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The Bailout and Oversight.

Commentators have criticized the Paulson bill for claiming too much discretionary authority for the Bush administration, echoing a well-known complaint about Congress's authorization of the use of force against al Qaida. That authorization was a blank check, and this mistake will not be repeated, or so it is claimed, with the usual bromides about checks and balances.

It appears, though, that there are two criticisms rolled into one. One argument is that after 9/11 Congress did not deliberate enough before handing over power to the executive. The other argument is that Congress did not properly restrict the power of the executive in the course of issuing an authorization—by giving it limited powers or subjecting it to judicial or other types of review. Having learned from our mistakes after 9/11, we should insist both on democratic deliberation and enactment of meaningful oversight mechanisms.

These arguments are not so much wrong as question-begging. Congress has every incentive to deliberate; it will defend its institutional prerogatives and seek to ensure that the enacted law reflects its policy preferences. The problem is that, in the midst of a financial crisis, Congress does not have as much time as it ordinarily does. Most laws take months or years to pass. A complex optimal stopping problem arises: the longer Congress deliberates, the more that it will acquire information for making a good decision, but the greater the risk that the crisis will spin out of control. The stop-and-deliberate crowd (especially the economists among them!) need to acknowledge this problem. One suspects that their attitude merely reflects skepticism about the magnitude of the crisis or the ability of the government to solve it, not any real confidence that new information will emerge so that Congress can make better decisions. (That, or devotion to empty political forms.) How long should Congress take? A week? A month? A year? I can't see any reason to think that Congress will take any less time than it is reasonable for it to take given the urgency of action.

Meanwhile, the Dodd bill implements several oversight mechanisms -- or, more precisely, mechanisms that constrain the executive in some ways even as the bill hands over power to it in other ways. These mechanisms might be wise, but it must be acknowledged that they come at a price -- and their defenders have not shown that the price is worth paying.

1. Bankruptcy judges are given power to adjust mortgages. Democrats want to help homeowners. They give Treasury some discretionary authority to minimize foreclosures, but the sharing of power with bankruptcy judges is a crucial mechanism for limiting the power of the executive branch. Whether mortgage adjustment is good policy or not, the price of such a division of power is clear. The value of the mortgage-related securities you hold is in part a function of your prediction of how bankruptcy judges will trim the interest and principal in bankruptcy. The judicial system is highly decentralized and it will take years for common principles to develop. So it will be hard to predict how judges will act, and accordingly it will be hard to adjust the value of your assets. By contrast, if Treasury were given this power, it could issue some regulations and settle the issue. Remember that it is the valuation problem that is said to be the source of our current crisis in the first place.

2. Judicial review of "any determination of the Secretary with regard to any particular troubled asset." Determinations will be set aside if "arbitrary and capricious, an abuse of discretion," etc. The risk here is that prospective sellers of bonds will fear that a court will subsequently set aside the sale because the price or other terms seem unfair. Maybe no court would do that, but maybe some would. Are they likely to do a good job? To decide cases consistently? The result is more uncertainty with respect to the value of assets that are not selling because their value is already uncertain.

3. Reporting to Congress and an oversight committee that includes two congressional appointees, one from the majority party and one from the minority party, plus the heads of the Fed (Bernanke!), the SEC (Cox!), and the FDIC. I like the bipartisan representation of the committee, but the committee has no power. But suppose that it does. Now we must worry that Treasury will make purchasing decisions to please particular members of Congress who care about particular businesses in particular districts -- creating more uncertainty in the market, unless market participants can guess who those people are.

The benefit that is purchased is that it will be harder for Treasury to use its powers to aid political friends, and perhaps some good-faith pricing errors will be caught or avoided. But if this benefit is really substantial, why stop here? Why not make judicial review more searching or set up an independent agency to purchase assets? Why not have a bipartisan committee to make purchasing decisions? No one has a theory about how power should be divided. Dividing power makes sense in the abstract, but in the concrete it just raises, in procedural form, all the questions of policy that have not yet been answered. It reduces the ability of government officials to abuse their power but also to resolve the crisis.

As I have noted before, the oversight mechanisms that have received serious attention are pretty trivial, which suggests that Congress and probably most experts, believe, rightly or wrongly, that the executive needs a free hand.

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