A Bailout Is Just a Start

Lawrence Summers

Congressional negotiators have completed action on a $700 billion authorization for the bailout of the financial sector. This step was as necessary as the need for it was regrettable. In the coming weeks, the authorities will need to consider hugely important tactical issues regarding the deployment of these funds if the chance of containing the damage is to be maximized.

Right now, what must be considered are the conditions necessitating the bailout and its impact on federal budget policy. The idea seems to have taken hold that the nation will have to scale back its aspirations in areas such as health care, energy, education and tax relief. This is more wrong than right. We have here the unusual case where economic analysis suggests that dismal conclusions are unwarranted and recent events suggest that in the near term, government should do more, not less.

First, note that there is a major difference between a $700 billion program to support the financial sector and $700 billion in new outlays. No one is contemplating that $700 billion will simply be given away. All of its proposed uses involve purchasing assets, buying equity in financial institutions or making loans that earn interest. Just as a family that goes on a $500,000 vacation is $500,000 poorer but a family that buys a $500,000 home is only poorer if it overpays, the impact of the $700 billion depends on how it is deployed and how the economy performs.

The American experience with financial support programs is somewhat encouraging. The Chrysler bailout, President Bill Clinton's emergency loans to Mexico and the Depression-era support programs for the housing and financial sectors all ultimately made profits for taxpayers. While the savings and loan bailout through the Resolution Trust Corp. was costly, this reflected enormous losses exceeding the capacity of federal deposit insurance. The head of the FDIC has offered assurances that nothing similar will be necessary this time.

It is impossible to predict the ultimate cost to the Treasury of the bailout and the other commitments that financial authorities have made -- this will depend primarily on the economy as well as the quality of execution and oversight. But it is very unlikely to approach $700 billion and will be spread over a number of years.

Second, the usual concern about budget deficits is that the need for government bonds to be held by investors will crowd out other, more productive, investments or force greater dependence on foreign suppliers of capital. To the extent that the government purchases assets such as mortgage-backed securities with increased issuance of government debt, there is no such effect.

Third, since Keynes we have recognized that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times. After using the economic expansion of the 1990s to bring down government indebtedness, the United States made a serious error in allowing deficits to rise over the past eight years. But it would compound this error to override what economists call "automatic stabilizers" by seeking to reduce deficits in the near term.

Indeed, in the current circumstances the case for fiscal stimulus -- policy actions that increase short-term deficits -- is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.

The economic point here can be made straightforwardly: The more people who are unemployed, the more desirable it is that government takes steps to put them back to work by investing in infrastructure or energy or simply by providing tax cuts that allow families to avoid cutting back on their spending.

Fourth, it must be emphasized that nothing in the short-run case for fiscal stimulus vitiates the argument that action is necessary to ensure the United States is financially viable in the long run. We still must address issues of entitlements and fiscal sustainability.

From this perspective the worst possible actions would be steps that have relatively modest budget impacts in the short run but that cut taxes or increase spending by growing amounts over time. Examples would include new entitlement programs or exploding tax measures. The best measures would be short-run investments that will pay back to the government over time or those that are packaged with longer-term actions to improve the budget, such as investments in health-care restructuring or steps to enable states and localities to accelerate, or at least not slow, their investments.

A time when confidence is lagging in the consumer, financial and business sectors is not a time for government to step back.

Well-designed policies are essential to support the economy and, given the seriousness of health-care, energy, education and inequality issues, can make a longer-term contribution as well.

The writer, who served as Treasury secretary from 1999 to 2001, is a managing director of D.E. Shaw & Co. He writes a monthly column for the Financial Times, where this article also appears today.

In Times of Crisis, Trust Capitalism

By Joseph Calhoun

The US government is executing a coup d’etat of capitalism and I fear that we will pay the price for many years to come. Hank Paulson, Ben Bernanke and a host of others tell us the credit market is not working and the only way to get it working again is for the government to intervene. They claim this intervention is urgently needed and if we don’t act, the consequences are dire. Dire, as in New Depression dire. Have these supposed experts on capitalism forgotten how it really works?

Last week Goldman Sachs raised $10 billion in new capital in one day. They sold $5 billion in preferred stock and warrants to Berkshire Hathaway and also completed a secondary offering of common stock that raised another $5 billion. Friday, JP Morgan raised $10 billion in a secondary offering to help pay for the Washington Mutual takeunder. Both of these offerings were oversubscribed, meaning that the companies could have raised more capital if they wanted. There is not a shortage of capital for well run financial companies.

There is, however, a shortage of capital for companies that have acted irresponsibly with investor capital in the recent past. For some reason, our political leaders believe this is a failure of the market, but isn’t this what should be expected from rational investors? Given a choice, why would a rational investor allocate limited capital to the losers rather than the winners? If capital is really as scarce as it seems, isn’t it better for our economy if we make sure that it is allocated wisely?

The biggest bank failure in the history of the United States happened last Thursday night and by Friday morning, it was business as usual. The only difference was the name on the door and the losses suffered by those unfortunate enough to invest in Washington Mutual bonds or stock. The taxpayers didn’t lose anything and depositors didn’t lose anything, only investors. That is how capitalism works in case everyone has forgotten.

The “crisis” we face today is not a creation of the market. Government intervention over many years (but especially the last year) is what brought us to the point where we’ve placed our hopes for economic recovery on the good intentions of a Congress facing re-election in a few weeks. There has been much commentary recently about the role of Fannie Mae and Freddie Mac in the creation and expansion of the sub-prime mortgage market which many believe to be the cause of this mess. That criticism is certainly warranted, but little attention has been paid to the real culprit – the Federal Reserve. Furthermore, what attention there has been is concentrated on the role of Alan Greenspan rather than Ben Bernanke. While Alan Greenspan deserves his share of the blame, Bernanke’s contribution to this mess should not be minimized or excused.

Bernanke obviously does not trust the market to sort the winners from the losers. When this erupted last year, the Fed lowered interest rates, including the discount rate, which is the rate charged by the Fed to lend directly to banks. There has always been a stigma attached to borrowing directly from the Fed and for good reason. If a bank can’t get other banks to lend it money, that tells the market something about the condition of the bank in question. Last August, Bernanke convinced three large banks to borrow at the discount window in an effort to remove that stigma. When that didn’t work, he concocted a scheme to allow banks to borrow from the Fed in anonymity via a mechanism he called the Term Auction Facility. When Bear Stearns blew up, he added the Term Securities Lending Facility for investment banks. By removing the stigma of borrowing from the Fed and hiding the identity of the borrowers, Bernanke removed important information from the market.

Now we face a situation where banks are not willing to lend to each other and have therefore become dependent on the Fed for daily liquidity. This is a direct result of the Fed’s actions. Banks will not lend to each other because they don’t know which ones are really in trouble. The rise in inter-bank lending rates is a rational market response to a lack of information. Furthermore, why pay those inter-bank rates when the Fed or ECB is offering easier terms?

These opaque lending facilities are just part of the problem created by the Fed and Treasury. The Bear Stearns intervention started the process by raising expectations that the government would step in and broker deals that would normally be left to the private sector. By providing favorable terms to JP Morgan in the deal, private actors came to see an advantage in waiting to see if the Fed would provide similar terms again. The worry at the time was that a Bear Stearns failure would cause a collapse of the system, but after watching Lehman Brothers file bankruptcy one has to wonder if that worry was based on fear or facts. Lehman filed bankruptcy on a Sunday night and the market opened the next day and functioned as it should. Would a Bear bankruptcy have been different? We will never know, but I have my doubts.

Now markets are waiting on pins and needles as the politicians haggle over the details of the latest bailout attempt by the Fed and Treasury. This has introduced another roadblock to the re-capitalization and reorganization of the financial industry. Companies that are in need of capital are waiting to see if the plan will bail them out of their difficulties. If Hank Paulson is willing to pay an above market price for their bad loans, why should they dilute their equity now? Why not wait until they can offload the bad paper on the taxpayer and raise capital at a better price? Why take Tony Soprano terms when Uncle Sam is willing to let the taxpayer take the hit for you?

If this bailout goes ahead in its current form and the Treasury pays a high enough price to recapitalize the troubled banks, what has been accomplished? The plan may be enough to induce the banking sector to start lending again, although frankly, I don’t know why we would want institutions who have shown such poor judgment in the past to stay in that business. This plan short circuits the capitalist model which would allow the stronger, well-run institutions to gain market share and/or expand profit margins. The long-term effect will be to lower the overall return on capital in the financial services industry. The government apparently believes that the key to economic recovery is to allocate limited resources in an inefficient manner. Does that make sense?

Paulson and Bernanke have testified to Congress that the market for the mortgage paper rotting on the balance sheets of bad banks is not working. They have not offered an explanation of why that market is not functioning except to blame the complicated nature of some of the securities. That explanation begs the question of how exactly the Treasury believes it will be any better at deciphering the mortgage market. A more logical explanation is not a lack of willing buyers, but a lack of willing sellers. The Fed has allowed institutions to use collateral of ever falling quality to secure loans from the Fed. If a bank can finance its activities through the Fed and keep the bad loans on the balance sheet, what incentive does it have to sell? Selling will reveal the true condition of the company and will also force other institutions to do the same under mark- to-market accounting. The Fed is the one keeping the market from functioning. The Treasury does not need to enter the market for it to start functioning; the Fed needs to leave the market.

Paulson has said that the cause of the current problems is the housing deflation, but that ignores the elephant in the living room. The housing bubble, which was concentrated in a relatively small number of states, was caused by the reckless actions of the Greenspan Fed. The consequences of that bubble have been exacerbated by the Bernanke Fed. The market is functioning as it should. It is the Fed that is not functioning correctly. There is no reason we had to go through either the bubble or the aftermath. We got into this mess because we tried to avoid the consequences of the Internet bubble. We will only make things worse by trying to avoid the consequences of the housing bubble.

We are not on the verge of a new depression. The housing bubble collapse in California, Florida and a few other states is not enough to bring down the entire banking system. Investors who made mistakes in these markets should be held responsible and those who navigated the Fed-distorted market should be rewarded for their wisdom and prudence. Enacting the Paulson plan will not allow that to happen and our economy will suffer for it in the long run. The Japanese tried to prop up failed banks in the aftermath of the bursting of their twin bubbles and the result was 15 years of stagnation. Why are we emulating a strategy that is a demonstrable failure? A better alternative would be to allow capitalism to work as it should and stop the interventions of the Fed in the money market. Trust capitalism. It works.

House votes down bail-out package

The moment the vote was declared

The lower house of the US Congress has voted down a $700bn (£380bn) plan aimed at bailing out Wall Street.

The rescue plan, a result of tense talks between the government and lawmakers, was rejected by 228 to 205 votes in the House of Representatives.

About two-thirds of Republican lawmakers refused to back the rescue package, as well as 95 Democrats.

Shares on Wall Street plunged at the news, ending down more than 700 points - the biggest daily fall ever.

A White House spokesman said that President George W Bush was "very disappointed" by the vote's result.

President Bush on the rejection of the bail-out plan

A US Treasury spokesman said that Mr Bush, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke would meet to discuss the way forward.

The vote followed a day of turmoil in the financial sector.

• Wachovia, the fourth-largest US bank, was bought by larger rival Citigroup in a rescue deal backed by US authorities
• Benelux banking giant Fortis was partially nationalised by the Dutch, Belgian and Luxembourg governments to ensure its survival
• The UK government announced it was nationalising the Bradford & Bingley bank
• Global shares fell sharply - France's key index lost 5%, Germany's main market dropped 4% while US shares plunged after the vote result was announced.

'Global contagion'

As news of the vote came through, traders on the floor of the New York Stock Exchange stood dumbfounded.

Analysts say that without a bail-out plan, the banks will be left to handle all their own bad mortgage debt as best they can and more of them will be in danger of going bust.

Wall Street's benchmark index suffered its biggest daily point drop ever.

"There's a monster amount of fear out there," said Joe Saluzzi, a trading manager.

"This is global contagion. It's no longer just the United States," he told Reuters news agency.

Mr Bush had argued that the bail-out plan was a "bold" one which he was confident would restore strength and confidence to the US economy.

But after a several hours of impassioned debate, the bill's opponents - the majority of whom were from the Republican Party - got their way.

They had raised concerns about both the content of the plan and the speed with which they were being asked to pass it.

Some agreement on issues such as oversight, greater protection for taxpayers and curbs on executive bonuses had been reached in fraught weekend talks.

These concessions, however, ultimately failed to persuade enough lawmakers that the plan was in the best interests of the nation.

Blame game

The no vote plunged the world of Washington politics into turmoil, reports the BBC's Kevin Connolly from the US capital.

Pelosi urges bipartisan approach

So grave are the consequences of this decision, our correspondent says, that the speaker of the house paused for several long minutes after the vote was taken before declaring it official.

"The legislation has failed, the crisis has not gone away," said Nancy Pelosi, the house's Democratic speaker.

She said that 60% of Democrats had supported the bill, and urged both sides to try again to find a resolution.

"We must work in a bipartisan way in order to have another bite at the apple in terms of some legislation," she said.

Republican leaders, meanwhile, criticised a scathing speech by Ms Pelosi about the Bush administration's economic policies for injecting partisanship into the issue and scuttling the vote.

Call for calm

Democratic presidential candidate Barack Obama spoke shortly after the vote, saying it was an outrage that ordinary people were being asked to clean up Wall Street's mess.

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"If I am president I will review the entire plan on the day I take office to make sure that it is working to save our economy and (that) you get your money back," he said.

He added that he expected Congress to pass a bail-out bill in some form and called for calm, although he admitted the path could be a difficult one.

Mr Obama's Republican rival, John McCain, is expected to give his reaction to the bail-out bill's failure shortly.

Lawmakers from both parties have called for further talks on new bail-out legislation.

Frantic steps will now be taken to get some kind of amended version of the bill through Congress, our correspondent says.

But, he adds, this vote would have shaken the confidence of the financial world and the ability of America's leaders to come up with convincing answers at a moment of crisis.

The mortgage-rescue plan

A shock from the House

The House of Representatives rejects the $700 billion bail-out plan

IT WOULD have been one of the most unpleasant laws that Congress had found itself writing so close to an election. Devoting $700 billion of taxpayers’ money to rescuing the country’s least popular industry was clearly not a vote winner. That Democratic and Republican congressional leaders held their noses this weekend and came up with the Emergency Economic Stabilisation Act was encouraging evidence that they appreciate the gravity of the financial crisis. But with a vote of 228 to 205, the House rejected it. World stockmarkets promptly slumped. At one point the Dow Jones industrial average had fallen than 700 points, its biggest intraday drop ever. The oil price slumped by $10 to less than $97 a barrel.

The House voted against the bill despite the best efforts of the two candidates to be president. “This is something that all of us will swallow hard and go forward with,” John McCain had said. Barack Obama had added that “What we can't do is do nothing.” As it stood on Monday, that was precisely what the House had chosen to do. The White House issued a statement expressing its severe disappointment and promising to get an economic team together to consider its next steps. It remains possible that the House will vote again. The Senate had been due to vote later in the week.

The bill had been widely expected to pass. Legislators from both parties wrung concessions from Hank Paulson, the treasury secretary, to provide necessary political cover. But voters seemed unconvinced. In a USA Today/Gallup Poll conducted on September 24th just 22% favoured Mr Paulson’s proposal while 56% wanted something different; only 11% preferred that no action be taken.

By legislative standards Congress moved at light speed after Mr Paulson and Ben Bernanke, the Federal Reserve chairman, proposed action on September 18th, warning of serious doom and gloom if nothing were done. In the past week the financial crisis has erupted in even more dangerous forms globally. The interbank-funds market has seized up and even the most creditworthy corporate and financial firms are paying punitive rates. Last week Washington Mutual became the largest-ever American bank to fail. In Europe, three countries had to come to the rescue of Fortis, a Belgian banking group, and Britain did the same with a mortgage lender, Bradford & Bingley. And on Monday Citigroup agreed to buy most of the assets of Wachovia, another beleaguered American bank, in a deal brokered by regulators.

The new law would have provided the Fed with an additional tool for combating the latest stage of the crisis: from October 1st it would have paid interest on reserves that banks maintain at the Fed. This would have let it pump almost unlimited cash into the money market without fear of interest rates falling to zero, Japanese-style.

Mr Paulson or his successor would have been given $250 billion immediately, $100 billion more at the president’s discretion and $350 billion upon Congress’s approval. The Troubled Asset Relief Programme, or TARP, would be allowed to buy mortgage-backed securities, whole loans (those not bundled into pools) and, in consultation with the Federal Reserve chairman, anything else necessary to stabilise the financial system. That includes taking control of entire companies. Mr Paulson said on Sunday that would get the power to avert “the potential systemic risk from the disorderly failure of a large financial institution,” implying the ability to bail-out a company while punishing its owners, as was done with Bear Stearns, Fannie Mae, Freddie Mac and AIG. Given the frequency with which institutions are collapsing, he would have been keen to invoke that power soon.

House Rejects Bailout Package, 228-205; Stocks Plunge

WASHINGTON — In a moment of historic import in the Capitol and on Wall Street, the House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry. The vote came in stunning defiance of President Bush and Congressional leaders of both parties, who said the bailout was needed to prevent a widespread financial collapse.

The vote against the measure was 228 to 205, with 133 Republicans joining 95 Democrats in opposition. The bill was backed by 140 Democrats and 65 Republicans.

Supporters vowed to try to bring the rescue package up for consideration again as soon as possible, perhaps late Wednesday or Thursday, but there were no definite plans to do so.

Stock markets plunged sharply as it appeared that the measure would go down to defeat, and kept slumping into the afternoon when that appearance became a reality.

Worldwide financial markets had slumped even before the House vote; shares in Hong Kong closed down 4 percent and in Paris and London they were down 3 percent. By 3:15 p.m. Eastern time the Dow Jones industrial average had fallen more than 5 percent.House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail.

It was a catastrophic political defeat for President Bush, who had put the full weight of the White House behind the measure and had lobbied wavering Republicans in intensely personal telephone calls on Monday morning before the vote. Both presidential candidates also supported the plan.

Supporters of the bill had argued that it was necessary to avoid a collapse of the economic system, a calamity that would drag down not just Wall Street investment houses but possibly the savings and portfolios of millions of Americans. Moreover, supporters argued, a lingering crisis in America could choke off business and consumer loans to a degree that could prompt bank failures in Europe and slow down the global economy.

Opponents said the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.

Immediately after the vote, many House members appeared stunned. Some Republicans blamed Speaker Nancy Pelosi, Democrat of California, for a speech before the vote that disdained President Bush’s economic policies, and did so, in the opinion of the speaker’s critics, in too partisan a way.

“Clearly, there was something lacking in the leadership here,” said Representative Eric Cantor, Republican of Virginia.

Democrats, meanwhile, blamed the Republicans for not coming up with enough support for the measure on their side of the aisle.

Members of both parties, doing a quick political post-mortem, said those who voted no had encountered too much hostility for the bill among their constituents, and were worried that a vote in favor would be political suicide.

The Senate had been expected to vote later in the week if the bill had cleared the House on Monday. Senate vote-counters had predicted that there was enough support in the chamber for the measure to pass. But the stunning vote in the House, coupled with the Jewish holidays, made it difficult to predict when other votes might be held. Many House members who voted for the bill held their noses, figuratively speaking, as they did so.

Representative John A. Boehner of Ohio, the Republican minority leader, called the measure “a mud sandwich” at one point, but he said that there was too much at stake not to support it. He urged members to reflect on the damage that a defeat of the measure could mean “to your friends, your neighbors, your constituents” as they might watch their retirement savings “shrivel up to zero.”

And Representative Steny Hoyer of Maryland, who as Democratic majority leader often clashes with Mr. Boehner, said that on this “day of consequence for America” he and Mr. Boehner “speak with one voice” in pleading for passage.

When it comes to America’s economy, Mr. Hoyer said, “none of us is an island.”

The House debate was heated and, occasionally, emotional up to the last minute, as illustrated by the remarks of two California lawmakers.

Representative Darrell Issa, a Republican, said he was “resolute” in his opposition to the measure because it would betray party principles and amount to “a coffin on top of Ronald Reagan’s coffin.”

But Representative Maxine Waters, a Democrat, said the measure was vital to help financial institutions survive and keep people in their homes. “There’s plenty of blame to go around,” she said, and attaching blame should come later.

The House vote came after a weekend of tense negotiations produced a rescue plan that Congressional leaders said was greatly strengthened by new taxpayer safeguards. “If we defeat this bill today, it will be a very bad day for the financial sector of the economy,” said Representative Barney Frank, Democrat of Massachusetts and the chairman of the Financial Services Committee. The Standard & Poor’s 500-stock index was down almost 3.4 percent at midmorning, even before the midday plunge; by 3:15 p.m. it had fallen more than 8 percent.

Earlier Monday, President Bush urged Congress to act quickly. Calling the rescue bill “bold,” Mr. Bush praised lawmakers “from both sides of the aisle” for reaching agreement, and said it would “help keep the crisis in our financial system from spreading throughout our economy.”

After long favoring a hands-off approach and deregulation of the financial industry, the Bush administration has found itself in recent weeks interceding repeatedly in the private market to try to avert one calamity after another.

Even before the House vote, European and Asian stock markets declined sharply on Monday, especially in countries where major banks have had significant problems with mortgage investments, like Britain and Ireland. In the credit markets, investors once again bid up prices of Treasury securities and shunned more risky debt.

Early in the House debate, Jeb Hensarling, Republican of Texas, said he intended to vote against the package, which he said would put the nation on “the slippery slope to socialism.” He said that he was afraid that it ultimately would not work, leaving the taxpayers responsible for “the mother of all debt.”

Another Texas Republican, John Culberson, spoke scathingly about the unbridled power he said the bill would hand over to the Treasury secretary, Henry M. Paulson Jr., whom he called “King Henry.”

A third Texan, Lloyd Doggett, a Democrat, said the negotiators had “never seriously considered any alternative” to the administration’s plan, and had only barely modified what they were given. He criticized the plan for handing over sweeping new powers to an administration that he said was to blame for allowing the crisis to develop in the first place.

The administration accepted limits on executive pay and tougher oversight; Democrats sacrificed a push to allow bankruptcy judges to rewrite mortgages. But Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry.

Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department. But by mid-afternoon on Monday, no one could safely predict whether the provisions in the 110-page bill were strictly academic.

Connie Mack: Bailout Bill 'Compromise' Compromises America

September 28, 2008 -

WASHINGTON - Congressman Connie Mack (FL-14) today denounced the so-called compromise bailout plan for the nation's financial sector.

“As I have said before, I didn’t run for Congress to be party to the destruction of freedom and free markets. Sadly, the so-called compromise on the financial sector bailout continues to do just that.

"When compared to the original $700 billion Paulson plan, this ‘compromise’ is merely a set of differences without distinctions.

“While it creates a gimmicky $700 billion installment plan, attempts to improve transparency, and has new provisions cloaked as taxpayer protections, its net effect is still a massive bailout of the financial sector that will snuff out the free market system. It still gives unprecedented and inappropriate amounts of power to the federal government, and it still exposes every single American to untenable risks and almost unimaginable costs.

“I opposed the original Paulson plan because it would have destroyed the free-market system. This so-called compromise will do the same. It compromises the cornerstones of America and it deserves to be rejected.

“There are proven free market proposals that would flood the marketplace with liquidity and confidence without destroying capitalism. Those proposals would provide tremendous opportunities to help guide and grow our economy without trampling on the basic tenets of the free market and without incurring yet another massive expansion of government.

“I urge my fellow House Republicans to stand with the American people in denouncing the destruction of capitalism. This ‘compromise’ should be rejected without delay and we should continue to fight for a plan that strengthens and grows our economy with free market principles.”

Congressman Flake Opposes Bailout
Bailout Will Only Prolong Crisis

Washington, D.C., Sep 28 - Republican Congressman Jeff Flake, who represents Arizona’s Sixth District, today issued the following statement regarding the bailout agreement:

“After having a chance to review the details of the bailout agreement, I will not be supporting the legislation,” said Flake. “Despite efforts by the House Republican Leadership to add some needed sanity to the proposal, this bailout still exposes taxpayers to hundreds of billions of dollars of liability.”

“We find ourselves in this predicament largely because implicit, and eventually explicit, federal guarantees in Fannie Mae and Freddie Mac shielded the financial services sector from market discipline. The way out of this mess is not to insert government deeper into the free market.”

“We don’t have enough money in the federal treasury, nor can we responsibly borrow enough money to keep the market from finding its eventual bottom. Trying to do so will simply prolong the crisis.”

“We do face a looming economic crisis, but there are other actions Congress can take to calm the markets and increase liquidity without exposing taxpayers to so much liability. Such actions were outlined in an alternative proposal offered by Rep. Ryan and Rep. Cantor. We should act on this proposal immediately.”

Club for Growth Urges Rejection of Bailout Bill

Washington – The Club for Growth urges all members of Congress to reject the latest “compromise” bailout bill.

Although conservatives in the House convinced Congress to strip many of the worst elements of the previous “compromise” bailout bill, the legislation remains fundamentally flawed. The bill increases the federal debt by billions of dollars, rewards bad decisions made by failing banks, and establishes a dangerous precedent for government bailouts down the road. This bill should be defeated, and it is clear from the precipitous drop in the Dow this morning that the markets are equally unimpressed with this legislation.

Instead of passing this bill, Congress should do two things immediately to help our credit markets. First, Congress should immediately suspend mark-to-market rules for banks. Second, Congress should lift the cap on the FDIC’s guarantee on transaction accounts at banks. Last week, the government instituted an unlimited guarantee on money market funds, creating an incentive to withdraw deposits from banks. The last thing the government should be doing is encouraging a run on banks. The best way to fix this under current circumstances is to lift the FDIC’s cap.

“For years, Congress played a central role in creating and encouraging the current crisis,” said Club for Growth President Pat Toomey. “With this bill, Congress further undermines our free-market system. If Congress really wants to stabilize the markets and restore financial confidence, it should suspend mark-to-market rules and lift the cap on the FDIC’s guarantee on transaction accounts. No member of Congress should leave town without getting this done.”

The Club for Growth will be key-voting the vote on the bailout bill, urging all members to vote “No.” Key votes are included in our Congressional Scorecard for the 110th Congress. The scorecard provides a comprehensive rating of how well or how poorly each member of Congress supports pro-growth, free-market policies.

U.S. House Rejects $700 Billion Financial-Rescue Plan (Update1)

Sept. 29 (Bloomberg) -- The U.S. House rejected a $700 billion financial-rescue plan intended to restore confidence in the nation's banking system, dealing a blow to government efforts to contain a lending crisis.

The House rejected by a vote of 228 to 205 the measure to authorize the biggest government intervention in the markets since the Great Depression.

The Dow Jones Industrial Average fell 458.3 points, or 4.1 percent, at 2:20 p.m. New York time.

``The American people rejected this bailout and now Congress did likewise,'' said Republican Representative Mike Pence of Indiana.

The legislation would have given Treasury Secretary Henry Paulson broad authority to buy troubled assets from financial companies.

``I'm very disappointed,'' said House Financial Services Committee Chairman Barney Frank. ``The Republicans killed this.''

President George W. Bush personally lobbied lawmakers to support the measure today and said it's needed to ``help keep the crisis in our financial system from spreading throughout our economy.''

Federal Reserve Chairman Ben S. Bernanke warned of ``grave threats'' to the financial system if Congress rejected the plan.

Opponents said the measure was too risky and too costly.

``I fear that ultimately it may not work,'' said Representative Jeb Hensarling, a Texas Republican, a leader of the opposition. The plan may put the U.S. on the ``slippery slope to socialism,'' he said.

Lawmakers were reluctant to support the measure a month before congressional elections because some voters viewed it as ``bailing out Wall Street,'' Frank said.

Flow of Credit

The final plan considered by the House would have given Paulson an immediate $250 billion to buy bad loans from financial companies, with the rest to be doled out in stages.

The compromise also included a proposal by House Republicans, whose objections scuttled an earlier agreement in principle, which provides for government insurance for mortgage- backed securities. The plan included a bipartisan oversight board to monitor to purchase and sale of assets, and imposed limits on the compensation of executives at participating companies.

Paulson and Bernanke proposed the rescue plan to revive lending and restore the flow of credit to the U.S. economy. Opposition to their Sept. 20 proposal for almost unfettered authority to purchase assets has been strongest in the House, particularly among Republicans who balked at its cost and pressed for more taxpayer protections.

House Republican leaders today, in speeches on the House floor, urged their colleagues to support a bipartisan House and Senate compromise crafted over several days.

Still, lingering opposition from many Republicans prompted Democratic leaders, including House Speaker Nancy Pelosi and Majority Whip James Clyburn, to circulate among Democrats on the House floor this morning to seek more support.