An Unfair And Ineffective Bailout

Center for American Progress (always have great links !!)

(What do you think will happen with the Congressional hearings !!)

The Bush administration's initial plan to bail out Wall Street's ailing financial markets was just three pages long. It called for Treasury Secretary Henry Paulson to be given unprecedented and unilateral authority to buy up $700 billion in souring mortgage assets from the very financial institutions that "engineered the current crisis." Section 8 of the proposed legislation ensured that none of Paulson's actions could be challenged by any court or federal agency. The section read: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Across the political spectrum, economic and financial analysts immediately questioned the fairness and effectiveness of the plan. Indeed, economist Paul Krugman wrote yesterday in the New York Times,

"If this plan goes through in anything like its current form, we'll all be very sorry in the not-too-distant future."

In a rare moment of agreement, New York Times columnist Bill Kristol wrote similarly that he is "not convinced" that the Bush administration "has even the basics right." In addition to offering nothing in the way of oversight, the Paulson plan provided no relief for struggling homeowners and gave tax payers nothing in return for taking on the bad debts of Wall Street. While congressional negotiators made significant headway yesterday toward a progressive version of the Paulson plan, it is not there yet.

BUSINESS AS USUAL: The Bush administration's initial attempt to railroad anyone skeptical of the Paulson plan is reminiscent of some of its previous legislative initiatives. The Bush administration has a long track record of using times of crisis to demand -- and then mismanage -- unprecedented amounts of power and money. Just as troubling, the Wall Street Journal reported yesterday that lobbyists for Wall Street firms have launched an aggressive campaign to ensure that the terms of the Treasury's proposed bailout are as favorable to the finance industry as possible. A major player in this effort is the Financial Services Roundtable, a "lobbying group representing the nation's banks." Over the weekend, the Roundtable successfully lobbied the Treasury to make the proposed bailout "broad enough to include different types of assets" -- possibly including assets held by foreign banks. Further, the Roundtable said yesterday that including relief for struggling homeowners in the bill would be a "deal breaker." The Los Angeles Times notes that finance sector is well-positioned to shape the legislation because it has "given lavishly to both parties in Congress."

CONGRESSIONAL PUSH BACK: Yesterday, members of Congress pushed back against the Paulson plan, successfully securing key concessions from the Bush administration. The Wall Street Journal reports this morning that Rep. Barney Frank (D-MA) and the Bush administration agreed on a plan to appoint an "independent board to monitor the bailout and report on its progress to Congress and the public." The board, however, "wouldn't have authority to veto Treasury investment decisions, and the bailout's launch wouldn't be delayed while a board was being put in place." In addition, "both sides have also agreed to a measure that would allow -- but not require -- the Treasury to take an equity stake in a financial institution that sells assets to the government." Such an equity stake could allow taxpayers to eventually realize some profit in exchange for taking on a given institution's bad assets. Further, Krugman notes that the equity stake provision allows the government to, if necessary, infuse struggling institutions with capital. Finally, the Treasury agreed to cursory support for struggling homeowners, promising to deploy officials from the FDIC, Fannie Mae, and Freddie Mac to "help adjust the loans of borrowers who were behind on payments but deemed credit-worthy" and ensure that "renters in homes headed for foreclosure aren't evicted." Restructuring the mortgages that Treasury will control is crucial not only for helping the homeowners but for wiping out the risk in the securities that are linked to those mortgages. As David M. Abromowitz and Andrew Jakabovics write for the Center for American Progress, without such a provision, "taxpayers will be saddled with increasingly worthless [assets] as many of the underlying mortgages fail."

BUT STILL NOT THERE: Early yesterday, Sen. Chris Dodd (D-CT) released his own plan for the proposed bailout. Some of the provisions proposed by Dodd have been accepted by the Bush administration, but several of the most promising aspects of Dodd's plan have yet to appear in the negotiated agreement between Congress and the Treasury. A significant aspect of the Dodd proposal is to allow bankruptcy judges "to restructure mortgages for homeowners facing foreclosure." The Center for Responsible Lending explains that "current law makes a mortgage on a primary residence the only debt that bankruptcy courts are not permitted to modify in chapter 13 payment plans." This means that struggling homeowners are excluded from debt relief that is available to "yacht owners," "subprime lenders," and even individuals with mortgages on second and third homes. Dodd's plan would also "give the Treasury secretary the power to prevent payment of bonuses if executives took excessive risk or if they were predicated on earnings targets that weren't met." Members of Congress will have an opportunity to push for modifications to the current plan when when Paulson and Federal Reserve Chairman Ben Bernake testify before Congress today and tomorrow.

Make Diplomacy, Not War: Nicolas Kristoff

Iraq and Afghanistan are the messes getting attention today, but they are only symptoms of a much broader cancer in American foreign policy.

A few glimpses of this larger affliction:

¶The United States has more musicians in its military bands than it has diplomats.

¶This year alone, the United States Army will add about 7,000 soldiers to its total; that’s more people than in the entire American Foreign Service.

¶More than 1,000 American diplomatic positions are vacant because the Foreign Service is so short-staffed, but a myopic Congress is refusing to finance even modest new hiring. Some 1,100 could be hired for the cost of a single C-17 military cargo plane.

In short, the United States is hugely overinvesting in military tools and underinvesting in diplomatic tools. The result is a lopsided foreign policy that antagonizes the rest of the world and is ineffective in tackling many modern problems.

After all, you can’t bomb global warming.

Incredibly, the most eloquent spokesman for more balance between “hard power” and “soft power” is Defense Secretary Robert Gates. Mr. Gates, who is superb in repairing the catastrophe left behind by Donald Rumsfeld, has given a series of astonishing speeches in which he calls for more resources for the State Department and aid agencies.

“One of the most important lessons of the wars in Iraq and Afghanistan is that military success is not sufficient to win,” Mr. Gates said. He noted that the entire American diplomatic corps — about 6,500 people — is less than the staffing of a single aircraft carrier group, yet Congress isn’t interested in paying for a larger Foreign Service.

“It simply does not have the built-in, domestic constituency of defense programs,” Mr. Gates said. “As an example, the F-22 aircraft is produced by companies in 44 states; that’s 88 senators.”

With the Olympics unfolding in China now, the Navy and the Air Force are seizing upon China’s rise as an excuse to grab tens of billions of dollars for the F-22, for an advanced destroyer, for new attack submarines. But we’re failing to invest minuscule sums to build good will among Chinese.

For the price of one F-22, we could — for 25 years — operate American libraries in each Chinese province, pay for more Chinese-American exchanges, and hire more diplomats prepared to appear on Chinese television and explain in fluent Chinese what American policy is. And for the price of one M.R.E. lunch for one soldier, the State Department could make a few phone calls to push the Chinese leadership to respond to the Dalai Lama’s olive branch a few days ago, helping to eliminate a long-term irritant in U.S.-China relations.

Then there’s the Middle East. Dennis Ross, the longtime Middle East peace negotiator, says he has been frustrated “beyond belief” to see resources showered on the military while diplomacy has to fight for scraps. Mr. Ross argues that an investment of just $1 billion — financing job creation and other grass-roots programs in the West Bank — could significantly increase the prospect of an Israeli-Palestinian peace. But that money isn’t forthcoming.

Our intuitive approach to fighting terrorists and insurgents is to blow things up. But one of the most cost-effective counterterrorism methods in countries like Pakistan and Afghanistan may be to build things up, like schooling and microfinance. Girls’ education sometimes gets more bang for the buck than a missile.

A new study from the RAND Corporation examined how 648 terror groups around the world ended between 1968 and 2006. It found that by far the most common way for them to disappear was to be absorbed by the political process. The second most common way was to be defeated by police work. In contrast, in only 7 percent of cases did military force destroy the terrorist group.

“There is no battlefield solution to terrorism,”

the report declares.

“Military force usually has the opposite effect from what is intended.”

The next president should absorb that lesson and revalidate diplomacy as the primary tool of foreign policy — even if that means talking to ogres. Take Iran. Until recently, the American officials in charge of solving the Iranian problem were not even allowed to meet Iranians.

“We need to believe in the power of American diplomacy, and we should not believe a military conflict with Iran is inevitable,”

said Nicholas Burns, until recently the under secretary of state for political affairs and for three years the government’s point person on Iran.

“Our first impulse should be a serious and patient and persistent diplomatic effort. Too often in our national debate we focus on the military option and give short shrift to the diplomatic option.”

So here’s a first step: Let’s agree that diplomats should be every bit as much of an American priority as musicians in military bands.

I invite you to comment on this column on my blog, www.nytimes.com/ontheground, and join me on Facebook at www.facebook.com/kristof.