On Senate Passage of Financial Legislation

By October 2, 2008Economy, Taxation

The roll call vote on H.R. 1424, which, as amended, is the Emergency Economic Stabilization Act, plus the tax extenders. The measure passed 74-25.

For more, see documents on the Senate Banking Committee website. Division A (pp.2-113) of the draft legislation is referred to as the Emergency Economic Stabilization Act of 2008; Division B (pp. 113-261) is referred to as the Energy Improvement and Extension Act of 2008; and Division C (pp. 261-451) is referred to as the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.

A good Washington Post editorial, “America’s Second Chance.” We appreciate the fact the Post went to the substance of the legislation; the “you’ll be sorry” argument only carries one so far.

The case for the plan, known formally as the Troubled Assets Relief Program (TARP), does not hinge on its perfection. As we have said, it is possible to imagine alternatives, some of which, such as a direct federal purchase of bank equity, might prove more effective at a lower cost to taxpayers. Or they might not. The point is that TARP is the only plan on the table that has both a reasonable chance of political success and a reasonable chance of economic success. Under the circumstances, which at the moment include a mounting worldwide financial collapse, we do not have time to run a legislative seminar on the theory and practice of financial rescue.

Furthermore, TARP, as modified by Congress after Treasury Secretary Henry M. Paulson Jr. initially unveiled it, is a plausible proposal. The Treasury would purchase currently unmarketable assets from the financial sector, clearing out the accumulated junk paper that is destroying confidence and the flow of credit. Though TARP seeks $700 billion in ultimate authority to buy assets, the likelihood is that the Treasury will pay less than that, because (a) its purchases might jump-start a private market and (b) the government might be able to resell securities for more than it paid. There would be significant oversight and an option for the government to take equity in the firms it aids.

Finally, a protest of political pique. May we please be spared lectures about Wall Street and fat-cat tycoons and the like from members of Congress whose support for Fannie Mae helped block more rigorous regulation of the GSEs? If we have to be lectured to, we’d prefer instruction from observers of financial regulation who had it right all along. If they were right then, good chance they’re right now. Hence, from AEI:

“[Peter] Wallison and Charles W. Calomiris argue in the September Financial Services Outlook that a repeat of the Fannie and Freddie disaster could be prevented by eliminating the government-sponsored enterprise model. “

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