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Stiff Resistance to Financial System Bailout Plan

00:00AM Sep 24, 2008

via a special arrangement with Informa Economics, Inc.

After likely key changes ahead, plan is expected to pass Congress

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The proposed $700 billion bailout has met stiff resistance and calls for significant changes in the package up on Capitol Hill – from both political parties. Some key lawmakers insist that two items be part of any final deal: that the Treasury allow bankruptcy judges to write down the value of mortgages for people's main residences, and that there be limits on executive pay. Rep. Joe Barton (R-Tex.) said that, "just because God created the world in seven days, doesn't mean we have to finish this bill in seven days.”

Meanwhile, Federal Reserve Chairman Ben Bernanke confirmed what I previously reported– that the US would not pay reduced "fire sale” prices when buying assets from banks, signaling that Treasury plans to purchase bad assets from banks at prices very near their original value. Bernanke said the use of a reverse auction process would help set values closer to hold-to-maturity prices rather than fire-sale prices. Treasury Secretary Henry Paulson agreed, adding that reverse auctions and other market-based approaches would be beneficial for different situations, thus the request for broad-based authority to use several approaches.

White House officials acknowledged that they will lose their request to bar courts and administrative agencies from reviewing Treasury's decisions about handling the bailout. "There will be real problems with this kind of language,” Senate Banking Chairman Christopher Dodd (D-Conn.) told Treasury Secretary Henry Paulson at Tuesday's hearing.

House Finance Services Chairman Barney Frank (D-Mass.) said that House and Senate staffs would soon begin work on a unified bill. Senate Majority Leader Harry Reid (D-Nev.) said Democrats remain committed to passing the plan before adjournment, but said they would insist on changes to ensure more accountability and protect taxpayers' dollars. Reid suggested Paulson and other officials have essentially sold Democrats on the need to act quickly on a bailout package but said the issue now is whether Republicans will back the plan. He said GOP resistance exists in both the House and Senate.

Paulson said the rescue plan would provide the greatest protection for American taxpayers, adding that the consequences of failing to act would be worse. "This is not something that I ever wanted to ask for," he said, "but it's much better than the alternative." Bernanke agreed, noting that absent a rescue plan to aid credit markets, overall economic conditions would certainly worsen: jobs would be lost, the unemployment rate would rise, the number of foreclosures would increase, gross domestic product would contract. "The economy will just not be able to recover in a normal, healthy way, no matter what other policies are taken," he said. "I therefore think this is a pre-condition for a good, healthy recovery by our economy."

To put the $700 billion cost of the Wall Street rescue package into perspective, the Congressional Research Service noted in a recent report that the total cost of the war on terrorism, including the wars in Iraq and Afghanistan for fiscal years 2001 through part of 2009, is $859 billion. This includes $653 billion for Iraq alone.

The Meltzer Plan. Talking on the NewsHour, economist Allan Meltzer said he does not like the Treasury Plan to end the financial crisis and proposes an alternative:

"If they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think -- that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them. People paid back the loans. They weren't allowed to pay dividends until they repaid the loans. They weren't allowed to take bonuses until they repaid the loans. I think that's the way -- if we're going to do this, then that's the way we should do it.”

Comments: Both Republican and Democratic lawmakers say that President George Bush should address the nation on this major issue -- and that would appear to be an obvious thing for a country's leader to do, especially with a major crisis at hand. It is bewildering why the president has not been more out front on trying to explain this important matter to a very upset American public.

As for the bailout package, some form will eventually be approved by Congress, despite increased opposition from President Bush's own party. But some of the changes could be quite significant and it will be important to see how market traders and others view the end result.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.