Second, there is a truly alarming likelihood that $700 billion will probably not be enough. Estimates of the total amount of junk out there vary, but the key point to hold fast to is that Bernanke, Paulson, and most financial experts have consistently underestimated the problem. Nor is there any reason to believe their forecasting is improving. Less than a fortnight ago, as Lehman was let go, the Fed was boasting that it now had a much better grip on markets than it did when Bear Stearns went down. It seems clear that even under this option, the bank inspectors had better be unleashed before much money goes out the door. Otherwise, we may well end in the worst of all possible worlds: the $700 billion is gone, but trust in the money markets remains elusive.

Third, the draft plan is silent on the prices at which assets are to be bought and, presumably later, resold. The problem of possible sweetheart deals is real and has to be addressed. Already there are reports on the web that the Treasury believes such methods are really rough-and-ready ways to get aid to firms that need it. There is also little doubt that politics colored some assets sales by the Resolution Trust Corporation, set up during George H.W. Bush's administration to dispose of debris from the S&L crisis.

Under both options 2 and 3 above, it is vital that Congress insist on reasonable terms for the public. Just as with Bear Stearns, the mere announcement of the bailout sent financial markets around the world soaring. There is absolutely no reason why some of the gains accruing both to private investors in the companies directly being bailed out and the broader market cannot be recaptured for taxpayers whose money makes it all possible.

It is easy. You can do it, for example, by taking equity in the firms you bail out and selling later. We prefer this to warrants, which are rights to buy shares at a low price that ensure a gain when they are finally exercised. Our fear is that coalitions of firms will do what Chrysler did and organize later to pressure the government not to exercise the warrants. Because there will be many of them, they are more likely to succeed.

It also makes sense to insist that firms receiving aid issue senior debt to the government with rights over all other bonds, etc., they have outstanding. That's to make sure some money comes back right from the start and that managements cannot keep all the earnings for themselves by reducing accounting profits and paying themselves more.

To recapture some of the broader market gains flowing from the injection of public money, one could place a modest new tax on interest, dividends, capital gains. "Carried interest," the ludicrous special tax break for private equity and hedge funds that not only Republicans but Senator Schumer and other Democratic Congressional leaders continue to defend, should go as part of any political deal on a bailout. It is beyond crazy to ask American workers to subsidize firms that will soon be back trying to break up their firms and throw their rescuers out of work.

And finally, obviously, it is necessary to re-regulate. Details of some reforms might require time to work out, though we see no reason they should be any more intractable than details of a bailout, which Paulson and Bernanke want to do almost overnight. Our general view is that handing out money before nailing down reforms is too dangerous; Congress should legislate at least the basics, with a promise to fix details later. If Wall Street does not like it, it does not have to accept the money.

It helps that the main reforms necessary are obvious. Compensation practices that encourage taking big risks that blow up after bonuses are paid have to go, immediately. Limits on leverage--how much financial institutions can borrow--are another no-brainer. Probably there is also need for new rules on reserve requirements across the board and restrictions on the use of insured deposits.

Above all, trading in complex derivatives--the main cause of the current disaster--has to be completely overhauled, at once. Derivatives have to be standardized and move to public exchanges that collectively guarantee them. Failure to do this will just start the whole nonsense over again. Just imagine being told a year from now that losses on credit default swaps written by firms that were bailed out under the new plan require us to pony up still more cash.

Congressional Options

It is fine for Democrats to hold out for mortgage relief and for another stimulus package. The best way to do the first, probably, is by reviving something like the Home Owners Loan Corporation that worked so well in the New Deal. That bought mortgages from people who were in danger of losing their houses and converted them into obligations that they could afford to repay. This sort of bailout has the wonderful property of directing public money to the public, rather than Wall Street. But it would still bail out Wall Street, since reviving housing and stopping mortgage defaults feeds directly through to mortgage bonds values and derivatives based on them.

But no one should be fooled by Democratic talk about mortgage relief and economic stimulus. The main focus of the design of the bailout must be the bailout itself. That is the rat hole down which $700 billion and probably plenty more will soon start disappearing if Congressman Barney Frank, Senator Dodd and, of course, Senator Obama do not walk the walk instead of just talking the talk.

The situation is dire, but it is not hopeless. A flurry of discussions with other central banks and governments may soon produce claims that international agreements hem in legislators here. Congress has a straightforward counter to this and any manipulative threats of economic collapse: Turn the gun around. Move every bit as speedily as Paulson and Bernanke demand, but pass a bill that anyone can see protects the public far better than the Men in Black's proposal. If President Bush--remember him?--refuses to sign it, make it obvious to voters who's really crashing the system for private gain. All of the House and a third of the Senate are up for re-election. Enough votes can probably be found from among Republicans who would like to survive a Democratic landslide to pass something far better than the Men in Black's bridge loan to nowhere.

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