The Washington Post

WASHINGTON—Since writing a week ago about the inequity of taxpayers being sent a bill that will top $100 billion for a savings-and-loan bailout, a flood of disturbing information has come across this desk.

No one challenges the seriousness of the problems that have put hundreds of the thrift institutions on the endangered species list and triggered the Bush administration to press congress for emergency legislation to pump money into the S&L deposit-guarantee fund.

But many questions are being raised about the adequacy of this belated effort to cope with a crisis that presidential candidates deliberately avoided seeing last fall, when it was in plain view. And even more fundamental challenges are being pressed to the philosophy behind the bailout. These questions should have been part and parcel of last fall’s debate, so voters’ views could have been heard before lobbyists and legislators took to the backrooms of Capitol Hill for settlement.

A number of economists, mainly at conservative-oriented think tanks hardly hostile to the Bush administration, have raised what appear to be pertinent objections.

They ask if the Bush plan puts the burden of responsibility on those who made the foolhardy, high-risk loans; or whether, with fine impartiality, it is penalizing the prudent, healthy savings institutions for the sins of the others.

The Bush rescue plan will pump money into the system, some of it coming from taxpayers and the rest from a levy on healthy S&Ls and banks. While tightening supervision (a classic case of locking the barn door after the horse has escaped), it would delay major reforms in the deposit-insurance system, pending an 18-month study.

Last week, senior officials of five conservative think tanks—the American Enterprise Institute, the Cato Institute, the Competitive Enterprise Institute, the Heritage Foundation and the National Taxpayers Union Foundation—along with Robert E. Litan, a senior fellow at the Brookings Institution, issued a strongly-worded challenge to this strategy. Their joint action was unusual enough to command attention. And Heritage rushed out a supplementary commentary of its own prepared by Henry N. Butler, director of the law and economics center at George Mason University.

The joint statement says, first, that the administration should stop temporizing, recognize the seriousness of the problem, and seek authority from congress “to raise at least $50 billion during the current fiscal year, rather than over the next three years, in order to swiftly shut down insolvent thrifts and stop the hemorrhaging of federal insurance fund losses.” Many others have also suggested that the administration’s gradualist approach was shaped more to meet budget-deficit targets for this year than to deal with the crisis.

Chairman Dan Rostenkowski, D-Ill, of the House Ways and Means Committee, in an interview with The Washington Post, raised the question whether keeping the costs of the S&L bailout “off-budget” might not raise the eventual bill to American taxpayers by several hunderd billion dollars as a way of making the budget deficit smaller and thereby inducing a continued stream of foreign investment to the United States. If so, he said, his Chicago constituents are getting worse treatment than Tokyo and Dusseldorf bankers.

Second, these critics complain that the Bush plan delays the needed hard look at an insurance scheme which, among other things:

Guarantees deposits up to $100,000, even though the average depositor has only $8,400 in his or her account, and allows wealthy families to get even more protection through multiple accounts under different names.

Charges the same insurance rates to all institutions, whether they are conservative, prudently managed operations or speculative highfliers. The perverse consequence of this system, they note, is that it encourages risk-taking hotshots, since their deposits are protected to the same generous extent and at the same low cost as the more cautious operators.

Butler, in his Heritage paper, argues for private insurance of the thrifts, on the grounds that market forces then would penalize (through higher premiums) those who make risky loans. That radical a reform is not likely in the midst of the prevailing chaos of collapsing thrifts and nervous depositors.

But the issues belatedly being raised are important ones. Taxpayers who were denied an opportunity to hear this debate before last November’s election have to hope that their representatives and senators will be more conscientious and attentive—and courageous—than the presidential candidates were in 1988.