House Republicans defended their “free enterprise principles” as keeping the government from selling Main Street out for Wall Street. Economists not keen on GOP bailout

A number of economists may be questioning Treasury Secretary Henry Paulson’s plan to rescue the financial markets, but they really don’t like an emerging House Republican alternative.

“I can’t manage to find any reason to doubt that the House Republicans’ plan would destroy the U.S. financial system,” economist Robert Waldmann wrote on the Angry Bear blog.


Admittedly, Washington think tankers and Wall Street players haven’t seen more than a one-page “economic rescue principles” released by aides to House Minority Leader John A. Boehner (R-Ohio). But what they’ve seen has them scratching their heads.

The most prominent Republican alternative, drafted by Reps. Eric Cantor of Virginia and Paul Ryan of Wisconsin, would federally insure all mortgage-backed assets at a price and premium established by the government. But that proposal has yet to be embraced by the entire House GOP Caucus.

The plan centers on insuring mortgage-backed assets at prices and premiums set by the government, creating a virtual backstop for the debt. This would not require an initial outlay of taxpayers’ funds in the neighborhood of Paulson's $700 billion. Democratic leaders say Paulson doesn’t believe a mortgage insurance proposal will work, though he hasn’t said so publicly.

“I frankly don’t understand how this is supposed to work,” said Douglas Elmendorf, an economist at the nonpartisan Brookings Institution and an outspoken critic of the Paulson rescue plan.



People generally buy insurance for events that are unlikely to happen; a homeowner pays out a couple hundred dollars for fire insurance, and if their house burns down they get hundreds of thousands of dollars from their insurance company, provided by premiums collected from other policyholders, he explained.

“But with mortgage-backed securities, the bad thing has already happened,” Elmendorf said. “They’ve lost their value.”

The emerging GOP alternative does not resolve the problem of how the government prices the toxic assets at the heart of the crisis, experts said. In the Paulson plan, the government has to figure out how much to pay for the assets. But in the GOP alternative, the government would have to determine the premium prices to insure against the risk that the mortgages behind the assets don’t get paid off.

Many observers were buoyed by the modifications unveiled Thursday by Democrats and Senate Republicans that would allow the federal government to take out warrants — the option to buy shares — on some of the companies’ participating in the rescue. That way, if Treasury paid way too much for a firm’s assets, taxpayers would share in the windfall to the company.

Doubt and dismissals of the new Republican plan came from some of the harshest critics of the Paulson plan, now nearly a week old.

Matt Kibbe, president and chief executive officer of the conservative grass-roots group FreedomWorks, defended Boehner and Cantor for trying to offer a workable policy framework as opposed to Paulson, whose plan Kibbe believes borders on unconstitutional.

“The problem with it is you’re sort of ex-post going back and insuring things once they’ve already become uninsurable,” Kibbe said, “and the question is, does it just create a two-step process: one step where we create an insurance program, and the second step … where we have to step in and bail them out anyway.”

The emerging Republican alternative is a “distraction,” said Simon Johnson, a former chief economist at the International Monetary Fund and a fellow at the Peterson Institute of International Economics who criticized Paulson’s plan.

“I’m sympathetic to anybody who feels that people were trying to railroad them this week, but I don’t think that is going to get us anywhere,” Johnson continued. “If they’re really digging in [on the alternative package], that would be really unhelpful and bad.”

House Republicans, though, defended their “free enterprise principles” as keeping the government from selling Main Street out for Wall Street.

“We are moving forward on a plan that is better for the American taxpayer, on a plan that guarantees that Main Street merchants and Main Street consumers will have a part of whatever action takes place by the end of this weekend,” Rep. Adam Putnam (R-Fla.), chairman of the House Republican Conference, told reporters at the Capitol Friday.

Asked if the insurance proposal would be part of the final bailout package, Boehner noted the Republican goal was “to come to an agreement [and] to do our best to protect the American taxpayers.”

“There are a lot of options in terms of how we do that, and we're not going to negotiate here,” he told reporters. “Last time I looked, you didn't have a vote.”