No Blank Check for Paulson

NEW YORK – US Treasury Secretary Hank Paulson’s $700billion rescue package has run into difficulty on Capitol Hill. Rightly so: it is ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency - the ultimate fulfillment of the Bush administration’s dream of a unitary executive.

Paulson’s record does not inspire the confidence necessary to give him discretion over $700billion. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85billion loan to AIG on punitive terms.

The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Paulson reversed again and proposed a systemic rescue.

Paulson had gotten a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Paulson’s hand and he had to take them over.