The post-bailout agenda
For starters, Congress must admits its mistakes in creating a housing bubble.
For Congress, spending billions to buy up Wall Street's dodgy mortgages may be the easy part. The next act requires lawmakers to respond to public anger and prevent America's economy from falling into another giant credit hole. Where to start? With Congress itself.
House Speaker Nancy Pelosi says Congress bears no blame for the current crisis. And in a Thursday night TV speech, President Bush cited a large influx of foreign money as a primary cause for American's financial excess.
Such political deflection doesn't bode well for what should be the biggest rethink of the government's role in financial markets since the New Deal, or even since Alexander Hamilton set up the first central bank.
Congress too often fails to find a balance between letting business regulate itself and forcing a government's hand on markets. Two mistakes stand out from this crisis and call for correction:
One is the 1999 repeal of a Depression-era Glass-Steagall law that prevented the financial institution from both lending money and investing it. The repeal recreated the same conflict of interest and casino-like culture of greed that led to the 1929 market crash. It also led to companies becoming "too big to fail," forcing government bailouts.
Congress's other big mistake was creating the impression that government will always support the easy buying of houses and help keep home prices rising.
Various laws coerced lenders to provide "affordable" home loans, with the biggest offenders being the government-backed Fannie Mae and Freddie Mac. They ate up half the mortgage market and, under pressure from Congress, let many borrowers lie about their incomes. And lobbyists for such lenders and the housing industry made sure this gravy train kept running.
What did America get for all this government wink-wink?
Two decades ago, a home cost 3.5 times a buyer's income and down payments were often 20 percent. Last year, the median price of a home was 4.9 times the median household income and often with no down payment. Along the way, the average size of a home nearly doubled as Americans went on a "house envy" binge.
On top of this huge debt overhang was Wall Street's role in buying and selling mortgages as "securities" with not enough transparency or capital requirements to cope with a market bust.
Congress didn't discover until 2007 that it had created an oligopoly of only a few credit-rating agencies that missed how many mortgages were not creditworthy. And meanwhile, from 2003-2006, the Federal Reserve kept the money spigot open for low interest rates.
Wall Street also invented exotic financial instruments, such as "credit swaps" and "short selling," that Congress failed to rein in. Instead, it's now focused on easy targets, such as executive pay which hardly lies at the root of the mortgage crisis.
Both John McCain and Barack Obama propose streamlining the tangle of financial regulators â€“ something proposed in March by the Treasury secretary but rejected by Congress. But Congress can't leave all responsibility for preventing another mortgage blow-out to regulators.
If taxpayers must now rescue Wall Street, they expect Congress to admit its own mistakes and correct them.