Did Bernanke Save The Day For Plan Paulson?
The Secretary of the Treasury got a very uncivil reception from the Senate today, as clearly congressional constituents have sent a flood of emails and other communications critical of the Paulson bailout (look at the hurry to pass the plan after Thursday’s closed-door emergency meeting, and contrast that with everyone’s “hold on just a minute” attitude now – a development I strongly approve of).
Indeed, it appeared to have been a complete washout – until Bernanke went off-script, and perhaps – PERHAPS – saved the day for some form of the Paulson plan (thought not without significant modification) to pass:
…[T]here was a sense in the room that the plan might be in deeper trouble than expected.
But then, Bernanke took the microphone, set aside his prepare remarks, and calmly laid out the benefits of the Paulson proposal in such a way that took the starch out of the opposition.
A key point of the critics was that under the plan Treasury must pay more than the market value for the mortgage assets.
But Bernanke explained that the mortgage securities have two prices – a “fire-sale price” if the mortgage asset was sold quickly today and a “hold-to-maturity” price if the mortgages were held to maturity.
Banks have been paralyzed by this fire-sale price because their precious capital would evaporate overnight.
The key to the plan, Bernanke said, was that if Treasury was able to buy the mortgages, it will be able to hold them to maturity. As a result, the fire-sale price could be avoided.
This would remove uncertainty, return liquidity, and credit markets should be able to unfreeze, Bernanke said.
“This is not an expenditure of $700 billion. This is a purchase of assets. If auctions are done properly…the American taxpayer will get a good value for his or her money and as the economy recovers, most, all, or perhaps more than all, of the value will be recovered over time,” Bernanke said.
Bernanke warned that the plan was a “pre-condition” for an economic recovery. He said there would be a severe economic downturn with no action.
“I believe that if the credit markets are not functioning that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, and the economy will not recover in a healthy way,” he said.
He said his background is as a college professor, not someone from Wall Street, so he does not have “those interests” in mind.
In an instant, the momentum of opponents had reached its zenith and began to recede.
In boxing parlance, the critics kept swinging for almost four more hours but never laid a glove on the plan.
At the end of the hearing, it seemed apparent that while the Paulson plan might not sail though by the weekend, it remained on track.
I still would like to see some equity provisions, and definitely some oversight will be added. I’m not opposed to a bailout in principle, just one of the form originally proposed (the infamous “blank check”, which seems pretty much dead in the water).
Meanwhile, on the economic front, many people are saying that Friday’s debate, scheduled on foreign policy and national security, should be given over entirely or partially to the economy, given the urgency of the market turmoil…and in the category of take the good news where you can find it, the AP is reporting that Democrats are going to let the ban on offshore drilling expire…
Bernanke’s rationale for the Treasury Department plan is the same as it was last week. Banks and brokers are going down the tubes because accounting regulations require them to mark their assets to market, and the marks are below what the assets are fundamentally worth, because everybody is selling them at the same time. A transfer of these assets to the Treasury means that its balance sheet is much larger, but the worst case scenario is that it only recovers part of its outlay when the underlying mortgages are paid out, foreclosed, or sold to a third party. The best case scenario is that the Treasury makes money over time.
If Bill Clinton or Ronald Reagan were President, they would have found a way to explain the situation in a simple way and rally public support behind it. However, since Bush is by no means a Great Communicator — and nobody believes anything he says anyway — there is a vacuum of support from the White House, and the plan is floundering. Moreover, given the serial bungling of the Bush administration, few people expect them to get it right this time. So Paulson has to fight the legacy of the Bush administration as well as the many legitimate questions about the plan’s efficacy.
The irony of the situation is that it is only the Democratic votes in Congress which can prevent George Bush from leaving office as the modern day Herbert Hoover.
I’d like a more detailed explanation of what Bernanke means when he says the phrase “good value for his or her money” in reference to the taxpayer’s $700B purchase of distressed securities. I would expect the minimum to be $1 for a $1, but if something less is more likely then why does this deal constitute “good value”?
As predicted. Goodies for Dems and “oversight” added.
My question is: did Bernanke save the day for Plan McCain?
John McCain has the worst attendance record in the Senate, having missed more votes than anyone else (including Tim Johnson, who was out for several months following his brain surgery). Now he is going to suspend his campaign to show up in Washington to weigh in on an issue he admittedly doesn’t know much about? Wtf?
I don’t suppose this would have anything to do with him and his campaign director being caught in a lie about receiving money from Freddie Mac; Palin’s husband and staff saying “thanks but no thanks” to subpoenas; the cone of silence which both McCain and Palin have placed themselves in since the convention; avoiding embarrassing questions about how the deregulation he supported contributed to the financial crisis; or the prospect of facing Obama in a debate.
More worrisome still: McCain’s riding into town to grandstand and inject some Presidential politics into the negotiations may well scuttle the deal which was “98% done”, according to some reports.
Might we borrow a phrase from someone or other, and say that McCain is “willing to lose the economy in order to win a political campaign.”?
Ah, the world is moving back into its proper orbit – Jacques and Peter, I disagree, for reasons I’ll explain soon in a post…