US finance big guns defend rescue plan
US Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke waged a stout defence of their management of a $700bn (€554bn) financial bailout today, just a week after abandoning the original strategy behind the rescue.
Focusing the programme on infusing billions into banks – and possibly other types of companies – to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilising the financial system than buying rotten assets from financial institutions, the centrepiece of the original plan, Mr Paulson said.
Buying those toxic debts would have required a “massive commitment” of the bailout money, Mr Paulson told the House Financial Services Committee. As economic and financial conditions quickly worsened, it became clear that the first instalment of the money for that purpose “simply isn’t enough firepower,” he said.
Last week, Mr Paulson changed course and said the government would not use any of the $700bn (€554bn) to buy bad assets from banks. That had been the focus of the plan Mr Paulson and Mr Bernanke originally pitched to Congress.
“There is no playbook for responding to turmoil we have never faced,” Mr Paulson said. “We adjusted our strategy to reflect the facts of a severe market crisis.”
However, Barney Frank, the committee’s chairman, worried the administration was sending confusing signals to taxpayers and Wall Street investors, and said he has “serious concerns about the improvised and ad hoc nature” of Treasury’s implementation of the programme.
“We all understand that when conditions on the ground change, policymakers must be agile enough to adjust to those changed circumstances,” he said. “But changing too quickly, without adequately explaining why you’ve changed or what you’re going to do next, risks sending mixed signals to a marketplace that is in dire need of certainty and a sense of direction.”
Mr Paulson said the department will focus on rolling out a capital injection program to pour $250bn (€198bn) into banks in return for partial ownership stakes in them.
The treasury also will search for new ways to boost the availability of car loans, student loans and credit cards, which have been become harder to get due to the credit crisis.
Mr Paulson repeated his opposition to using some of the bailout money to provide guarantees for mortgages at risk of falling into foreclosure, another huge source of distress for the economy.
Mr Paulson said he is not planning to initiate another capital injection program beyond those already announced and is therefore unlikely to tap the remaining $350bn (€277bn) dollars before the Bush administration leaves office on January 20.
That would mean the incoming administration of President-elect Barack Obama would decide whether and how the money should be spent.
The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks, paying dividends to investors or bonuses to executives. That has touched a nerve with some lawmakers.
