Conservatives Against the Treasury Plan

Rep. Mike Pence, a very well respected conservative congressman, is not a fan of the Treasury bailout of the mortgage industry:

A conservative Republican on Saturday night became the first lawmaker to unequivocally oppose a Treasury proposal granting the agency expansive authority to start purchasing up to $700 billion in devalued mortgage debt and other distressed financial assets.

Indiana Rep. Mike Pence, an outspoken conservative, issued a statement acknowledging "our financial markets are in turmoil" before making the argument that "nationalizing every bad mortgage in America is not the answer."

Pence and conservatives who agree with him could become the first major trouble spot for congressional leaders trying to usher the Treasury proposal through Congress. Texas Rep. Jeb Hensarling, who chairs the conservative Republican Study Committee, walked right up to the line of opposing this legislation on Friday, but Pence, who made his case on a conference call with fellow conservatives Saturday afternoon, became the first GOP lawmaker to oppose it outright.

“The administration's request amounts to the largest corporate bailout in American history," Pence said. "Congress should act, but should act in a way that protects the integrity of our free market and protects the American taxpayer from more debt and higher taxes."

Pence offered a number of alternatives, from suspending capital gains taxes to passing a comprehensive energy bill to establishing a commission to overhaul entitlement spending, but nothing that would give the markets the financial security Treasury Secretary Henry Paulson and others believe they desperately need.

"Congress must not hastily embrace a cure that may do more harm to our economy than the disease of bad debt," Pence said.

The Indiana Republican also stokes an ongoing call to overhaul of Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants that act as a backdrop for most Americans' home loans. The Treasury Department could use Fannie and Freddie as financial vehicles to purchase some of the bad debt before Congress grants it broader authority.

Expect more conservatives to echo these arguments in the coming days, but it remains to be seen how broad that opposition will be.

I have my reservations as well. This plan essentially removes risk from the lenders and places it firmly in the laps of the taxpayers. When you remove risk you encourage further shenanigans in future lending. It's important that this legislation not only stabilize the markets, but get rid of the dumb lending practices that gave us all this bad paper.

This plan reminds me very much of the plan that was used in the 80's when the S&Ls started collapsing. I worked for an S&L that failed in 1985 but continued to operate for 10 more years thanks to the Resolution Trust Corporation that stripped away all the bad loans and left the core business to function without them. It worked for the S&Ls and would work for this problem but it has to be structured very carefully.