More than two hours in, Richard Shelby asked Paulson the $700 billion question.
"What if it doesn’t work?" Shelby asked.
"You can't assure us because you thought some of the other things were supposed to work," Shelby said, referring to the Fed's $80 million AIG loan, the Bear Stearns bailout and the Freddie/Fannie takeover.
Paulson said he "respectfully" disagreed that those actions were ineffectual.
“If the Federal Reserve hadn’t stepped in with A.I.G. we would be facing a major calamity.”
On the larger point, Paulson and Bernanke claim the bailout will ultimately rescue the system by creating a floor for real estate values, which will ultimately stabilize housing prices and unfreeze the credit markets.
In most cases, Bernanke said the mechanism for unloading the bad debt was to buy mortgages at a "reverse auction" with the government as the sole buyer. Theoretically, Treasury would pay the "hold to maturity" price of the asset rather than the "fire-sale" values banks have been unloading assets at recently.
Utah Sen. Robert Bennett, a former businessman, defined the problem with such a set-up, saying the government's dilemma was making sure the prices weren't so low as to incur a new round of bank write-offs -- but not so high as to soak taxpayers or set artificially high housing values.
Paulson agreed heartily.
The Dow's dawdling at plus 40.