Bringing it all back home: how to save main street, ignore K Street, and thereby save Wall Street.

 
Introduction 
 
I. Where We Are and How We Got Here 
II. Where We Were and How We Got There 
III. Bringing It All Back Home 
Conclusion 

INTRODUCTION

After a number of heady false starts, against the backdrop of threatened financial catastrophe, Congress and the White House enacted a stopgap financial "bailout" plan early in October 2008. (1) The so-called "Troubled Asset Relief Plan" ("TARP," "the Plan") is remarkable in a multitude of respects. As a fiscal matter, the Plan's sheer size--$700 billion, with no assurance that this will be all--appears to be unprecedented. It dwarfs even the costs of the savings and loan ("S&L") cleanup nearly two decades ago, remarkable as those were in their own day. As a legal matter, the sheer breadth of barely reviewable discretion that the TARP confers upon the Treasury presses hard against Constitutional limits on Executive Branch authority. Indeed, lawyers largely agreed that the original, three-page version of the Plan might well have delegated authority in excess of what the Constitution permits, while the amended, 400-page version squeaks by at best. (2)

At least as striking as the TARP's fiscal scale and delegated executive scope, however, has been the remarkably restless character of the Treasury's actions taken under the Plan since its enactment. Messrs. Bernanke, Bush, and Paulson originally projected the TARP, late in September 2008, as a proposed "buy-up" of mortgage-backed securities ("MBSs") said to be clogging the credit markets. (3) The Treasury next began speaking instead, about mid-October 2008, of "buying-in" to financial institutions. (4) This, it was said, would make lendable funds more immediately available to lenders, hence restoring liquidity to credit markets more expeditiously. (5)

By early November, the Treasury was reporting that the buy-in plan would entirely supplant the earlier buy-up plan. (6) About mid-November, however, the Treasury abruptly announced it would enter the short-term debt markets as well, once again "buying-up," in order to get commercial paper circulating again. (7) Then, near the end of November, the Plan changed again: now, we were told, the Treasury would resume purchasing "toxic" assets, but more kinds than MBSs. (8) Finally, in early December, talk had turned toward employing some of the TARP monies to tide over automakers as well, a course of action that indeed began by the new year. (9)

Throughout all of the on-a-dime pivots and changes of direction, a few voices softer than the Treasury's have been offering proposals aimed at the primary cause of our present financial worries--the ongoing mortgage foreclosure crisis afflicting our post-bubble real estate markets. (10) With time and continued tumult, these proposals have gradually come to be more widely heard. Sheila Bair, Republican Chair of the FDIC, can be added to the list of those arguing that mortgage foreclosures lie at the core of our woes--a list that since autumn has included not only progressive housing advocates, but also financiers and economists as ideologically diverse as the Democrats George Soros and Joseph Stiglitz, and the Republican Glenn Hubbard. (11) Even former Federal Reserve Chair Bernanke and former Treasury Secretary Paulson acknowledged the need to stabilize freefalling mortgage markets.

It is very good news that so many, at last, are now looking to stemming the foreclosure crisis as the best means of addressing the present financial crisis. However necessary the "transfusion" supplied by the first half of the Treasury's new $700 billion was to keep the "patients" that are our national and global financial systems alive on the table, the fact is that these patients--and the public rise--will continue to hemorrhage until we stanch the flow of foreclosures that is still underway. The only real question is how best to do that.