This story was written by Aishlinn O'Connor, The Duke Chronicle
The "fundamentals of our economy" are not strong. They were put at great risk due to unregulated gambling on Wall Street. And in the end, when the bluffs were exposed and investment banks lost, they hurt more than just themselves. A Wall Street ignored by Congress would have huge rippling effects on the economy. So to prevent such an economic failing, the government and taxpayers are coming in to save the day -- to play the part of what George Stephanopoulos called "the world's biggest insurance company."
Sen. John McCain says it's greed that did us in. Sen. Barack Obama says it was lack of proper government regulation. Treasury Secretary Henry Paulson says it started with "excesses in the system, irresponsible behavior and practices at financial institutions." But no matter what caused it, we still face the same situation today.
The financial sector is clogged with illiquid assets, ones that can't be easily sold for a variety of reasons. The bailout plan announced by Secretary Henry Paulson would allow the government to buy up to $700 billion worth of these illiquid assets from financial institutions and attempt to liquidate them. Basically taxpayers are taking the risk, paying out the money in an emergency short-term solution and hoping the government can then sell off these assets over time.
Under the current plan, the government does this for free. They offer to help both foreign and domestic banks out of their financial crisis without demanding anything in return.
Paulson justifies this decision with the urgent timeframe; we must save these companies now before the domino effect bankrupts them all, but we need time to study what regulations are needed. He also argues that unlike AIG, Fannie Mae and Freddie Mac, these companies have yet to fail. This bailout is preventative. Any restrictions would make saving these companies "difficult for them," not to mention him. "We need this to be clean and quick, and we need to get it in place."
Many in Congress disagree. They point to the fact that the government only has leverage over these financial giants now. Once the government determines exactly how they are doling out the $700 billion, the corporations have no need to cooperate with the government. What's to say they won't go back to the same risky practices that got us in this mess? Congress wants to have some control in the form of an oversight board over the way the money is spent. They desire caps on CEOs' pay and the "golden parachutes" they receive when fired. Democrats would make more resources available to homeowners in order to prevent more of the foreclosures that created the illiquid assets. They wouldn't take on the risk for free.
But no one knows exactly when this impending freezing of money is going to happen. I, though, am not comfortable letting Congress and the Treasury take their own risks by delaying the bailout. Too much gambling has already occurred. In authorizing this money so quickly, Congress should demand the oversight capabilities they desire and appoint experienced individuals to the board.
Congress must also demand something from these companies. We can't know yet what new regulations will be needed on the industry, but we can demand that the institutions who are aided by the bailout help us figure out what those should be. These institutions should be asked to cooperate fully -- to open up the financial books, the investing strategy proposals, the lending requirements, the company management models and anything else the Treasury or Congress needs in its investigation.
Congress should continue to look at options in increasing aid to homeowners and regulations of Wall Street, but needs to use its leverage quickly. Demanding transparency and cooperation coud be the most effective way to use this leverage. Any other regulations should only be for this transitional time. This way no more risky snap decisions are made. The government will use taxpayers' money to take on the illiquid assets, to fix the financial situation in the short term. In return, the financial industry itself will have to give the government the information it needs to keep the economy fixed in the long run.