David Cay Johnston, who won a Pulitzer Prize for his innovative coverage of our tax system, retired this year as a investigative reporter for The New York Times. He is the author of Free Lunch: How The Wealthiest Americans Enrich Themselves at Government Expenses (and Stick You with the Bill).
As the Senate prepares to vote on the bailout bill, tossed onto the top of a truckload of special interest tax breaks, here are four questions taxpayers should be asking:
1. Are there cheaper alternatives?
2. Are there temporary measures that might keep the credit markets liquid while alternatives are examined?
3. What risks does borrowing $700 billion pose to our future, especially if the bailout is not enough to lubricate the credit markets?
4. What is the backup plan?
Congress has only heard from the advocates of this plan. It has not taken testimony or reviewed plans proposed by economists and others.
Among the options that could be cheaper is temporarily eliminating mark-to-market accounting for assets in which trading is thin-to-nonexistent, but which still have value if held to maturity. Another would be a temporary government guarantee of all overnight loans through the banking system. Yet another would be taking preferred stock in return for government default insurance.
Look at what the government in Dublin did after its stock market fell on Monday. At six Irish banks the government is guaranteeing that every depositor and creditor will get their money in full. Our Congress could do that. After all, our government just, in effect, guaranteed all money market funds.
Temporary measures like this would give us time for rational debate on whether the bailout will work, or whether it'd throw money away in an effort to prevent the inevitable deflation of Wall Street. You can't keep filling up a leaky balloon forever.
It would also give time for experts to testify about the risks of borrowing such a huge sum. Those risks include inflation and the possibility that America's credit worthiness in the global markets will plummet--potentially a huge disaster. Without foreign capital flowing into the United States, our heavily leveraged financial system will collapse.
Our government relies on the trust of China and others to buy our government's debt at the rate of more than $10 billion a week. If they stop buying because they do not trust that we will repay, or fear that we will use inflation to make the bonds they buy worth less, we'll be consumed by problems galore.
And in that is a key issue: What are the opportunity costs of the Paulson plan? What will we not be able to do because of this debt? Will it meant more decay of the infrastructure, which imposes costs on the economy by making business less efficient, by making the cost of moving goods higher?
And what is the backup if this plan fails? More borrowing? Just what risks does that impose? We cannot go on forever borrowing our way out of our economic problems. But without the capacity to borrow, our options will be severely and painfully limited.
--David Cay Johnston