Despite the warning from the country’s top two economic officials, leaders in both parties demanded changes in the White House-backed proposal, and conservative Republicans recoiled at the prospect of federal intervention into private capital markets.
“The financial markets are in quite fragile condition and I think absent a plan they will get worse,” Bernanke said.
The legislation sought by the Bush administration would allow the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions. Getting those debts off their books should bolster the institutions’ balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it could help lift a major weight off the sputtering national economy.
Paulson calls the effort “the single most effective thing” that can be done to help “the American people and stimulate the economy.”
After presiding over the lengthy Senate Banking Committee hearing, Sen. Chris Dodd, D-Conn., spoke disparagingly of the administration’s proposal. “What they have sent us is not acceptable,” he told reporters.
Sen. Richard Shelby of Alabama, the panel’s senior Republican, added, “We have got to look at some alternatives” to the administration’s plan.
In recent weeks, the U.S. government has taken unprecedented steps to calm economic turmoil that shaken the country’s financial system. Among other things, the government has taken control of Wall Street giants Fannie Mae and Freddie Mac, provided an $85 billion emergency loan to insurance giant American International Group Inc., and temporarily banned short selling of hundreds of financial stocks.
This week, the Fed allowed Goldman Sachs and Morgan Stanley, the country’s last two remaining private investment banks, to operate as bank holding companies so that they can accept deposits as commercial banks do in order to stay in business. Merrill Lynch recently agreed to be purchased by Bank of America; Lehman Brothers filed for bankruptcy protection, and Bear Stearns was taken over by JPMorgan Chase.
“We all recognize the gravity of the situation,” Dodd said, adding that the “economic maelstrom” was caused by a combination of “private greed and public regulatory neglect.”
Congressional Democrats remain wary of moving forward with a resolution too quickly and possibly causing more damage to the weakened economy. They continue to push the Bush administration about details of the bailout plan, demanding that CEOs from failing companies should not get “golden parachutes” in the form of large compensation packages as they head out the door.
Senate Majority Leader Harry Reid of Nevada said that while Democrats were pushing back on some issues, they would not fail to act.
“Democrats in the Senate aren’t going to drag our feet,” he said in a speech Monday. “We’ll respond with the urgency of action that this situation demands, but after eight years of fiscal dereliction of duty, it’s time for accountability.”
Reid added, “Should we resolve the issue in one day? I think not.”
Some Republican counterparts agreed with Reid’s call for caution, but Senate Republican Leader Mitch McConnell of Kentucky, speaking on the Senate floor called for swift action.
“When there’s a fire in your kitchen threatening to burn down your home, you don’t want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement,” he said. “You want them to put out the fire before it burns down your home and everything you’ve saved for your whole life.”
“The same is true of our current economic situation. We know that there is a serious threat to our economy, and we know that we must take action to try and head off a serious blow to Main Street,” he added.
President Bush, who spoke Tuesday morning at the U.N. General Assembly in New York, said he is confident that Congress will reconcile differences and pass the $700 billion bailout proposed by Bernanke and Paulson.
Speaking during a meeting with Pakistan’s new president Asif Ali Zardari, Mr. Bush said, “There are good ideas that need to be listened to in order to get a good bill out that will address the situation to get this piece of legislation passed which is necessary to address the financial situation and provide a rescue plan to make sure that there’s stability in the markets.”