A couple of years ago, a friend of mine was driving down the highway in a new car that he had owned less than a year. As he drove, he thought he heard a noise but wasn’t sure where it was coming from, so he turned down the radio and listened. Sure enough, he did hear something. It was barely discernable at first, but then grew louder as he drove along. Sensing something was wrong, he pulled off on the shoulder and opened the hood of his engine to see what had made his oil light come on.

A couple of hours later, his car was towed back to the dealer who had sold him the vehicle. The next day, my friend would learn that the mechanic who had recently serviced his car there had failed to tighten the plug that kept the oil from draining out of his engine, and it began to leak. When an engine loses enough oil, it begins to seize up and then stops running altogether, and that’s what happened in this case. 

Our nation’s economic engine is a little like the engines of the vehicles that we drive. Just as a car’s engine will seize up and stop running if it loses enough oil, our nation’s economic engine will grind to a halt if the liquidity that enables our banking system to function drains out of it. 

Unfortunately, the engine in my friend’s car had to be replaced – at the dealer’s expense, I should add. Had the problem been detected earlier, that expense might have been avoided. It’s not enough, though, when an engine is losing a lot of oil to simply add more oil. You’ve got to figure out what’s causing the leak, fix it and take the steps necessary to ensure that the same problem doesn’t occur again. 

The economic stabilization, or rescue, plan that the Senate passed this week replaces a lot of the oil, or liquidity, that’s drained out of our nation’s banking system this year. The plan does a lot more than that, though, to reduce the likelihood that this nightmare doesn’t happen again on someone else’s watch. The proposal that’s been hammered out authorizes the U.S. Treasury to purchase at deeply discounted prices hundreds of billions of dollars of undervalued mortgage-backed securities and to hold them until they appreciate in value. The market value of these investment instruments is greatly diminished today because the market which allowed them to be freely traded until last month has seized up, impeding the flow of capital in other markets, as well. Not just on Wall Street, but on Main Street and on a lot of the streets where American families live and work.   Increasingly as days go by, American families are finding it harder to borrow money to buy a car, buy a house or send a kid to school, and small business are finding it tougher to find capital to keep their doors open.

But just replacing the “oil” that’s drained out of our banking system isn’t enough.   

In addition to setting up a bipartisan oversight board to monitor the rescue operation that will be set up in the Treasury Department, an independent Inspector General will be created and staffed to ride herd on the rescue effort and to ensure adequate accountability and to provide for transparency. Safeguards are mandated to make certain that bad behavior and the inept management of some financial institutions that contributed to getting us in this mess are not rewarded. Moreover, the Treasury is directed to work with homeowners facing foreclosure and to modify the terms of those mortgages where feasible in order to avoid additional foreclosures when the mortgages of those homeowners are included among the mortgage-backed securities that the Treasury ends up owning for the next few years.

Will it all work out in the end? To be honest with you, it’s hard to say for sure, but there are a couple of precedents from the last 25 years or so that suggest – at least to me – that it just might. One of those precedents goes back to 1980, a time when Chrysler was about to go under because the company couldn’t obtain the financing to enable it to begin production of its new K-car, a vehicle that Lee Iacocca, then CEO of Chrysler, believed would help save the company. 

Iacocca and Chrysler went hat in hand at the time to the federal government and to a number of states where Chrysler had significant operations, asking for help. As state treasurer, I was authorized that year by the governor and legislature to negotiate a collateralized, interest-bearing loan to the company and did so. Chrysler later repaid the loan to our state and to others. We made money on the deal, and deposited that money in the state’s treasury. 

Meanwhile, the federal government did not actually loan money to Chrysler, but Uncle Sam did provide loan guarantees to the company to enable it to find financing in the private sector. When Chrysler subsequently repaid those loans, as well, the federal government was able to take the warrants issued to it for guaranteeing the loans that Chrysler obtained and turn those warrants into hundreds of millions of dollars for the U.S. Treasury and for our citizens. 

A decade later, during the S & L crisis, hundreds of failing savings and loans across the country had on their books billions of dollars of loans to finance apartment complexes, residential housing developments, shopping centers and office buildings. At the time, the value of many of those properties was badly depressed, along with the economy of many parts of the country. A school of thought emerged, however, that when the economy recovered, the value of those assets would recover, too. As a result, something called the Resolution Trust Corporation – commonly referred to as the RTC – was created by legislation that I had a hand in creating as Delaware’s congressman. The job of the RTC was not to run or regulate the failing S & L’s. The job of the RTC was to acquire many of the undervalued properties, hold them until market conditions improved and then sell them. The lion share of the proceeds went to the Treasury in an effort to make taxpayers whole.

In the end, the RTC did its job. The economy and property values recovered. Markets stabilized. Many failing S & L’s were closed or merged into other financial institutions that went on to prosper. Most of the taxpayers’ investment in the RTC was recovered, 85 percent as I recall, and the economy eventually went on the longest period of expansion in the history of the country. 

Both the Chrysler and the S & L crises provide lessons that are helpful to us now as we seek to stabilize mortgage markets and housing values, and as we attempt to restore liquidity and confidence in our banking system.

During the first presidential debate, a question was asked repeatedly of each candidate concerning which initiatives they would each jettison from their agendas as President because of the $750 billion hole in the budget that fixing the housing and banking crisis will cost. Neither candidate directly answered the question, but the answer is that if we’re smart about it and execute well the plan that’s been developed, there’s a very good chance that this rescue effort won’t cost taxpayers anywhere close to $750 billion. In fact, we may end up making money for the U.S. Treasury like we did in the Chrysler rescue effort, or at least we should come close to breaking even as we did after creating the Resolution Trust Corporation to help resolve the S & L crisis. 

In closing, let me note that there actually is some low hanging fruit out there that is available to the next president and Congress to begin ratcheting down future budget deficits below the record-setting one for the fiscal year that we’ve just concluded. Let me mention just a few of those opportunities.

First, the IRS reported last year that the level of federal taxes owed, but not now being collected, exceeds $300 billion per year. Second, the Office of Management and Budget reports that the level of improper payments by federal agencies hovers around $50 billion per year. Most of that is over payments, and the $50 billion doesn’t even include some of our largest agencies like the Defense Department or Homeland Security. Third, the General Accountability Office recently reported that the amount of cost overruns on major Defense Department weapons systems under development has grown from less that $50 billion in FY2000 to almost $300 billion in FY2007. Fourth, the federal government wastes several billion dollars each year to maintain surplus property that it no longer needs. Fifth, recovery audits conducted last year in just three states recovered for Medicare $1 billion lost to scam artists or monies that were simply misspent. Conducting similar recovery audits in all 50 states should enable us to recover amounts that will dwarf that billion dollars. 

And here’s one more. The last time that Congress and then-President Bill Clinton passed line-item veto legislation, the federal courts declared that version unconstitutional. A modified version has since been drawn up and introduced by a junior senator from a small state on the East Coast. Many believe that this version just might meet constitutional muster and also save a few bucks for taxpayers and the Treasury, too. Maybe with a new President and a new Congress, we’ll find out.

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