A better bailout

The bailout that Treasury Secretary Henry Paulson has proposed for the U.S. financial system could cost as much as $700 billion, or about $2,300 for every American man, woman and child. Taxpayers rightly expect to receive something tangible in return for such an investment, and there are at least four things policymakers can and should deliver.

Paulson’s proposal would let the Treasury Department buy mortgage-related assets from financial firms with few constraints on how the power would be used. For an administration accustomed to overreaching, such a request for unfettered authority is neither surprising nor welcome; the Bush White House is in no position to ask for that kind of trust. Congress should make the Treasury’s bailout efforts subject to the same oversight -- by Congress and the courts -- as its nonemergency actions, while also requiring that banks compete for aid and that taxpayers be protected against wasteful spending on overpriced assets.

Some lawmakers want to force lenders that receive aid to halt all foreclosures, but that would reward borrowers who bought homes they couldn’t afford even at today’s reduced values. Instead, lawmakers should make it easier for lenders to help borrowers who can afford to stay in their homes until the housing market rebounds. The Treasury should lead the way by agreeing to write down loan values and reduce mortgage interest rates, and by taking other steps to keep the mortgages it acquires out of default wherever practical. Doing so wouldn’t just help homeowners, it would lower the bailout’s ultimate cost to taxpayers.

Wary of the political backlash, some congressional Democrats want to leaven the aid for Wall Street with money for infrastructure projects, more tax rebates and low-interest loans for automakers. The political appeal of such proposals isn’t matched by any broad economic benefits, however. A simpler and more sensible approach is to extend unemployment benefits, which would stimulate consumer spending and boost the economy.

Finally, more needs to be done to protect against another subprime mortgage fiasco. The Federal Reserve Board took an important step in July when it updated its “truth in lending” rules to guard against some types of predatory lending. The California Legislature then passed AB 1830, which adds several new protections, including a ban on lenders paying mortgage brokers more when they persuade subprime borrowers to take costlier or riskier loans. Gov. Arnold Schwarzenegger has threatened to veto the bill because it (like the federal truth-in-lending rules) would allow borrowers to sue lenders for future violations. The governor’s concern is based on a hypothetical binge of lawsuits, whereas the problems addressed by AB 1830 are real and documented. The governor should do his part to avert the next $700-billion bailout by signing this bill.

Together, these steps would improve the proposal, stimulate the economy and better protect consumers.