Secure Our Securities

The Paulson proposal is a solid short-term solution to the financial crisis

Over the weekend, leaders in Washington reached a tentative agreement on a government rescue strategy for the fraught U.S. economy. After intense, partisan negotiations, the core proposal of Secretary of the Treasury Henry M. Paulson’s original $700 billion bailout plan remains largely intact. Originally conceived and announced last week amid unprecedented U.S. bank failure and market turmoil, the bailout plan will appear in front of the House of Representatives this morning. The aim of the Paulson proposal, if passed, will be to inject liquidity into the stagnant credit markets, which must be greased in order to prevent further deterioration of the financial sector.

The $700 billion bailout is an appropriate short-term tactic and should stabilize the U.S. economy, buying time to address root problems. The credit market freeze stems from banks that are unwilling or unable to lend out capital for any significant length of time. Surviving banks are, quite appropriately, concerned that their damaged assets, composed largely of mortgage-backed securities, may rapidly decline in price, leaving banks with a need for immediate capital. By purchasing a portion of these depressed assets from troubled banks, the Treasury will alleviate some of this market congestion. While there are concerns with the fine points of the bailout plan, the broad strategy of immediately removing these securities from the market seems to be the best way to return to stability to such a volatile market.

The issues afflicting our financial system are both far-reaching and immediate, and our elected officials must transcend petty politics in crafting novel solutions to such unprecedented problems. Much of the political squabble heard throughout the negotiations of the past week has been far too polarizing and narrow-minded. On one side, liberal democrats must realize that it is far more important to stabilize our nation’s economy than fret over the padding of a handful of corporate pocketbooks. On the other, conservative republicans must see that in so severe a crisis, government intervention into the market is necessary to limit the extent failures in other parts of the American economy. Other detractors of the plan have pointed out the undue burden on American taxpayers, but the price of stability may not prove so high if the Treasury can shrewdly make a profit from the assets they purchase.

The $700 billion price tag, however, appears to have been derived somewhat arbitrarily—especially considering that the targeted assets evade precise valuation. This large sum needs to be used sensibly, coupled with thorough negotiation with banks to determine fair values for damaged assets.

Furthermore, the government should be more forthcoming in where they see these bailout funds coming from. Printing money will not be an acceptable source, and if they anticipate increasing taxes, that must be made clear. Moreover, alternative sources of funds to remove these assets should be given sufficient consideration: Foreign and private investors can provide deep pockets of untapped funding.

The bailout will carry with it inherent risks that prevent any definite prediction of its effectiveness. And surely, even an ideal outcome to this rescue effort will not fix all of the long-term issues plaguing our nation’s financial systems. No matter who wins in November, this country will need to seriously reflect on and address the threats facing the foundations of our economy.