Dear Member of Congress:
The 362,000 members of the National Taxpayers Union (NTU) implore you to resist a "quick fix" in the form of a financial market bailout package that could result from current negotiations between Congressional leaders and the Administration. This may be your last chance to protect taxpayers and our economy from what could be the greatest fiscal policy fiasco in our nation's history.
For the past several weeks, ordinary citizens have watched with trepidation as the U.S. Treasury and the Federal Reserve make decision after decision to increase the liabilities of the government, reward bad actors, and foment moral hazard on an unprecedented scale. Yet, taxpayers have long been relegated to the sidelines of this important debate. Whether out of benign neglect or intentional obstruction, past Congresses and Administrations have failed to clarify and define the limits of government's role in enterprises such as Fannie Mae and Freddie Mac, all while coming to the aid of wholly private financial institutions.
The results were predictable, but apparently eluded policymakers inside the Beltway. Ailing banks and insurance companies have been incentivized to make their balance-sheet problems worse in order to be "too big to fail." As the Fed and the Treasury rush to raise cash for these schemes, their discounted offerings threaten to trigger a higher interest burden on taxpayers from the national debt. Other industries (such as automakers) sense an opportunity to crank up their lobbying and campaign-cash machines just as Fannie, Freddie, and others did to get their turn at the federal trough.
Taken together, the Treasury and the Fed have (with Congress' blessing and legislative collusion) committed some $800 billion in taxpayer funds for loans, credit guarantees, mortgage renegotiations, and outright subsidies in an attempt to undo the damage Washington's policies have done. Meanwhile, the response from many Members has ranged from sanctimonious indignation over "how this could have happened" to shameless pronouncements that much more intervention will be necessary. This will threaten the very foundations of our economy if pursued any further. Accordingly, taxpayer advocates recommend the following actions:
1) Don't Rush. The Administration pressured Congress into approving a terribly flawed bailout package for Fannie Mae and Freddie Mac by arguing that "markets couldn't wait" for serious deliberation of what was being proposed. This claim has proven to be nonsense. Roughly six weeks passed between Congress's enactment of the comically misnamed "American Housing Rescue and Foreclosure Prevention Act" and the actual government takeover of these institutions. "The markets" will react more negatively to a poorly drafted package than none at all. You owe your constituents a thoughtful debate about such a sweeping proposal simply handed to you from the Leadership.
2) Restrain the Executive Branch. Recent bailout events have created the heaviest bundle of liabilities ever thrown into the laps of taxpayers by unelected officials. Why hasn't Congress taken a serious oversight role? Congressman Jeb Hensarling (R-TX), along with more than 100 of his colleagues, yesterday called upon Secretary Paulson to "bail out the American taxpayer from bailout mania." All lawmakers in the House and Senate, Democratic or Republican, should be able to agree that the Legislative Branch deserves a greater say over the course to which the Treasury and the Fed have committed taxpayers. Senator Jim Bunning's (R-KY) legislation to strip the Fed of its authority to make loans to non-bank institutions is a good starting point for debate.
3) Limit the Scope and Duration of Any Legislative Package. As much as they may be regarded as possessing some kind of magical foresight, Treasury and Federal Reserve officials are crafting remedies based on imperfect information. Other parts of the federal government, especially Congress, cannot gaze into the future of financial markets either. Some say this argues for giving wider latitude to the Treasury and the Fed to respond as events unfold. We believe that the need for agile, flexible policymaking must be balanced against the need to regularly evaluate the results of federal market interventions and issue "course corrections" where necessary to limit taxpayer exposure.
Lawmakers also have the chance to revisit past policies embodied in the American Housing Rescue and Foreclosure Prevention Act. Representative Michele Bachmann (R-MN) has urged Federal Housing Finance Agency Director Jim Lockhart to suspend Government-Sponsored Enterprise (GSE) financing for the "Housing Trust Fund," an unnecessary and costly political giveaway to housing-activist groups. This suspension should be cemented into law by an act of Congress.
4) Help Markets Stabilize Themselves. More corporate welfare will send the wrong signal to firms that made poor business decisions. With input from financial policy experts, Congressman Scott Garrett (R-NJ) has introduced legislation (H.R. 6659) that will foster a private "covered bond" market capable of providing the liquidity to alleviate some mortgage market disruptions. This legislation deserves speedy passage.
5) Consider the RTC Model with Caution. The Savings & Loan crisis prompted Congress to create the Resolution Trust Corporation in order to expedite the liquidation of failed thrifts' assets. This arrangement was not without its flaws, and the historical parallel to the current situation is not exact. If lawmakers insist on moving forward with more federal buyouts -- a position we do not necessarily concede -- then the purpose of an RTC-style entity should be strictly limited to a few tasks. Facilitating a broad public value for Mortgage-Backed Securities around which the market can stabilize would be helpful. In addition, the entity should serve only as a clearinghouse, rather than a repository, for any bad paper the government assumes.
This means that private institutions must not be encouraged to dump their underperforming portfolios on taxpayers. Some have suggested that an RTC-like arrangement could be voluntary, with participating firms required to pay a transaction fee and/or offer a deep discount on the debt the government would assume. The latter is an especially wise precaution, along with a hard ceiling on the permissible amount the entity could hold at any one time. Finally, any such entity must be given a finite statutory authority emphasizing the need to move holdings back into the private sector as quickly as possible.
6) Avoid the Temptation to Take Over More Firms. Some lawmakers have argued that the federal government should resolve financial market troubles by creating an entity resembling the Reconstruction Finance Corporation from the Depression era. Doing so would give the federal government an actual equity stake in the institutions seeking relief. This would be a tremendous mistake, and would only further push our banking industry into nationalization. Moreover, the federal government is demonstrably incapable of managing the assets it already has. Giving bureaucrats a long-term interest in the ongoing operation of companies would be disastrous.
7) Don't Go Backward. Congress should reject "go-soft" proposals such as a 90-day moratorium on GSE foreclosures, which would raise the burden on taxpayers. There are also calls for massive re-regulation on both sides of the aisle. Such a move would be especially counterproductive, as several financial industry experts blame the post-Enron mark-to-market rules as contributors to the current woes of many firms. If lawmakers wish to be honest with themselves and the American people, they should be the first to take responsibility for the lack of response to systemic problems amid well-funded lobbying campaigns by the likes of Fannie Mae and Freddie Mac. Likewise, lawmakers must resist lobbying from state and local governments for more aid to reconcile foreclosures. The federal government has already thrown more than $3 billion into that venture.
8) Prosecute the Offenders. Director Lockhart's decision to deny "golden parachutes" to outgoing Fannie Mae and Freddie Mac executives was a welcome step toward accountability. Much more needs to be done. We find it curious that many Members of Congress have little compunction about hauling CEOs up to Capitol Hill for finger-wagging sessions, yet they seem less than enthusiastic in following up allegations of government mismanagement and corruption in this scandalous meltdown. To restore the faith of the American people in simple justice, the House and Senate should conduct broad-based investigatory hearings into the actions of Fannie Mae, Freddie Mac (and their former executives), government regulatory agencies, former public officials, and even current Members of Congress. The aim should be to discover the role that poor governance played in the current debacle, and refer for prosecution those found responsible.
9) Enact Broad-Based Fiscal Reforms. Supporters of the Administration's approach contend that the up-front infusions of government backing are necessary to prevent a worse calamity in the future. We are not completely convinced, and believe that even the opposite could come true if these policies are implemented carelessly. If the moral hazard left behind from mistakes of the past is not thoroughly cleaned up, an even larger problem will arise. This is why bailouts for other industries, such as the unconscionable effort from the auto industry to cash in on $25 billion of loans, should be declared dead on arrival. Congress should also recognize that any actions to put tax dollars on the line in a rescue package should be met with equal and opposite reactions to reduce federal spending. At the very least, Congress must shelve plans for budget increases in the coming fiscal year, since the government has already incurred substantial liabilities because of the American Housing Rescue and Foreclosure Prevention Act.
On the tax side, Congress should reassure investors by making permanent the 15 percent tax rate on capital gains and dividends and by passing Senator Jim DeMint's (R-SC) plan to index capital gains for inflation. How can leaders credibly tell Americans to keep their confidence in the long-term health of their savings when one of the most important considerations of investing -- taxes -- remains in flux?
10) Encourage Transparency. Any bailout legislation must contain provisions that make all information about transactions such as asset purchases, loans, and takeovers completely public. One model for disclosure is the grant and contract database available online at www.USASpending.gov, which Congress mandated through the Federal Funding Accountability and Transparency Act.
Moreover, whistleblower protections are critical to ensuring the flow of important details about institutional corruption and managerial defects that can greatly help oversight efforts. Several years ago, Congress resisted attempts to grant anti-retaliation provisions for whistle-blowing employees at Fannie Mae and Freddie Mac. We can only imagine the tremendous difference such safeguards could have made in identifying and correcting the scandalous practices at these entities.
11) Remember the Ultimate Goal. If it is the intent of the Legislative and Executive Branches to nationalize the banking and insurance industry, leaders should say so directly to the American people. If, on the other hand, elected and appointed officials truly perceive the government's intervention as a limited and temporary policy, they should act the part. This entails breaking up Fannie Mae and Freddie Mac on a shorter timetable than the 10 years once envisioned by Secretary Paulson, and serving as a facilitator in clearing bad debt out of the financial system. It should not mean increasing the portfolios of Fannie and Freddie, imposing more complex regulations that don't aid transparency, or owning a long-term stake in private or quasi-private enterprises. The only long-term policy should be to resolve that never again will the federal government interfere with and manipulate market forces by creating entities that are "too big to fail" and encouraging moral hazard.
One catch-phrase that has emerged from the current financial industry turmoil is that the federal government seeks to privatize profits and socialize risks, but this fashionable statement is hardly new. In June of 2000, during testimony before the House Financial Services Committee, we noted that an official commission appointed to investigate the S&L crisis blamed subsidized federal deposit insurance for being "at the heart" of the problem. We concluded that, "Market discipline cannot prevail if Congress allows the institutions it creates to privatize profits but socialize risks...." What was true then could not be more valid today.
The price tag for recent federal or federally sanctioned forays into the financial market has, by some estimates, approached more than $800 billion. Congress will soon contemplate legislation which could double that total -- or worse. Despite the already urgent challenges of entitlement programs, which will compound year after year, the liabilities the government may soon assume are even more volatile and could materialize rapidly. It is no exaggeration to say that the very future of our nation and its economy is at stake. We urge you to bear this fact, as well as the recommendations we have outlined, in mind as you deliberate legislation in the coming days.
Vice President for Policy and Communications