Trickle-down Bailout or Financial Darwinism?

Treasury Secretary Paulson tells us that the credit market can't function because it has too much bad debt. He proposes to solve this problem by funding a massive bureaucracy with $700 billion, buying the bad debts from lending institutions to give them capital and a clean slate. The theory is that this would allow loans to go forward again, people would be able to begin to buy homes again, and in due course the benefits would trickle down from the lenders into the economy, which would eventually right itself and resume normal functioning.

Suppose instead the massive new bureaucracy provided loans directly to consumers, rather than buying the old bad debts. Leave the bad debts with the companies that granted them, and those companies can live or die with them. In the meantime, the new agency would process loan applications, and would fund new mortgages based on criteria set by the agency management or Congress.

This plan doesn't help people who are the victims of predatory lending practices, but neither does the Trickle-down plan. In either case it's possible that the lending agency could renegotiate the terms of the bad loans. 

In both systems there are issues with how the government eventually gets out of the loan business.  In the Trickle-Down plan Secretary Paulson plans to sell the debt or the collateral once the market has turned around.  In the Financial Darwinism plan the loans could eventually be sold to private sector institutions.

This Financial Darwinism model has three main advantages compared with Secretary Paulson's Trickle-down plan: it immediately opens up the mortgage market again, it could be funded more gradually, and it leaves the consequences with the companies that took the risks.

Bipartisanship

In George W. Bush's victory speech after the 2004 election, he vowed with unwonted candor that he would "reach out to those who share our goals." This was depressing, since it indicated that bipartisanship means to him that everyone may march behind him in lock-step or sleep in the cold. A "uniter, not a divider" would look for common ground and build on it.

Still, blinkered as this pronouncement was, the House leadership seems not to have gotten the message: when the House and Senate conference committee produced a consensus bill to reconfigure the intelligence establishment in a way that the White House, the Senate Republicans and the House Republican leadership found acceptable, the House leadership allowed it to be derailed by two committee chairmen. Everyone involved agreed that it would have passed handily in the House if it had been brought to the floor, but the Republican leaders preferred to let it die rather than give it a straight-up floor vote that would have succeeded due in part to the support of Democrats, who were in fact marching in lock-step behind Bush and "sharing his goals" on this issue.

If this is the Republican idea of healing the electoral wounds and knitting the red and blue states into a single country again, it's going to be a very long four years... and not just for the Democrats!