As it stands, the plan is a colossal mistake.
This government's track record should not predispose us to trust them. George Bush paid back his oil industry donors with decisions that gave them billions in extra profits. He created a phony crisis in Iraq and then embarked on a war in which, among other things, his people robbed the treasury blind. Untendered contracts went to friends (including a company the VP formerly headed). Billions of dollars just disappeared. That's on top of his tax cut for the rich, which is estimated to be responsible for $200 billion of this year's deficit.
The financial industry's track record should make us run screaming from the notion of trusting them. This is an industry built on greed. As we now see clearly, their M.O. was to package up bad debts and sell them as supposedly low-risk securities, and keep doing that until the house of card crumbled. What do they care? They got their millions (some hedge fund managers make over a billion dollars a year) and they aren't going to be held accountable.
The budget deficit is already at nearly $800 billion this year, including $80 billion to bail out AIG and $200 billion to bail out Fannie Mae and Freddie Mac.
What the US really needs to do is solve the root of the problem: bad mortgage debt. There are a couple of programs trying to do just that, but some of the funding is now unavailable because Fannie Mae and Freddie Mac are in government conservatorship. Trying to solve the problem by alleviating symptoms just promises another two years or more of financial and economic crises.
If we must have a bailout, it must be done properly. Congress has been talking about caps on CEO compensation and an economic stimulus package as part of the bailout. Those are good ideas. But the main things that are needed are (1) a plan that will work; and (2) transparency and accountability.
The plan as it has been presented to congress doesn't put restrictions on how Paulson spends the money - it doesn't even restrict Paulson to using the money for the bailout. He could buy assets at a huge premium, throwing untold millions at Republican supporters or others of his choosing. The Republicans could use this opportunity to secure campaign financing for decades.
The bill must be amended to say exactly how Paulson will use the money. Economist Paul Krugman says he doesn't think the plan as stated will work. Long-term, we'd be far better off paying off people's mortgages than bailing out financial institutions; short-term, some sort of bailout is probably needed, but it's not clear that this approach will work at all. As Paul Krugman says, this blunt tool plan only succeeds if the government grossly overpays for otherwise-unsellable assets in order to inflate the system. We need other ideas. Like maybe this one.
If congress approves the plan, Secretary Paulson will become the most powerful person in the United States. An investment banker before becoming Treasury Secretary, wikipedia estimates his personal wealth at over $700 million. His experience in government is just over two years. Paulson met with congress last week and scared the beejus out of them with his projections of what will happen if they don't pass his plan. He says that action must be taken quickly and that his plan must be passed by congress with no restrictions or add-ons. In effect, the bailout hands control over the economy to Paulson, and Paulson is arguing that there can be no restraints or oversight of his activities. He is trying to railroad congress into approval, promising Armaggedon if they don't do it. They must resist.