New deal or no deal.

September 20, 2008, 2:44 pm

Paul Krugman says “no deal”:

As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?…

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

Adam Davidson at NPR says,

I would guess that this has to be one of the biggest peacetime transfers of power from Congress to the Administration in history. (Anyone know?). Certainly one of the most concise.

It’s certainly both brief and expansive. The Secretary of the Treasury may purchase mortgage-related assets, and hire people to help him do it, and designate agents to do it, pretty much insofar as he pleases, up to $700,000,000,000, beholden to nobody and subject to no review, for the next two years.

Compare for example the Reconstruction Finance Corporation, created in January 1932, at 47 Stat. 5, and authorized to loan to pretty much any lending agency as it pleased, with not more than $200,000,000 for the relief of banks closed or in the process of liquidation. All loans had to be secured, couldn’t be made on foreign securities or acceptances, no more than 5% of the money could go to any one company, couldn’t exceed three years’ term, couldn’t pay fees or commission to applicants for loans, and so forth. Railroads accepting such loans had to do so under terms acceptable to the regulatory Interstate Commerce Commission.

The law in addition made provision for winding up the Corporation when appropriate and requiring it to report quarterly to the Congress on its activities and employees.

In short, although the situation in January of 1932 was visibly more dire than it is now, Congress was less willing to hand over utter independent authority to the Hoover administration.

With Roosevelt, Congress was a bit more trusting of the executive. Compare the National Recovery Act, of June 1933, at 48 Stat. 195. Here,

the President is hereby authorized to establish such agencies, to accept and utilize such voluntary and uncompensated services, to appoint, without regard to the provisions of the civil service laws, such officers and employees, and to utilize such Federal officers and employees, and, with the consent of the State, such State and local officers and employees, as he may find necessary, to prescribe their authorities, duties, and responsibilities, and tenure, and, without regard to the Classification Act of 1923, as amended, to fix the compensation of any officers and employees so appointed….

The President may delegate any of his functions and powers under this title to such officers, agents, and employees as he may designate or appoint, and may establish an industrial planning and research agency to aid in carrying out his functions under this title.

It’s worth noting (a) the Supreme Court found this blanket grant unconstitutional; (b) the agency created under these provisions, the National Recovery Administration, is generally held to have been a bad idea partly because of its ill-defined mission and was basically defunct by the time the Court got to it, because other parts of the law and other laws had let the Roosevelt administration create other, better defined and more successful agencies for recovery.

As for (a) I’ve no reason to believe the Supreme Court would today shoot down blanket emergency authority the way the Court of 1935 did; as for (b) I expect Henry Paulson to be a better administrator than Hugh Johnson.

But more broadly, do you think this Congress should be more trusting of the Bush administration than the 1932 Congress was of the Hoover administration? Conversely, do you think the Bush administration deserves the same level of trust from this Congress as the Roosevelt administration? Even the giant relief bill of 1935, which gave Roosevelt around $5bn, had more strings attached than this law.

Even given this level of trust, how about what Krugman calls a “quid pro quo” for us, the taxpayers? New deal or no deal.

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