Larry Kudlow

Honestly. A clean bill as requested by Treasury man Henry Paulson, along with John McCain's oversight board, can help fix the credit-crunch problem. It needn't be this hard.

According to the Paulson plan, distressed assets will be sold by banks through a reverse auction (the low bid wins) to various investment funds, hedgies, private-equity boys and other banks. And taxpayers will have a strong ownership position in these asset sales. When the assets are worked out over time -- as they will be once housing and the economy recover -- taxpayers will actually make money on the deal.

This is similar to the Resolution Trust Corp. story 20 years ago, when Bill Seidman presided over similar asset sales from bankrupt S&Ls and wound up making money for Uncle Sam and his taxpayers. A long prosperity wave followed.

In fact, industry insiders tell me the Federal Reserve and the SEC may be moving toward a five-to-seven year amortization plan for the scoring of bank losses from the sale of this distressed paper. This is very constructive. Fed head Ben Bernanke also is talking about getting rid of mark-to-market accounting and moving toward "hold to maturity." This is good.

But the credit arteries are now clogged with a terrible virus that can be removed by the Paulson rescue plan. And as the problem is solved, credit and loans will be made more available to Main Street homeowners, small businesses and consumers of every type. Credit markets will gradually unfreeze. It can be done. A deep recession can be avoided.

And maybe along the way we can get a strong King Dollar to fight inflation and attract international investment. And perhaps, just perhaps, we can get more drilling to reduce gas prices at the pump -- a big recovery tonic. And, dare I hope, maybe we even can get corporate tax reform with lower tax rates, which along with energy deregulation will spur jobs and wage growth.

But after Tuesday's Senate hearing, I'm very concerned. The bells and whistles that would be attached to Paulson's plan by our Democratic friends are anti-capitalist and anti-opportunity.

Capping compensation for both the selling and purchasing institutions? What? Salaries and bonuses are no business of the government. People go to work for profits. For opportunities. It's at the heart of our free-market capitalist system.

Now, I can understand companies like AIG, Fannie and Freddie, which effectively have been nationalized. That's different. I don't care if they all make $75,000 a year, just like the regulators. But to stretch this to the banks that are selling or buying the assets goes beyond the pale. It's France. But it's France heading toward the old Soviet Union, or at least Tsar Putin's Russia.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.