Outside editorial: America's second chance

Posted: Friday, October 03, 2008

America is the land of second chances, so it is fitting that the House of Representatives should get an opportunity to redeem itself for its reckless rejection of the financial rescue package on Monday. Wednesday night the Senate approved a revised version of the plan, not altering its fundamentals but perhaps providing enough political cover for House Republicans and Democrats to change their votes. Since 228 House members voted no on Monday, at least 12 must switch (lest Speaker Nancy Pelosi have to cast a deciding vote). We hope they will; in fact, in a responsible legislature, the vote would not be close.

The case for the plan, known formally as the Troubled Assets Relief Program (TARP), does not hinge on its perfection. As we have said, it is possible to imagine alternatives, some of which, such as a direct federal purchase of bank equity, might prove more effective at a lower cost to taxpayers. Or they might not. The point is that TARP is the only plan on the table that has both a reasonable chance of political success and a reasonable chance of economic success. Under the circumstances, which at the moment include a mounting worldwide financial collapse, we do not have time to run a legislative seminar on the theory and practice of financial rescue.

Furthermore, TARP, as modified by Congress after Treasury Secretary Henry Paulson initially unveiled it, is a plausible proposal. The Treasury would purchase currently unmarketable assets from the financial sector, clearing out the accumulated junk paper that is destroying confidence and the flow of credit. Though TARP seeks $700 billion in ultimate authority to buy assets, the likelihood is that the Treasury will pay less than that, because (a) its purchases might jump-start a private market and (b) the government might be able to resell securities for more than it paid. There would be significant oversight and an option for the government to take equity in the firms it aids.

Make no mistake: This rescue will probably cost the government, i.e., the taxpayers, money - a lot of money. At least initially, the government will overpay for the assets it buys, if only in the sense that there is no market at all for them at present. The government will face politically difficult conflicts of interest. Its accumulation of mortgage-backed assets, on top of the de facto nationalization of Fannie Mae and Freddie Mac, means it will be in a position to modify many thousands of loans, but the better the deal Uncle Sam cuts distressed homeowners, the greater the hit to the taxpayer.

And, of course, the government will pay for TARP with borrowed money, adding to this country's already worrisome national debt. When you strip away all the rhetoric, pro and con, TARP amounts to a deliberate but as-yet-unquantifiable reduction in our future wealth - for the sake of our present stability. It is an attempt to buy the whole country a second chance - to buy time for banks, Congress and, yes, individual American households to make painful but overdue corrections. If that sounds like a bad deal, consider the fact that these hard choices are unavoidable, no matter what the House does. And then ask yourself whether it would be better to make them in an atmosphere of relative order or amid the chaos that looms - but which we can still at least try to prevent.

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