Friday, November 14, 2008

Some explaining to do

This week, I returned to Washington to participate in hearings examining the progress the Treasury is (or is not) making to restructure mortgages allowing people to stay in their homes. In a nutshell: they are not yet doing enough, despite a substantial influx in Treasury money to help homeowners.

Treasury Secretary Paulson committed money from the rescue package in order to make financial institutions more financially sound and allow them to begin lending again. Part of the understanding is that the outlay of federal funds would in turn encourage lenders to renegotiate troubled mortgages. Three hundred billion has been spent, and significant progress has yet to be made.

Needless to say, the Financial Services Committee and frankly the American people have a few questions for Secretary Paulson. Next Tuesday we will have an opportunity to ask him directly as Secretary Paulson, Ben S. Bernanke, Chairman of the Federal Reserve and Sheila Bair, Chairman of the Federal Deposit Insurance Corporation will all testify in front of my Committee.

At about the same time this week that we were questioning bankers about why we weren't seeing more progress in re-writing mortgages, Secretary Paulson made some news of his own. In a press conference he surprised those of us charged with overseeing the $700 billion rescue package by saying he had changed his mind about the need to buy up the toxic assets that have frozen the credit markets.

On Wednesday, Paulson said the Treasury would now use funds to put more capital into the banks rather than buying up bad mortgage assets through the Troubled Asset Relief Program (TARP). I mention the section title of the $700 billion package to emphasize the Congress' intent with the bill — namely to buy troubled assets.

Paulson said that he believes his new plan is a "more powerful and quicker way to deal with the problem."

"Seven hundred billion [dollars] wouldn't go far enough in my judgment. So you get much more leverage by putting capital into the banks. What we were looking to do was to stabilize the system and encourage banks to lend more. And the quickest and most powerful way to do that was with capital."

Now, I am not an economist. So the new Paulson Plan may very well be what is needed.
However, his failure to alert Congress of his shift in strategy does not inspire confidence in the American people. When embarking on a plan meant to build confidence, it would be helpful if the government was all singing from the same hymnal.

There is another problem with the shift in strategy that goes beyond whether it works or not. If, say, after Congress appropriated funds to the Department of Housing and Urban Development, and rather than spending money on homes, the Secretary decided to buy airplanes — we would rightly take issue with that.

Secretary Paulson is right when he says the 509 page bill we passed gave him fairly wide latitude. But, the stated purpose of the rescue package is clear as day in the title — troubled assets.

As of this afternoon, the Treasury has yet to buy a single troubled asset with the $700 billion appropriated to do so. Not one.

Secretary Paulson and Chairman Bernanke will have some explaining to do on Tuesday.