30 September 2008

Jeff Frankel Grudgingly Supports The Modified Paulson Plan

Frankels is at Harvard (for those of you who care about such things).

Here's his analysis of the plan:
When the Treasury came out with its $750 bailout plan on September 22, I thought it lacked so many necessary ingredients that it deserved a thumbs down.

But in the negotiations between the Treasury and Congressional leaders over the course of last week, most of the missing ingredients were inserted. Starting with the additions that were most necessary on the merits, and moving toward the ones where the necessity was more political, they were:

· Institutionalized oversight of the Treasury, which had previously been startlingly absent.

· Provisions so that the taxpayer would share in the upside potential of banks and other financial institutions, rather than just socializing the losses. These provisions should allow the possibility that the government could recoup most or all of its short-term losses as has often ultimately been true in past unpopular bailouts.

o First, by giving the government equity stakes in the banks that sell their bad loans to the Treasury.

o Second, by having the president in five years submit legislation to recoup the cost from the financial sector if the taxpayer is still in the red at that point.

· Limits on executive compensation, especially golden parachutes, at banks taking advantage of the opportunity to dump their bad loans on the Treasury.

· Dividing the $750 billion into three slices over time, which at least offers the congressional negotiators a little bit of cover.

· A provision for possible government insurance of mortgages instead of acquisition of them. This was a bone thrown to the Congressional Republicans who had blocked the plan several days ago; I don’t know why they would want this provision, but at least it can’t do much harm.

Some other proposed provisions, from both the right and left, were left out, and for good reason in most cases.

(h/t Ryan D.)

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