The Bush administration last week announced its plan to abandon the original $700 billion economic rescue plan (Troubled Asset Relief Program (TARP)) and launched a new initiative to inject $250 billion directly into financial institutions. This is to be accomplished by buying bank stock. The thinking is that this will help thaw frozen credit markets and get skittish banks lending again.
On Tuesday November 18th, Members of Congress held a hearing titled “Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities” in 2128 Rayburn House Office Building. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair testified before the House Financial Services Committee. Our overall opinion: the hearing led to plenty of blame being passed around concerning this unanticipated policy shift.
In his statement, Treasury Secretary Paulson defended his decision to change the focus of the bailout plan. He told the panel that Treasury assessed how best to use the TARP funds thru this period. "The U.S. has 'turned a corner' in averting a financial collapse, but more work needs to be done to get things back to normal", Paulson said.
Then he explained why the administration switched bailout strategy. He indicated that, given the severity and magnitude of the situation, an asset purchase program would not be effective enough, quickly enough. Therefore, Treasury decided to forgo its initial plan to buy illiquid assets from banks and other entities and instead developed a plan to inject capital directly into banks. The rationale for developing the capital injection program rests on the assumption that “by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.”
Many Congressmembers complained about the administration's “180 degree change in policy”. Purchasing trouble assets was the cornerstone of the financial market rescue plan and was almost the entire focus of Congressional debate in the period leading up to legislative enactment. But, as soon as Treasury received the money, it decided that giving capital to banks in return for preferred stock was a better use of the funds. This, some members felt, was obviously deceptive. Members felt that they were fooled by Treasury policy makers.
Paulson argued that Treasury couldn't pursue its initial strategy because after investing $250 billion in banks, Treasury didn't have enough left to have a meaningful impact. An emphasis on capital seems the better strategy going forward. Paulson said he believed that “more capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is also essential to increasing lending which, although difficult to achieve during times like this, is essential to economic recovery.”
However, one of Congressman, a gentleman from Pennsylvania, expressed his disappointment that the Administration has been flip-flopping and that Treasury did not inform Congress immediately of the change. “Do we have a plan? Where are we going?” He asked. “There is no playbook for responding to turmoil we have never faced,” Mr. Paulson responded. “We adjusted our strategy to reflect the facts of a severe market crisis.”
Congressional Democrats questioned the management of the bailout program, stating "Congress gave you the authority you requested, but the economy has only gotten worse." Mr. Paulson suggested not all the news was bad. “Our system is stronger and more stable than just a few weeks ago," he said. And Mr. Paulson pointed out that the financial rescue legislation was not meant to be a panacea for all our economic difficulties. "It will take a while to get lending going and repair our financial system" he said. “This won’t happen as fast as any of us would like, but it will happen much, much faster than it would have had we not used the TARP to stabilize our system.”
(Tian Weng,
Master of Economics' 09
George Washington University)
On Tuesday November 18th, Members of Congress held a hearing titled “Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities” in 2128 Rayburn House Office Building. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair testified before the House Financial Services Committee. Our overall opinion: the hearing led to plenty of blame being passed around concerning this unanticipated policy shift.
In his statement, Treasury Secretary Paulson defended his decision to change the focus of the bailout plan. He told the panel that Treasury assessed how best to use the TARP funds thru this period. "The U.S. has 'turned a corner' in averting a financial collapse, but more work needs to be done to get things back to normal", Paulson said.
Then he explained why the administration switched bailout strategy. He indicated that, given the severity and magnitude of the situation, an asset purchase program would not be effective enough, quickly enough. Therefore, Treasury decided to forgo its initial plan to buy illiquid assets from banks and other entities and instead developed a plan to inject capital directly into banks. The rationale for developing the capital injection program rests on the assumption that “by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.”
Many Congressmembers complained about the administration's “180 degree change in policy”. Purchasing trouble assets was the cornerstone of the financial market rescue plan and was almost the entire focus of Congressional debate in the period leading up to legislative enactment. But, as soon as Treasury received the money, it decided that giving capital to banks in return for preferred stock was a better use of the funds. This, some members felt, was obviously deceptive. Members felt that they were fooled by Treasury policy makers.
Paulson argued that Treasury couldn't pursue its initial strategy because after investing $250 billion in banks, Treasury didn't have enough left to have a meaningful impact. An emphasis on capital seems the better strategy going forward. Paulson said he believed that “more capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is also essential to increasing lending which, although difficult to achieve during times like this, is essential to economic recovery.”
However, one of Congressman, a gentleman from Pennsylvania, expressed his disappointment that the Administration has been flip-flopping and that Treasury did not inform Congress immediately of the change. “Do we have a plan? Where are we going?” He asked. “There is no playbook for responding to turmoil we have never faced,” Mr. Paulson responded. “We adjusted our strategy to reflect the facts of a severe market crisis.”
Congressional Democrats questioned the management of the bailout program, stating "Congress gave you the authority you requested, but the economy has only gotten worse." Mr. Paulson suggested not all the news was bad. “Our system is stronger and more stable than just a few weeks ago," he said. And Mr. Paulson pointed out that the financial rescue legislation was not meant to be a panacea for all our economic difficulties. "It will take a while to get lending going and repair our financial system" he said. “This won’t happen as fast as any of us would like, but it will happen much, much faster than it would have had we not used the TARP to stabilize our system.”
(Tian Weng,
Master of Economics' 09
George Washington University)