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Don't break the fix

With a few crucial tweaks, the feds and the state should let the economic rescue plan do its work.

October 08, 2008

Shortly after Congress gave his administration sweeping new power to aid the financial industry, President Bush warned that the rescue "cannot be accomplished overnight." No kidding. The Dow Jones industrial average has dropped more than 1,000 points since Congress approved the bailout bill. European governments rushed to save banks and reassure depositors. Foreclosures hit new highs in Los Angeles, New York and Seattle. And in California, legislative leaders considered calling an emergency session to fix the new state budget, as revenues in September alone were $1 billion short.

The economy almost certainly will get worse before it gets better. Financial analysts are saying with increasing unity that a global recession is either looming or ongoing. So federal and state governments will be under pressure to do something, regardless of whether it would actually spur growth and turn the economy around. They should resist that pressure and give the recently enacted rescue plan time to work -- with the exception of a few steps that could shorten the downturn and limit the cost of the bailout.

Congress missed a chance to provide a quick boost to the economy when it failed to extend unemployment benefits before adjourning to hit the campaign trail. An extension should be at the top of the agenda for the lame-duck session next month. In the meantime, the federal government can help California and other states that are struggling to borrow funds even for short-term needs. With Treasury bills surging in popularity, the government can raise money for the states far more cheaply than they can do so for themselves.

In return, Sacramento can try to slow the foreclosures that are at the heart of the global financial crisis. Despite having more troubled borrowers than any other state, California has done little to limit the damage caused by foreclosures or guard against another subprime mortgage meltdown. Lawmakers blocked most of the major proposals, and Gov. Arnold Schwarzenegger vetoed all but one of those that made it through. Now, as they grapple with the budget, state leaders also should find a way to extend to all troubled borrowers with subprime or exotic loans the relief that state attorneys general announced Monday for Countrywide Financial borrowers. That includes delaying foreclosures and modifying loans in ways that do not reward the most egregious risk-takers. The goal is to buy time -- not just for lenders to avert needless foreclosures, but for the Treasury Department to loosen the credit crunch that's exacerbating the problem.

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