H. D. Vinod Professor of Economics and Director of Fordham Institute of Ethics and Economic Policy Fordham University, Bronx, ny 10458

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Devil is in the Details of Paulson's Rescue Plan

H. D. Vinod

Professor of Economics and Director of Fordham Institute of Ethics and Economic Policy Fordham University, Bronx, NY 10458

E-Mail: Vinod@fordham.edu

Web page: http://www.fordham.edu/economics/vinod

September 22, 2008

US treasury secretary Mr. Paulson has proposed a bold plan to rescue the world financial system, which involves a taxpayer bailout of over $700 Billion. The Wall Street investment banks are disappearing and unbelievable changes occurring are somewhat similar to the great depression. This short paper suggests four important changes to specific sections of the Paulson proposal intended to provide better checks and balances. (1) Limits on compensation, (2) Caps on purchase price of assets, (3) Preventing abuses by service providers and (4) Preventing conflicts of interest. The amendments (3) and (4) are not much mentioned in the financial press, but are crucial. These safeguards allow a solution closer to what Sweden did in the 1992 Banking crisis, with a near zero cost to the taxpayer. I identify four classes of 'winners' who benefited from the billions lost by investors in Banks and brokerages in recent weeks which includes bonus-earning employees and sub-prime borrowers who enjoyed the pleasures of home-ownership for a while. Clearly any winners should not be allowed to share the $700B bailout funds.
The details of the bailout plan are now available at: http://blogs.wsj.com/economics/2008/09/20/treasurys-financial-bailout-proposal-to-congress/
The bailout gives full (too much?) authority to Mr. Paulson with no guidelines on how he should exercise that authority. For calming the worldwide markets, the bailout legislation needs to be urgently passed, but Mr.Paulson's proposal in its current form is not consistent with basic democratic tenets of checks and balances. After Iraq experience with no-bid contracts and several abuses, the general public is in no mood to give a $700B blank check to anyone. It is not prudent to give so much money in the hands of one person, with no clear guidelines. It is not enough to have mere congressional oversight, we need language to protect the taxpayer. While the urgency of action by the Congress is obvious, there is a need to make changes in at least four areas:

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