Replace Secretary Paulson and Suspend Mark to Market
by Newt Gingrich (more by this author)
Posted 10/01/2008 ET
Following Monday's failure of the Paulson plan in the House, it is imperative that our leaders not hesitate to bring stability to our financial markets.
We need action now.
The Paulson Plan - is dead. The time has come for Congress to turn its attention to a plan that does the right things the right way instead of trying to fix the wrong way of this monstrosity of a Wall Street bailout bill.
As I said to Fox News' Greta Van Susteren Monday night, and spoke about at the National Press Club on Tuesday, there are two steps that could be taken that would send a needed signal to the world financial markets that America has leaders who recognize the gravity of the crisis and are capable of putting aside narrow partisan self-interest for the good of the country.
Step One: Replace Secretary Paulson
A plan that relies on the former chairman of Goldman Sachs presiding over disbursing hundreds of billions of dollars to Wall Street is a terrible concept and inevitably will lead to crony capitalism and the appearance of - if not the actual existence of - corruption.
The American people understand this and they don't trust the Paulson plan. Congress should never have been faced with this as its only option to solve the financial crisis. Congress never should have been confronted with this bill. And one man, above all others, is responsible.
That man is Henry Paulson, who may have been a great deal maker for Goldman Sachs, but has been an utter failure during this economic crisis.
It's time - passed time, in fact - for President Bush to fire Secretary Paulson.
President Bush should replace Paulson immediately with someone more capable of forging a deal that the American people can trust. Secretary Paulson's Deputy at Treasury is Robert Kimmitt. He does not have the Wall Street background that made Secretary Paulson so difficult to trust as a negotiating partner and should be much more open to alternatives because he has less invested in the "Paulson" plan.
Kimmitt need not go through the actual confirmation process to immediately take over negotiating with Congress. The sooner Paulson is replaced as the chief negotiator for the administration, the sooner we will have a deal the American people can support.
Step Two: Suspend the Mark-to-Market Accounting Rule
The second thing our leaders should do immediately is simple and uncontroversial: Suspend the "mark-to-market" accounting rule that is exacerbating this crisis.
Under this artificial rule, the value of assets of banks moves up and down with economic conditions, regardless of their underlying worth. So in a time of economic crisis - such as the current subprime mortgage crisis - the value of bank assets gets caught in a downward spiral, causing investor panic and a drying up of credit.
In 2004, the European Central Bank issued this now eerily prescient opinion of the mark-to-market rule:
"With a real estate crisis or a stock market crash... [a bank] under [mark-to-market] accounting might aggravate the effects of the shock. Banks may be encouraged to react by panic selling and tightening lending standards, thus contributing to a further deepening of the crisis."
A Smart First Step
I've spent the past few days talking with businesspeople across the country - from Oklahoma, Georgia, Nevada and California - and they agree: this artificial accounting rule is needlessly making the financial crisis worse.
On Monday I appeared on Fox News' On the Record with Greta van Susteren and called for mark-to-market to be suspended.
I also wrote this op-ed yesterday for forbes.com urging the same course of action.
I gave a speech at the National Press Club in which I discussed in depth the need to end this problem now. You can read the text and view it here.
Then, later that afternoon, the Securities and Exchange Commission took a smart first step by issuing a "clarification" giving companies more leeway in estimating the value of mortgage related investments. You can read more here. Securities and Exchange Commission Chairman Chris Cox deserves credit for recognizing how this accounting requirement is needlessly exacerbating our current financial difficulties.
The Bush Administration's Expensive Legacy
Taking these two steps - replacing Secretary Paulson and suspending the mark-to-market rule - are absolutely necessary right now to give Congress the breathing room to develop a plan to replace the Paulson Plan and to re-establish trust with the American people.
The Bush Administration has now provided three case studies that have badly damaged the cause of conservatism.
First there was former FEMA head Michael Brown during Hurricane Katrina, whose incompetence convinced Americans that Republicans can't be trusted with governing.
Then there was Ambassador Jerry Bremer in Baghdad, whose decisions as the head of the American occupation of Iraq convinced Americans that Republicans can't be trusted to manage foreign policy.
And now we have Secretary Paulson at the Treasury, whose intransigence during the worst financial crisis since the Great Depression has convinced Americans that Republicans can't be trusted with their money.
It's a tragic and very expensive legacy. No conservative and no Republican should doubt how much it has hurt our cause and our party.
Rebuilding Public Trust with a Work Out, Not a Bailout
As I told Greta Van Susteren Monday night on Fox News, the fundamental flaw in the Paulson Plan was that it was seen by the American people as a deal designed by and for Wall Street.
Congress needs to go back to the drawing board and develop, not just a financial markets rescue bill (which should be a work out, not a bailout) but also an economic growth bill.
This economic growth package should do two fundamental things:
First of all, it needs to provide relief for our financial markets that is based on lending troubled institutions the capital to restore our credit markets, rather than buying their bad assets. The taxpayers should be asked to extend these institutions a line of credit until they can get back on their feet, rather than blindly acquire these institutions' toxic paper. This is the essential difference between a workout and a bailout.
Second, the plan should stop the flow of $700 billion each year out of our economy and into the coffers of foreign dictators by achieving energy independence. Not only would our national security be improved, but this much new energy income would cause our economy to boom and government revenues to grow.
A Final Warning: Don't Allow the House Democrats to Move the Plan Left
A lot of people are scratching their heads over what would cause House Speaker Nancy Pelosi to deliver such a bitterly partisan speech minutes before the House voted down the Paulson Plan - a plan she purported to support.
I think it's likely that Speaker Pelosi deliberately delivered her highly partisan speech at the last minute to get precisely the result that she got - the defeat of the Paulson Plan. The danger now is that she and the liberal Democrats in the House will spend the next couple days re-loading the bill with all the leftwing pork projects that Senator McCain and the House Republicans were able to remove from it.
This danger makes it imperative that Republicans unify behind Minority Leader John Boehner in resisting moving any rescue plan to the left. The stakes are too high for the American people to allow liberal Democrats to use the current crisis to line the coffers of their special interest allies.