Paulson and Bernake testifying today in Congress
Today Treasury Secretary Henry Paulson and others are testifying on Capitol Hill regarding the Bush Administration’s request for authority from Congress to borrow up to $700 Billion Dollars for up to two years to purchase mortgage related assets, almost exclusively of the subprime variety. Both Paulson and Federal Reserve Chairman Ben Bernake urged immediate Congressional action to forestall and reverse the deepening credit crunch across America and the world and potentially avoid a deep recession. Paulson faces a tough sell as US likely voters oppose the bailout 44%-25% and centrist, politically independent voters oppose the bailout 47%-18%. Sensing some popular resistance, DC politicians are aggressively confronting Paulson’s plan.
While packaged and sold to U.S. and international financial institutions as relatively safe and adequately secured investments over the last few years, shares in some bundled subprime mortgage instruments are presently nearly impossible to value. The subprime mortgages are not producing cash flow as predicted because the borrowers cannot make the payments and foreclosures have been rising steadily since 2006. The viral effect of a continued collapse in value of the subprime securities purchased by financial institutions on markets throughout the world may be staunched by the bailout.
Both Democrats and Republicans are pushing for minor alterations of the Administration’s proposal to add oversight and limit executive pay for financial companies that participate in the bailout. Democrats are further battling the Administration directly by attempting to limit the lending authority to a one-year period, reduce the cap on lending to $150 Billion dollars and tack on proposals for a $50 Billion Dollar stimulus package. The risk of the bailout being delayed beyond this week based on partisan wrangling over the legislation is having a dampening effect on the stock market, with the Dow Jones Industrial Average losing over 500 points this week so far, dipping below 11,000.
Nothing less than the survival of the United States as the financial center of the world and the dollar as the world’s currency is at stake this week. No amount of hyperbole can overstate the risks facing the world economic system from the spread of complex financial instruments secured by bundled subprime mortgages on U.S. homes. Indeed, last week the Dow Jones was several hundred trades away from a free fall to 8300 according to insiders at large trading houses. Every American, whether a Democrat, Republican, another party or an independent centrist should read the text of the Administration’s plan, the various changes and additions offered and scrutinize the actions taken in the next few days which will rewrite American financial history.
The risk of inaction by the Democratic Congress is to anger centrist, independent voters who may turn on the Democrats if no bailout is passed and the markets free fall after Congress adjourns. Obama could also suffer if Democrats are perceived as stopping the bailout. The risk of action by the Democratic Congress is two-fold: if the bailout fails, Democrats will be blamed along with Bush and the GOP. If the bailout succeeds and the markets rally strongly before the election, the Presidential election may tip to John McCain. History will be written this week, and the political and economic pressure on Congress, the Administration and the Presidential candidates could not be higher.