Memo To Obama: No More Rushed Rescues

Barack Obama has promised that one of the changes he will bring to Washington will be a new era of transparency and openess. His first chance to show the country that he means what he says may now be at hand as his advisors put together his administration’s financial rescue plan.

Instead of another rush to rescue banks with little-understood proposals–the Bush administration’s M.O.–Obama should publicly declare that he wants an orderly public deliberation on his program.

The last bailout was a disaster.  It was sold to lawmakers on threats of imminent financial collapse. It is still despised by the American people. The media were all too eager to play a role in foisting it upon the people, castigating dissenters by saying something big had to be done quickly.

The bill that was eventually passed by a cowed Congress turned out to allow the Treasury to engage in something that was never publicly contemplated, handing billions over to banks in exchange for equity shares. Exactly how this was done was basically a trick: the bill defined “troubled assets” to include not just the toxic mortgage products eroding their balance sheets but also preferred shares issued by the banks. And so the toxic assets the Treasury bought were the toxic preferred shares of the banks themselves.

Many now believe it was financially disasterous as well. No private investor is willing to put new capital into a bank that will be subordinated to the government’s shares. The banks have burned through the capital in only a few months, proving that they were much, much worse off than anyone was led to believe.  The mission of restoring financial stability has not been accomplished. The quick switch from buying mortgage securities to injecting capital has left the markets more uncertain and more fearful. Propping up failed banks has sapped the market of discipline and drained it of the value of Darwinian survival of the fittest. Confused investors have understably concluded that they simply cannot tell which banks are fit to survive.

Enough of this nonsense. This time it can be different. Let’s have a proposal that can be examined in depth by lawmakers, economists, financial professionals and the public. While there will no doubt be a need to allow for some flexibility if circumstances turn out to be much different than expect, it should not be so loosely constructed that no one can predict what will happen.

For too long, the operating assumption of the government seems to have been that the public cannot handle the truth, and that the experts in Washington and on Wall Street know better than anyone else what has needed. It’s time to put that assumption to rest. The experts don’t know jack. Maybe it’s time to have a little hope in the people.

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