President George W. Bush last week laid out a $700 billion Wall Street rescue plan ostensibly aiming at preserving the nation’s overall economy. Dubbed "Cash for Trash,” the plan has sparked a sharp debate. The House Financial Services Committee held a public hearing titled, “The Future of Financial Services: Exploring Solutions for the Market Crisis” on Wednesday, September 24th at Rayburn House Office Building. This was a legislative hearing to examine the Bush Administration’s financial services proposal. Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke explained the proposal at the hearing.
The hearing started at noon and included two parts. At the beginning, members of the Committee were given an opportunity to note their concerns and to comment on the bailout plan. Most did not endorse the plan: they thought it would be a mistake to rush such a huge expenditure, one that would boost the national debt to over 70% of GDP.
Committee members addressed four major sticking points. First, the lack of communication with the public before the plan came out. Members indicated that the Administration should tell the American people what happened and why the plan is needed. The second concern centered on benefits to the taxpayers, and members suggested that "people must be the first priority - we should protect taxpayers. It is absolutely unfair to use taxpayer funds to fix a hole Wall Street firms dug. Taxpayers should share in the benefits of this plan." Third, some members suggested that “robbing Peter to pay Paul” will not solve the problem. From a long-term development perspective, the country may experience a long and painful recession. Last but not least, members stated that public oversight of the Treasury rescue operation is required, especially in light of the lack of financial asset transparency. Members were concerned that someone may receive a unfair windfall using taxpayers’ money.
In the second part of the hearing, after 2:30pm, Mr. Paulson, and Mr. Bernanke tried to convince Congress that a $700 billion plan is the only way out of the current crisis. Mr. Paulson acknowledged the severity of the problem and stated that he understood the concerns raised, but explained the plan seeks to “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of business both small and large, and the very health of our economy”. He clarified that the $700 billion program was an “asset purchase program” instead of a “government spending program” because these assets would ultimately be resold with proceeds coming back to the government. He also pledged to protect the taxpayer to the maximum possible extent possible and to ensure transparency and oversight while implementing the program. Moreover, he is convinced that, although this approach may look bold and risky, it would be a far less costly approach than other alternatives. Finally, he expressed a desire to have Congress and the Administration work closely together to get through the difficult period. “Many of you also have strong views, and we must have that critical debate, but we must get through this period first,” he said.
The Fed Chairman Mr. Bernanke outlined the threat to the economy from the home mortgage crisis and argued that inaction would produce an even larger catastrophe, hence, the Federal Reserve's strong stand in favor of Treasury’s proposal to buy illiquid assets from financial institutions. He argued that having the government steps in would help restore normalcy to the market. “It’s possible for the government to buy these assets, to raise prices, to benefit the system, to reduce the complexity, to introduce liquidity and transparency into these markets and still acquire assets which are not being overpaid-for in the sense that under more normal market conditions, and if the economy does well, most all of the value can be recouped by the taxpayer.” Mr. Bernanke said in his testimony.
One member noted her worries concerning the adverse impact of the current situation on women and minority owned businesses. Mr. Paulson replied that he got her message but would work through the Treasury plan first.
(Tian Weng, Master of Economics' 09
George Washington University
Washington, DC 20052)
The hearing started at noon and included two parts. At the beginning, members of the Committee were given an opportunity to note their concerns and to comment on the bailout plan. Most did not endorse the plan: they thought it would be a mistake to rush such a huge expenditure, one that would boost the national debt to over 70% of GDP.
Committee members addressed four major sticking points. First, the lack of communication with the public before the plan came out. Members indicated that the Administration should tell the American people what happened and why the plan is needed. The second concern centered on benefits to the taxpayers, and members suggested that "people must be the first priority - we should protect taxpayers. It is absolutely unfair to use taxpayer funds to fix a hole Wall Street firms dug. Taxpayers should share in the benefits of this plan." Third, some members suggested that “robbing Peter to pay Paul” will not solve the problem. From a long-term development perspective, the country may experience a long and painful recession. Last but not least, members stated that public oversight of the Treasury rescue operation is required, especially in light of the lack of financial asset transparency. Members were concerned that someone may receive a unfair windfall using taxpayers’ money.
In the second part of the hearing, after 2:30pm, Mr. Paulson, and Mr. Bernanke tried to convince Congress that a $700 billion plan is the only way out of the current crisis. Mr. Paulson acknowledged the severity of the problem and stated that he understood the concerns raised, but explained the plan seeks to “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of business both small and large, and the very health of our economy”. He clarified that the $700 billion program was an “asset purchase program” instead of a “government spending program” because these assets would ultimately be resold with proceeds coming back to the government. He also pledged to protect the taxpayer to the maximum possible extent possible and to ensure transparency and oversight while implementing the program. Moreover, he is convinced that, although this approach may look bold and risky, it would be a far less costly approach than other alternatives. Finally, he expressed a desire to have Congress and the Administration work closely together to get through the difficult period. “Many of you also have strong views, and we must have that critical debate, but we must get through this period first,” he said.
The Fed Chairman Mr. Bernanke outlined the threat to the economy from the home mortgage crisis and argued that inaction would produce an even larger catastrophe, hence, the Federal Reserve's strong stand in favor of Treasury’s proposal to buy illiquid assets from financial institutions. He argued that having the government steps in would help restore normalcy to the market. “It’s possible for the government to buy these assets, to raise prices, to benefit the system, to reduce the complexity, to introduce liquidity and transparency into these markets and still acquire assets which are not being overpaid-for in the sense that under more normal market conditions, and if the economy does well, most all of the value can be recouped by the taxpayer.” Mr. Bernanke said in his testimony.
One member noted her worries concerning the adverse impact of the current situation on women and minority owned businesses. Mr. Paulson replied that he got her message but would work through the Treasury plan first.
(Tian Weng, Master of Economics' 09
George Washington University
Washington, DC 20052)