The rescue plan "is not going to keep a bubble inflated," said economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, "There's nothing you can do to prevent the future meltdown of the housing bubble and nothing you can or should do to keep home prices from falling further."
The debate over whether and how to intervene in the housing market is likely to prove highly contentious in Washington. Many taxpayers will perceive Paulson's plan as a bailout of wealthy executives, including some whose lax investment policies contributed to the crisis. Yet a homeowner bailout may be a political minefield itself, as many homeowners current on their mortgages view such assistance as a payoff to irresponsible borrowers.
Democrats are also likely to press for a tightening of financial regulation as the price of bailing out large financial institutions. Some of these regulations may garner bipartisan support. These include closer supervision by the Federal Reserve System of investment banks that have benefited from unprecedented access to Fed lending facilities, on the principle that the Fed deserves to have more jurisdiction over institutions with access to its money.
Others will press for more disclosure of trading positions and the inherent risks of some of the exotic investment instruments cluttering bank ledgers.
The investment industry is likely to resist regulations that set capitalization standards for institutions other than banks or set limits on how much they can borrow. Investment banks have traditionally resisted such standards, which limit their growth.
At the same time, given that unrestrained credit was a strong contributor to the crisis, the industry may not be able to stave off tougher rules.
"In the aftermath of the Great Depression, we got a lot of regulations that didn't work and created problems years later," Fordham's Lothian said. "It's not like we don't have myriad regulations already."
Despite the plan's huge costs, there appeared to be widespread agreement that a government initiative on a large scale was needed.
"Main Street is as much at risk as Wall Street," said Ludwig, the former federal regulator. "If we failed to act, the resulting loss of jobs, malaise in growth, damage to the engines of our economy and harm to the American taxpayer would be far more costly."
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michael.hiltzik@latimes.com
Times staff writers Richard Simon, Nicole Gaouette and Peter Y. Hong contributed to this report.
