Wall Street and Main Street are on the edge of a cliff due to eight years of thoroughly inadequate supervision of our credit markets and irresponsible deregulation—failures indicative of the bankruptcy of maverick deregulatory policies pursued by this administration. Now Congress and the American people are left holding the bag in the form of President Bush’s parting gift to the nation—a $700 billion rescue package to pay for his administration’s many, many mistakes.
Yet Congress this week must pass by overwhelming margins the financial rescue package it negotiated this weekend with the Bush administration. Wall Street’s disease will become Main Street’s epidemic if nothing is done—as credit dries up for companies seeking to make their regular payrolls and engage in even the most basic transactions. Assets continue to plunge in value. Sadly, the United States is at the point where it has to demonstrate to severely stressed domestic and global markets, in tatters thanks to the administration’s failures, that it understands its obligations to act—or risk a loss of faith in the U.S. economy.
Thanks to Congress, the legislation is better than the administration’s initial proposal seeking a $700 billion blank check. There’s now real oversight, better taxpayer protections, more upside for the country if the plan works, limits on excessive executive pay for firms bailed out by the plan, and some gestures toward homeowner relief.
The legislation now before Congress requires several federal entities that come into possession or control of home mortgages and mortgage-backed securities to implement plans to “maximize assistance to homeowners,” including reductions in interest rates and mortgage balances. This provision would apply not only to Treasury’s purchases under the bailout program but also to the Federal Housing Finance Agency in its role as conservator over U.S. home mortgage giants Freddie Mac and Fannie Mae and the FDIC when acting as receiver for failed banks. Congress wisely added a raft of oversight and public reporting requirements to the legislation, which means its members can keep a close eye on Treasury’s progress at driving mortgage modifications.
But, faced with administration and congressional Republican intransigence, the focus of the legislation is still on Wall Street, not Main Street. The bill focuses on mortgage-backed securities, not mortgages. If we want to solve the financial crisis, we need to focus on helping homeowners first and foremost. That will require helping distressed homeowners cope with their mortgage payments so that they can avoid foreclosure and continued economic distress.
Sadly, provisions pressed by the Center for American Progress and other progressive organizations to help responsible homeowners who were sold irresponsible mortgages modify the terms of those loans were not included in the final package.
Under this legislation, financially overwhelmed homeowners still cannot turn to federal bankruptcy judges in search of new repayment plans with realistic mortgage payments.
Treasury was not granted the power to get financial institutions that participate in the auctions to submit pools of mortgage loans so that Treasury can ensure the loans are restructured..
If it turns out (as we suspect) that Treasury cannot do enough to restructure mortgages to help our ailing housing market as the economy heads toward recession, then Congress and the administration must revisit this issue quickly and decisively. Getting bad mortgage-backed securities off the books of financial institutions may go a long way toward stabilizing global credit markets. But getting us past the current risk of financial calamity won’t help the real economy where families are stretching paychecks and trying to hold onto jobs unless the rescue program also stabilizes our housing market.
Other aspects of the legislation go a long way toward protecting U.S. taxpayers from more irresponsible mistakes by Bush administration officials and the inevitable efforts by private-sector institutions to take further advantage by dumping their worst assets into this bailout program. The Center will present a more detailed analysis of the legislation and its impact on taxpayers, homeowners, and the financial markets in the coming days.
Most immediately, Congress must accompany the passage of this legislation with swift efforts to help our economy weather a looming recession. First and foremost, the Senate and House of Representatives need to come together on a new economic stimulus package that President Bush must sign. This new stimulus package must contain new infrastructure investments in a low-carbon economy. And it must feature expanded unemployment and food stamp benefits, a broadened Earned Income Tax Credit, and targeted spending to help those hit hardest by eight years of economic mismanagement by the Bush administration.
Beyond a short-term stimulus, it will be up to the next president to put in place a plan for long-term economic recovery and a return to responsible investment and governing.