[StBernard] Bring On Paulson 3.0

[Westley Annis]

Bring On Paulson 3.0
Jerry Bowyer 09.30.08, 12:01 AM ET


As of this writing, the modified Paulson plan has been voted down by
Congress and the Dow has taken the largest one-day plunge in history. All of
this could have been avoided as recently, even, as a few weeks ago. It could
still be solved, but it's going to take at least one more upgrade for the
Paulson program to get it to work.

First there was Paulson 1.0: The taxpayers of America give the secretary of
the Treasury $0.7 trillion, which he then uses to buy vast swaths of
mortgage, auto and school loan paper. Forget 'czar,' Paulson becomes some
kind of global credit market pharaoh, dispensing diktats by mere decree. "So
let it be (under)written, so let it be done." He'd have been a little like
Eisenhower on D-Eve, but without (to my knowledge) the power to actually
take human life.

Maybe that plan was a little too ambitious.

Then there was Paulson 1.5. The same as above, except more so. The secretary
would be forced (like Caesar Augustus) to share his powers with an oversight
board. But regarding government power, the expansion was to be expanded. Any
company benefiting in any way from the plan would have its top management
compensation schedules set by the government. Given the sheer size of the
bailout, this would affect a very high proportion of the U.S. financial
industry. 

In addition, the government was to be given shares of stock in the company,
with no limit set--that means board seats. The hard left shock troops of
groups like ACORN would have been put on the government dole, and the left
would be free to conduct agitprop and intimidation on the middle class'
dime. Like Lenin, Barney Frank would have seized the "commanding heights" of
finance in a single move. Unlike Lenin, he would have done it without firing
a single shot.

Paulson 2.0 cut the Bolshevik stuff out of the legislation. ACORN subsidies?
Gone. Voting shares in U.S. companies? Gone. CEO compensation caps? Mostly
gone. In consultation mainly with House Republicans and a few "opinion
molders" such as yours truly. The size of the expenditure was also cut. Some
deregulatory measures were added, such as giving the SEC the authority to
suspend the tremendously destructive mark to market accounting mandate.
Score one for Kudlow, Forbes, Wesbury and a few lesser "molders" like
Bowyer. We harped on it; Paulson listened.

But Congress didn't listen. They turned it down and the markets are
imploding. Thank you, populism. Thank you, Newt Gingrich. Thank you, talk
radio. Thank you, Lou Dobbs.

Before we all run out to buy shotguns and propane tanks, perhaps we can try
a collective upgrade to Paulson 3.0. The fact is, this issue has been
mis-framed by most of the press (and the administration) and therefore it
has been misunderstood by the people. Freedom didn't lead us to this
crisis--central planning did. We weren't under-regulated; we were
over-regulated. There has not been a single piece of deregulatory
legislation passed in the last eight years. But there was a major piece of
re-regulatory legislation passed under Bush--the Sarbanes-Oxley Act. By
upping the penalties on financial executives largely from civil to criminal
sanctions, Sarbox put the whole multithousand page regulation manual on
steroids. No more fines, next time handcuffs. 

No wonder nobody wanted to hold politically tainted paper. Owning a
mortgage-backed security in this environment is like owning a pointy hat and
a black cat in colonial Massachusetts. 

These securities, which the government invented (through Fannie Mae) and
foisted upon the banks (through the Community Reinvestment Act), now has
regulatory cooties. Own it and you'll get sued. Sell it and you'll get sued.
Keep it and the regulators will force you to write it down to panic-level
prices--and then you'll get sued. Try to foreclose and state and local
government will refuse to enforce the contract. Try to get private equity
investment to keep your balance sheet alive and you find the door barred by
80-year-out-of-date regulations like the Bank Holding Company Act. 

Government did this to us. This plan isn't a bailout--it's more like
reparations.

But still, maybe we can improve it. Perhaps the mark to market regulations
could be suspended before the taxpayers are forced to move in. Maybe if some
of these rules are eliminated, little or no taxpayer dollars will be needed.
If Congress doesn't want to put public dollars into this, it should let
private equity put private dollars in. 

It's a silly throwback to the 1920s, which only allowed bank-holding
companies to buy a majority investment in a troubled bank. Back then, all
banks were local. Now banking is an international industry. Mutual funds,
private individuals, hedge funds, venture capitalists, leprechauns,
unicorns.everybody should be allowed to buy bank shares. If everybody is not
allowed to, I'm afraid everybody will be forced to. 

Before more coercion, maybe we could try a little more freedom. The plan's
getting there but there's something missing. Needs a little more liberty
bell.

Jerry Bowyer is chief economist of Benchmark Financial Network and a CNBC
contributor