This Bailout Is Still A Bad Deal

The Senate voted overwhelmingly to pass a bad bailout bill last night. Nothing to kick-start the real economy, except tax breaks for business. No help for homeowners.. No mandate for taxpayers to get shares in the banks that are bailed out. Virtual unchecked discretion for the Treasury Secretary to dispense $700 billion. It’s a good morning to be one of Hank Paulson’s friends on Wall Street.

Faced with an angry revolt of Americans opposed to bailing out the folks who got us in this mess, Congress decided to call in reinforcements—the banking and business lobby. Add in business tax credits, increase FDIC guarantees to appeal to small business and small banks, and call out the contributors.

And, of course, fan hysteria to frighten the public: “We must act to keep the banks working or mortgages will dry up, credit cards will be shut down, small businesses won’t be able to operate.”

There are two major problems with this argument.

First, the need to pass something does not require passing something lousy. Backed by most sensible economists, George Soros called for legislation [1] that would provide sound banks with capital, give taxpayers a preferred equity position and sort out the banks that can be saved from those that should be closed. Paulson’s stated plan of purchasing some of the toxic trash from the banks is likely to be more costly and less effective.

Second, while keeping finance going is necessary to a growing economy, it is not sufficient. We’re headed into a severe downturn. Consumers, no longer able to tap the value of their homes to add to stagnant wages, are tightening their belts. States and localities face sharp cuts. The coming recession will weaken the banks further with rising defaults on credit cards, auto and consumer loans. You can’t save a ship by bailing out the master’s quarters when the hull is taking on water.

Now the business and banking lobbies turns their attention to House members, needing a dozen more Republican votes to support the bad plan of a failed administration in its final days. Americans have one day to let Congress know [2] that while action is needed, this bailout is unacceptable.

But unless there is an unprecedented public uprising, this lemon is likely to pass. And the real work of getting our economy back on track will be left to the next president and the next Congress.