The Financial Crisis: How and Why Congress Should Play for Time

Here's the situation: Thanks to its own inability to control itself, Wall Street is now facing a crisis unmatched since the Great Depression. Unfortunately, a collapse of the financial sector would not only hurt rich investors, it would devastate the global economy. So, government action is imperative.

Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke say immediate Congressional legislation is imperative. And Congress is adjourning at the end of this week, with Members eager to get back to their districts and states to campaign.

But there is no way to handle the complexity of a $700 billion bailout in a few days.

There are some really hard questions about how to structure a Wall Street bailout program. Financial firms have to be subsidized, but they also have to feel some serious pain. Figuring out who to subsidize, and how much, is tricky. Determining how to ensure taxpayers get the best and fairest payback from the subsidized financial institutions is complicated. And developing a transparent and accountable structure to administer a $700 billion program buying and selling exotic securities is no easy matter.

Meanwhile, it would be unconscionable to bail out Wall Street but not protect homeowners and renters in homes that may be foreclosed on. Between allegedly super-sophisticated Wall Street hot shots and people who were fooled into taking bad mortgages -- or who have the misfortunate of renting from a landlord who's being foreclosed on -- it's obvious who is more deserving of government assistance. But Congress and the President have not been able to agree on plans anywhere near commensurate with the scale of the problem over the past year-plus. It's very hard to see how a proper and sufficiently scaled system of protection and assistance for homeowners and vulnerable renters is agreed upon in a few days.

The current financial mess is the outgrowth of a quarter-century rollback of regulations that controlled what financial firms could do, and protected financial titans from their own worst instincts. Wall Street is chastened right now, but it is a 100 percent certainty that the speculative culture will reemerge with a vengeance -- and in much shorter order than many now seem to believe -- unless regulatory standards are imposed to prevent a repeat of the current disaster. Legislation affording Wall Street what may be the biggest bailout in history is the time to attach new, robust regulatory rules. There are a lot of good ideas floating around about sound financial regulation, but the details are extraordinarily intricate and convoluted. It's not the kind of thing you can easily handle in a few days, even if you burn the candle at both ends.

Given the time pressure and the realities of the legislative process, is there anything Congress can do, other than make some minor adjustments to the Paulson proposal that asks Congress to give the Treasury Secretary $700 billion and trust him to make good decisions?

Yes. Congress can play for time.

Here are two ways Congress can give itself more time to do justice to the bailout legislation.

Option One: Congressional leadership commits itself publicly to doing bailout legislation. The leaders commit to a hard date -- maybe a week from Friday, maybe two weeks -- and announce that the Congress will reconvene on that date, with a guaranteed vote on the same day. They might even usher through legislation now that limits the length of debate and guarantees an up-or-down vote. The urgency to act now reflects Wall Street's crystallized panic. An assurance of pending action should quiet the panic enough for the economy to continue to function.

A variant of this idea is that Congress commit to adopt bailout legislation in a lame duck session, after the election. Even with a guaranteed vote, this option would enable more extended investigation, hearings and debate. But it would drag the process out longer, and a judgment would have to be made that the financial markets could remain calm enough, for long enough.

Option Two: Congress adopts the Paulson plan this week, with two major modifications. Instead of the requested $700 billion, Congress appropriates $100 billion. Congressional leaders commit to reconvene in a lame duck session, and guarantee a vote on the remaining $600 billion. However, the $600 billion package includes provisions that direct how the bailout is to be conducted, includes protections for homeowners, and imposes meaningful regulatory standards. The second key feature of the initial appropriating legislation is that it specifies firms benefiting from the $100 billion bailout fund agree to accept the terms imposed on the $600 billion bailout fund. That way, only the most troubled firms step up right away for bailouts, and no firm is able to escape the conditions imposed after Congress has more time to think through the implications of the bailout deal.

There is real urgency to act. But Congress still has the ability to dodge the Paulson steamroller and buy some time to do legitimate legislating.