wall Street banks got themselves hugely leveraged in real estate and other assets. In many cases they had no appreciation of the value of the underlying assets. They also apparently did not understand the complex financial derivatives that they had themselves created.

Now this situation has exploded in their faces, sinking several of the country's largest financial firms and bringing dozens of others near the cliff. As a result of the recklessness of the Wall Street gang, the economy is now facing a recession, with the unemployment rate rising rapidly. Millions of families are losing their homes.

So what is President Bush proposing? He is telling Congress that everything can be put back in order if they just give $700 billion to Henry Paulson, with no strings attached.

Keep in mind that Henry Paulson is himself one of the Wall Street gang, a former head of Goldman Sachs who pocketed hundreds of millions from the sort of deals that have wrecked the economy. He also managed to get just about everything wrong in his assessment of the economy. He missed the housing bubble altogether and then underestimated the seriousness of the financial crisis at every turn.

We cannot afford to give Paulson a blank check. Congress must first insist on some serious accountability in the bailout process: that means a board that involves Congressional appointees and a high level of transparency.

Congress should also insist that the Wall Street crew pays for its incompetence. An absolute cap of $2 million in annual compensation for any executive of any firm taking part in the bailout seems fair. The taxpayers should also be compensated for their support. The government should acquire an ownership stake in the companies that it bails out. For example, for every $10 billion in bad debts it buys, the government should get $2 billion in stock. That way, the taxpayers stand to get back some of their money.

There are more conditions that should be imposed as part of the bailout, but the key point is that Congress has time to structure the bailout to serve the country's interest. It should not allow itself it to be bullied into again giving the Bush administration a huge blank check.