Could the $700 billion bailout program being rushed through Congress not only fail to solve the problem being targeted–which, in case you forgot, is the clogging of credit markets–but actually do more harm than good? That's the frightening scenario raised by Weiss Research in a research paper submitted to Washington lawmakers on Friday.

In its report to Congress, Weiss issued some dire warnings indeed about the plan!

“The proposal before Congress for a $700 billion financial industry bailout will not only fail to end the massive U.S. debt crisis, but could actually aggravate the crisis by driving up interest rates,” Weiss asserts. “Therefore, Weiss recommends limiting and reducing the bailout as much as possible, while bolstering existing safety nets for consumers.”

Why is Weiss so worked up? Actually, the main problem they raise is one that's been haunting me since the depth of our economic debacle was revealed, and talk first surfaced about committing a massive amount of taxpayer dollars to bail out those who made or invested in all these horribly bad loans–where are we going to get the money?

Of course, we'd raise the cash the way Washington always does–by selling Treasury bills. That's the fundamental flaw in the plan, Weiss argues.

Indeed, the Weiss report warns against entertaining “any false hopes that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without putting major upward pressure on U.S. interest rates, aggravating the very debt crisis that the government is seeking to alleviate.”

What they mean is that if Treasury hikes the interest rate on its notes to raise all this cash, all those with adjustable rate mortgages will get socked with higher rates, probably pushing many more into foreclosure and further undermining the debt load being carried by the banking and securities markets. It would also make it more expensive for new home buyers and business to borrow, slowing down the economy even further.

On Friday, when it released its report, Weiss suggested that Uncle Sam severely scale back its plan substantially, and that's exactly what Congress appears to have done–by approving the bailout in stages, with Treasury having to satisfy Congress that everything is going according to plan before additional money is released.

But it's not clear to me that even that will make a difference, as once this ball gets rolling, I can't see Congress stopping it without risking the financial meltdown that the plan is designed to avoid.

And even releasing “only” $250 billion at a time would place an enormous strain on the Treasury to raise that much money in so short a time, would it not?

Weiss suggested that Washington focus on the following:

–Severely limit the government's authority to buy bad private-sector debts by requiring it to pay strictly fair market value, including a substantial discount that reflects their poor liquidity.

–Disclose to the public that there are significant risks in the financial system that the government is not able to address.

–Focus more resources on strengthening existing safety nets, including FDIC insurance of bank deposits, SIPC coverage of brokerage accounts and state guarantee associations that cover insurance policies. (The latest version of the plan would include an insurance mechanism for mortgage debt backed by House Republicans, but if financial institutions have a chance to dump these bad loans on Uncle Sam, why wouldn't they just do that instead of buying insurance and keeping all this garbage on their books?)

Weiss's analysis makes sense and scares the hell out of me, but are we damned if we do and damned if we don't? Trapped between the proverbial rock and a hard place??? If we don't create this mechanism, don't we risk locking up the credit markets and sending the stock market and economy into free fall???

What's the link to the insurance industry here, you might ask? Well, since the health of the insurance industry depends on the health of its customers, the overall economy and the stock market, I think the impact of a failed bailout–or a failure to have a bailout–would have quite an impact on p-c insurer. Don't you?

What do you folks think?

Special Reports /

Could The Bailout Plan Do More Harm Than Good?

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