Conservative Bailout Plans Don’t Address The Causes Of The Crisis

boehnercantor.JPGYesterday, negotiations over the $700 billion federal bailout imploded after House Republicans, led by Rep. Eric Cantor (R-VA) and Rep. John Boehner (R-OH) circulated an alternative plan that “advocates tax cuts and relaxed regulations.”

This is the second alternative plan offered by conservatives. This week, the Republican Study Committee (RSC) released its own plan, which is also being supported by former Speaker of the House Newt Gingrich.

Both of these plans are fundamentally flawed, and fail to address the causes of the current financial crisis.

The Boehner/Cantor Plan, among other provisions, calls for the removal of “burdensome regulatory and tax barriers” to pull capital into the market:

Instead of injecting taxpayer funds into the market to produce liquidity, private capital can be drawn into the market by removing burdensome regulatory and tax barriers that are currently blocking private capital formation. In short, too much private capital is sitting on the sidelines during this crisis, and it is well past time to unleash it.

This plan is essentially a non-starter. It doesn’t address the underlying problems in the mortgage market by allowing any restructuring of bad mortgages. Also, the plan’s provision to “insure mortgage backed securities (MBS) through payment of insurance premiums” is “akin to selling homeowners insurance in New Orleans after the dikes broke.” Only those financial institutions with the very worst assets would be willing to participate.

Cantor has admitted his plan has a problem, and said “he would support giving the Treasury secretary some authority to purchase the most troubled securities linked to failing mortgages,” because “some of the ‘exotic sliced and diced’ mortgage-backed securities at issue for the financial institutions are of such little value.” But the plan still does nothing to restructure the “sliced and diced” mortgages.

For its part, the RSC proposed cutting the capital gains tax to zero and privatizing Fannie Mae and Freddie Mac, in a “market based alternative” to the bailout. The RSC solution also calls for the suspension of mark-to-market accounting.

As previously noted on the Wonk Room, zeroing the capital gains tax would mostly benefit the wealthy and not draw capital into the market. Meanwhile, privatizing Fannie and Freddie incorrectly places the blame for the crisis on the GSE’s alone. While Fannie and Freddie did invest in bad mortgages, Bush administration regulators failed to prevent such practices.

Moreover, the collapse of Fannie and Freddie “was patently not the beginning of the latest leg of this crisis.” Instead, that honor belongs to the unregulated credit default swaps issued by insurance giant AIG that AIG subsequently couldn’t back up. The elimination of mark-to-market accounting would simply allow U.S. financial institutions to continue pretending that their bad assets are good, which would not fix the underlying problem of toxic mortgages pervading the market.

All in all, the conservatives have proposed deregulation to get the U.S. out of a problem caused by deregulation – with some tax cuts for the wealthy thrown in as a bonus.