Not Done Yet

Even if Congress enacts Bush’s financial rescue package, there is more needed to revive our economy and restore integrity to housing and financial markets, writes David Abromowitz.

Senate Majority Leader Harry Reid leads Senate leaders to a news conference following the passage of the Senate version of the bailout package by a vote of 74-25. (AP/Evan Vucci)
Senate Majority Leader Harry Reid leads Senate leaders to a news conference following the passage of the Senate version of the bailout package by a vote of 74-25. (AP/Evan Vucci)

Speaker of the House Nancy Pelosi faced charges of partisanship after delivering this analysis of why Congress was asked to support a $700 billion rescue package by Bush administration officials: “They claim to be free-market advocates, when it’s really an anything goes mentality. No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute and the taxpayer will bail you out. We know that [the free market] can create jobs, it can create wealth, many good things in our economy. But in this case, in this unbridled form it has created not jobs, not capital, it has created chaos.”

The angry response by right-wing ideologues in the House was undoubtedly prompted by truths cutting too close to home.The Speaker’s accurate recitation of history was not, however, the reason most of the ideologues failed to support their president earlier this week and Congress voted down the legislation. Responsibility for the bill’s defeat rests primarily at the feet of Republican leaders who failed to deliver votes that were the rationale for their participation in negotiations over the bill—as well as ideological principles at work, concerns over costs to taxpayers, and objections to the substance of the bill. The House will get a second chance to support the legislation courtesy of the Senate, which last night passed an amended version containing plenty of new incentives to induce more “yeas” in the House when the bill goes before them tomorrow. But the American people should not forget Speaker Pelosi’s telling synopsis of what brought our nation to this point of financial market meltdown on Wall Street and Main Street.

The Center for American Progress earlier this week detailed why we supported the legislation that Speaker Pelosi had also endorsed as a necessary first step to address the consequences of the administration’s long pattern and practice of loosing market forces while holding regulators at bay—ending in a near freeze-up of world credit markets.

Treasury Secretary Henry Paulson had initially pushed for authority to borrow and spend $700 billion to buy up troubled mortgages and asset-backed securities from Wall Street, but the proposal had the administration’s characteristic lack of accountability and oversight. It also completely failed to address the fundamental underlying problems in housing and mortgages. It was a plan that was neither fair nor effective. Not surprisingly, the first (three-page) draft of the Paulson plan arrived dead on arrival in Congress.

But after a weekend of high-level, bipartisan negotiations, Congress produced a bill turned slightly more toward addressing the underlying problem of failing mortgages and falling home values and with somewhat greater accountability for those in the administration and those on Wall Street. While not ideal by any stretch, economic conditions were deteriorating at a serious pace. This amended version of the Paulson plan seemed at first able to gather sufficient votes, but went down to defeat as two-thirds of Republican representatives bailed out on their leadership.

That’s why the Senate had to step forward to pass a newly negotiated version of the bill with some added provisions. The largest addition was the $107 billion “tax extenders” bill, which until now has been bouncing back and forth between House and Senate. The bulk of the cost of these tax extensions involve some politically essential enactments, such as the annual “fix” of the alternative minimum tax to prevent more of the middle class from falling into this non-inflation-adjusted tax net. Other worthy provisions include renewable energy tax credits, the expansion of the child tax credit to benefit lower-income families, and the research and development tax credit to encourage business innovation. Other less savory business tax breaks were also included.

The catch is the price tag—a sticking point in the House. In an earlier scuffle with the Senate, the House demanded that all these provisions be paid for with higher taxes or spending offsets. Nonetheless, they are now part of the financial rescue bill, alongside a new Federal Deposit Insurance Corporation ceiling of $250,000 for bank deposits. The hope is that the tax extenders and the increased deposit protections in the Senate bill will attract more votes in the House than they lose in order to bridge the 12-vote gap in the earlier vote.

The Center has, throughout this process, called for including provisions in the Senate and House versions of the bill to address some of the underlying causes of our current economic situation and strengthen this emergency intervention. Mortgage defaults and foreclosures are driving the economic downturn, and we continue to believe that without strong action to accelerate mortgage modifications, prevent foreclosures, and stabilize housing prices in neighborhoods across the country, the financial markets and our economy will not recover quickly from the excesses of deregulation during the Bush administration. There are nods in this direction in the legislation that passed the Senate, but nowhere near enough.

Despite these and other reservations, the Center and responsible leaders in Congress recognize that the international credit crisis is real and deep. The United States is hardly alone in facing this acute economic threat, but our country bears a dual role as both world leader and a key source of economic instability to restore order to our credit markets. The Federal Reserve and other central banks around the world have taken extraordinary action this year to maintain financial liquidity in global credit markets, but without swift congressional action such efforts alone are unlikely to be effective in the coming months.

Most importantly, these problems are migrating from Wall Street to Main Street. The weakness among lenders is freezing lending. There is a large and growing impact on businesses that can’t engage in routine borrowing that allows them to make payroll, purchase inventory, and make investments. Layoffs, skipped paychecks, and closures are the emerging result. Car loans and student loans are already harder to obtain. Credit cards are going to become harder and harder to come by.

The public is naturally angered by the prospect that much of the $700 billion could end up helping some of the same financial institutions that the Bush administration allowed to create a web of borrowing and credit derivatives that is unraveling as housing values deflate and supposedly innovative securitization structures prove vastly overvalued. Americans across the country are further angered that companies paid out hundreds of billions of dollars in bonuses to executives who were touted as financial wizards, yet the rest of the American taxpayers are largely left cleaning up after the party.

Members of Congress, however, cannot avoid their responsibility to do what is best for the economic health and security of the country because of this justifiable outrage. Too much is at stake for everyone, and if well run and supplemented with other policies, the net cost of the program will be less than $700 billion (and possible nothing) as the securities that the Treasury purchases are sold. The legislation is far from perfect, but it now has some constraints on executive pay and stronger accountability provisions for the disposition of the $700 billion that make it less likely that the taxpayer will end up stuck with the bill.

There is a danger that passage of this bill will be considered the solution to our economic problems. But passing this package, whether called a rescue or a bailout, is only the first step toward returning the U.S. economy to a path of strength and stability. Should the House follow the Senate’s lead tomorrow and approve this legislation, the American people must understand this is only a blood transfusion and a dose of painkiller to a trauma patient. If the credit crunch eases after Congress acts, then we have only bought the country time to more methodically consider what needs to be done to move beyond the precarious boom-and-bust economic policies enshrined in the conservative economic philosophy long dominant in Washington.

The next president and Congress will need to more directly stabilize the housing situation for tens of millions of American families, complemented by smarter targeted investments in our nation’s infrastructure and engines of innovation, and by more responsible tax policy and financial regulation. Any sensible policy going forward should include a number of key elements.

First of all, we need to slow foreclosures and modify and refinance loans wherever possible. As CAP has argued for nearly a year, without addressing the underlying threat to housing values, neighborhood stability, and family wealth, no proposal will turn the economic tide.

We must also invest in an accelerated shift over to an energy-efficient economy. This will create new green jobs, and will reduce wasted expenditures on foreign oil that risk our national security. Other investments include health care, education, and restoring sound fiscal policy, as detailed in the Center’s Progressive Growth series of economic policy recommendations. CAP has also proposed a Green Recovery program that would improve the economy over the next two years with rapid investments in energy transformation that would create 2 million new jobs.

Reforms in health care and education, and investments in other areas, are critical elements for our economic future. Then we must allow the Bush administration’s irresponsible tax cuts for the most wealthy in our society to expire in 2010. The costs of two wars and the starving of important investments over the last eight years weighs on all Americans. It is time for those with the highest incomes to pay their fair share while we fix our collective problems. Nor can the cost of cleaning up this economic mess become the rallying cry for those who want to once again cut heavily into programs such as higher education grants and loans, food stamps, and other basic benefits, in addition to infrastructure improvements and other basis services with the glib call for “tightening our belts.” We need to invest responsibly in our economic future.

Finally, we must reform our financial regulatory system so that effective supervision of our financial markets protects our economy from the excesses of Wall Street. Our current regulatory structure is not to blame for the current crisis. If  Bush administration officials had enforced the laws on the books and policed our markets vigorously instead of turning a blind eye to abuse and fraud in our mortgage markets and encouraging the growth of new and completely unregulated financial markets (most notably the $60 trillion credit default swap market), then we would not be in the dire situation we are in today. But reform is necessary to fix what the Bush administration has wrought.

Read more analysis of the financial crisis and rescue package:


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David M. Abromowitz

Senior Fellow

Michael Ettlinger

Vice President, Economic Policy