Bailout Gets More Costly Due to “Bipartisan” Deal; Foolish Limits on Foreclosure Should Be Removed

by Hans Bader on September 28, 2008 · 3 comments

Liberal Congressional leaders have apparently reached a deal with the Bush Administration on the principal elements of a $700 billion bailout of the financial system.  What this means is that the already costly bailout has now gotten even more expensive, with new tax breaks for politically-connected businesses and delinquent debtors, and limits on foreclosure that will make it harder for the taxpayers to ever get their $700 billion back.  Although it is being sold as a “bipartisan” — a buzzword often used to push bad policies – Republican House members were largely shut out of the negotiations that led to the deal.

The bailout just keeps expanding.  Michelle Malkin notes that although it was sold as a way of addressing the mortgage crisis, “the bailout allows foreign banks to partake of American taxpayer funding,” and “includes buying student loans, car loans, credit card debt and any other ‘troubled’ assets held by banks.”

Moreover, “the plan requires the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers’ monthly payments so they can keep their homes.”  These limits on foreclosure will increase the cost of the bailout, and make it harder for taxpayers to ever get their money back, as supporters of the bailout claim ultimately will happen if the Treasury manages to resell the “bad mortgages” it buys in the bailout.

One bright spot is that the broad elements of the deal made public do not contain the massive slush fund for left-wing groups contained in the earlier version of the bill drafted by Senator Chris Dodd.  Buried in Dodd’s bill was a provision that would have stuck taxpayers with 100 percent of all losses on any bad loan or mortgage, but not the profits, siphoning off part of the profit from any individual loan or asset on which the government ends up making a profit.  But there is no final written version yet of the bill containing the deal, so it is possible that the provision could be reinserted in the bill drafting process.  (The slush fund appears in brackets in the first “discussion draft” of the bailout deal).

That slush-fund provision should be kept out of the bill, along with the limits on foreclosure and special-interest tax breaks contained in the deal, which should be removed through the threat of a filibuster.

While expanding the bailout to appease a host of special-interest groups, Congressional leaders have ignored cheaper alternatives to a bailout (see here, here, here, and here for examples), and potential reforms of burdensome regulations that would reduce the need for a bailout.  They have left intact regulations and affordable housing mandates that contributed to the current crisis, and seem blind to possible negative side-effects of a bailout like future bubbles and inflation.

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