Financial Disaster: What Role for Congress?

As the president calls for swift action on far-reaching powers for the Treasury to buy up $700 billion of bad debt from Wall Street firms, Congress faces an age-old dilemma. Legislative bodies are not built for speedy action, but emergencies require them to act with dispatch.

If Congress fails to grant new powers to the Treasury, it risks deepening (and being blamed for) the greatest financial crisis since the Depression. If Congress rubber-stamps the proposal from Secretary Treasury Henry Paulson, it risks making a colossally expensive mistake—at exorbitant cost to taxpayers and to Congress’s reputation and future power.

In times of crisis, presidents often urge Congress to legislate quickly. When Congress does so, more often than not it defers to administration experts and enhances executive power. Enactment of the use of force resolution and the USA Patriot Act after the attacks of September 11^th are recent examples. Both legislative measures came back to haunt legislators who disagreed with how the president subsequently interpreted the expansive powers granted by those congressional delegations of authority.

Why is the rubber stamp so wrong, especially in light of the potential for global financial meltdown? Careful deliberation, after all, is hardly a hallmark of the contemporary Congress, and stalemate abounds over tough problems (especially when intensively competitive parties are loath to compromise). But the costs of a rubber stamp are severe. Deliberation is undermined, alternative solutions are ignored, and unintended consequences are rampant. This time around, those unintended consequences include encouraging more excessive risk taking by financial firms in the future and demands from other industries for similar treatment in the future that will be hard to resist and cheap in comparison. Given the slew of questions that have been raised from the left and right about Paulson’s request for unchecked power to purchase distressed assets and the cost to taxpayers, Congress is right to put the brakes on immediate passage of a blank check.

How then should Congress proceed to vet and amend the proposal? Some basic ground rules should apply.

1. Bipartisan consent is critical. When Democratic Speaker Nancy Pelosi and Republican presidential nominee John McCain agree that executive pay should be limited for firms that benefit from the program, the administration should take heed. Both parties should care about building public confidence that Wall Street executives will pay a price for the government bailout.

2. Focus on matters of power and process. The precarious state of financial markets does not justify the grant of unfettered power to the current Treasury Secretary and his successor after the elections. Legislative ambiguity fuels executive power. This means that strong and ongoing oversight of how the Secretary exercises his new authority should be written into the legislation. Details of the program—which assets can be bought, how they will be valued—should be stipulated in the bill or accompanying report.

3. Seek bicameral agreement. Differences between the House and Senate derail compromise as often as do fights between Congress and the president. Legislative review of Paulson’s plan should start, not end, on a bicameral footing. This means that efforts to expand mortgage relief should center swiftly on those provisions most likely to garner bicameral consent.

Congress is right to reject open-ended grants of power at untold cost. That imperative needs to be matched with an equally rigorous effort to nail down avenues of agreement both across the chambers and between the branches. How Congress acts this week has enormous consequence both for the soundness and stability of financial markets and for Congress’s institutional health and future.