With Congress scheduled to begin its election-year recess at the end of this week, the Bush administration has little time to pull a plan together that takes the bad mortgage-related debt off the books of banks and financial institutions and that stabilizes the financial markets. Steven L. Schwarcz's and Douglas W. Elmendorf's opinions on the plan can be read here.

Resident Scholar  Vincent R. Reinhart

Political leaders recognize that more than improvisation is needed to cope with the collapse of the housing market and the financial market crisis in its wake. Before they turn to the details of draft legislation, however, they had better settle on what they are trying to accomplish.

Helping households in distress is a retail business, requiring decisions on a mortgage-by-mortgage basis. Similarly, negotiating with individual financial firms about their mortgage holdings takes time and infrastructure. Such negotiations put the government at a decided disadvantage because the other side in the transactions has more information about each asset.

In both cases, politicians will have trouble establishing boundaries for assistance. While about one in 15 households with mortgages is now late in making payments, many more have suffered wealth losses. Builders, too, are in distress. And there are tens of thousands of financial institutions in the country, almost all of which have some impaired loans on their books.

The unpleasant reality is that time is short, resources are stretched and many of the nation's urgent needs are unmet. Because government funds are not unlimited, legislation should focus on the immediate problem of the strains in financial markets.

Providing aid to large financial firms is distasteful, especially when remembering their excesses and the time when their managers were considered masters of the universe. But those firms hold the larger economy hostage. As long as they are unwilling to support market functioning and make new loans, spending will sag and asset prices will slide.

The Congress should authorize the Treasury to purchase asset-backed securities in the secondary market and mortgages through auctions. For assets where it might not have all the information it needs, the Treasury could demand a slice of equity in the selling firm as well. As has been the case since its inception, the Federal Reserve can act as fiscal agent, making some of the purchases directly and supervising outside managers where special expertise is needed.

The election calendar narrows the window of action and provides reason to keep the draft legislation simple. The assets acquired this year will certainly not be sold before a new administration and Congress are in power. Thus, it is neither necessary nor appropriate to make decisions on what to do with those mortgage assets.

Vincent R. Reinhart is a resident scholar at AEI.