The Independent Voice of Southern Methodist University Since 1915

The Daily Campus

The Daily Campus

The Independent Voice of Southern Methodist University Since 1915

The Daily Campus

The Independent Voice of Southern Methodist University Since 1915

The Daily Campus


Give Paulson a chance

It is now undeniable that we are in the midst of an unprecedented financial crisis. While it appears that most policy makers are coming to grips with this reality, the various reactions are revealing.

This divergence in opinion indicates that many of these “experts” are making mere conjectures.

It would therefore be prudent to defer to our national economic gurus, namely Henry Paulson and Ben Bernanke, whose lives have been consumed with this deteriorating situation for over a year now. They have brought a serious proposal before Congress that, contingent on congressional authorization, would put an estimated $700 billion taxpayers’ dollars at risk by giving the Treasury Department the power to purchase illiquid debt away from institutional investors; debt that has been ravaging their balance sheets and has caused many either to go belly up or get bailed out by the taxpayer. The fear is that more could follow.

Tuesday, Secretary of the Treasury Henry Paulson delivered this unprecedented initiative to the Senate Banking Committee and summed up what we face: “[Overvalued houses] led to a housing correction resulting in illiquid mortgage assets which are choking the credit in our economy…We need to restore confidence in our financial institutions so they can facilitate and restore economic growth.”

Echoing Paulson, Chairman of the Federal Reserve Ben Bernanke ominously added: “The financial markets are in quite fragile condition and I think absent a plan they will get worse. I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”

If $700 billion is placed under the sole authority of the Treasury Secretary, naturally it will ruffle the feathers of a few lawmakers. But let’s consider some alternatives.

1) Senator Chris Dodd (D-CT), Chairman of the Senate Banking Committee, opposes Paulson’s proposal. Would the American people rather have this Senator spearhead the efforts to restore our financial system?

Senator Dodd, along with Senator Obama and other congressional Democrats, led a party-line vote in 2005 to roadblock S.190 – a serious Fannie Mae and Freddie Mac reform bill, of which Senator McCain was one of three co-sponsors. The bill would have regulated the two government sponsored enterprises by cracking down on their investments in risky mortgage-related assets, and thus arguably could have prevented the need for the recent government bailout after these risky assets plummeted in value.

Senators Dodd and Obama killed this measure at least in part because each had received $165,000 and $125,000, respectively, in campaign contributions from Fannie and Freddie executives. Considering this alone, deep skepticism ought to be applied to any of their alternative proposals.

2) On Monday night, former Speaker of the House Newt Gingrich appeared on Fox News and argued that $700 billion ought never to be placed in one man’s hands. Also, he argued that such an intervention would go against the grain of Ronald Reagan’s and Margaret Thatcher’s free market philosophy. This appears to be the similar mindset of several true blue conservative Republicans in Congress.

Speaker Gingrich and others have missed the all-important point that these are “unprecedented times.” That is to say, this is not the 1980s. Moreover, Paulson’s proposal would arguably restore confidence in, and might stave off the crash of, the very free market that Reagan and Thatcher loved so dearly.

Trickle down economics is a two way street, so to speak. As success on Wall Street spurs economic growth on Main Street, disaster on Wall Street portends disaster on Main Street. In other words, contrary to political demagoguery, the health of Wall Street and the health of Main Street go hand-in-hand. As both “Streets” now seem to be intersecting on Capitol Hill – pleading for help – Gingrich’s hands off approach would risk the health of our economy at large.

This is why the Speaker of the House was never charged with being the chief economic advisor to the president, as the Treasury Secretary generally is.

To be sure, in our system of checks and balances it is healthy for skepticism to be applied to any individual asking for unilateral authority over such a large heap of treasure. In that sense, lawmakers on both sides of the aisle are certainly – and constitutionally – entitled to opposition.

But the bottom line is that home foreclosures across the nation are happening at a disturbing rate of 10,000 per day, and this Paulson plan will likely curtail this high rate, and in doing so, potentially head off a prolonged recession.

To alleviate concerns, Secretary Paulson assured lawmakers that the legislative and executive branches would work in concert to ensure proper oversight. Because taxpayers’ dollars would be at risk, this also could provide for taxpayer reward if the plan were to be implemented effectively. The federal government might actually bring in revenue streams from this. Paulson further warned that this would “cost American families far less than the alternative, which is to have financial markets unable to fund everyday needs and economic expansion.”

In his testimony, Paulson comforted lawmakers that throughout his life, it has been his instinct to run toward problems. It appears he has run toward his biggest yet. And since he brings the added perspective of having been CEO of Goldman Sachs, he ought to have a chance to fix this unprecedented problem. In doing so, he very well could do something else unprecedented: use our taxes in a way that our government profits from financial instruments, rather than waste taxpayers’ dollars like a drunken sailor spending at a brothel – to which we seem to have grown accustomed.

Chris Barton is a senior finance and political science double major. He can be reached for comment at [email protected].

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