As the Federal Reserve moved quickly over the weekend to engineer an emergency sale of Bear Stearns, Democratic lawmakers said they will focus their attention on the faltering housing market when they return from their spring recess next month. They also vowed to push forward a second economic stimulus package that’s likely to include an extension of unemployment insurance and possibly an increase in infrastructure spending, and to take a hard look at strengthening regulation of industry.
But like the Fed itself, Democrats admit that on their first order of business — a housing market that has rattled the nerves of middle-class voters — they are moving onto uncertain ground and trying to create a safety net mechanism unlike anything lawmakers of this generation have written.
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“This is macroeconomics, not for the individual,” House Financial Services Committee Chairman Barney Frank (D-Mass.) told Politico. “We are in uncharted territory. We are all in uncharted territory.”
New York Sen. Charles Schumer (D-N.Y.), a member of his party’s Senate leadership, added: “It’s a brave new world.”
In a series of historic moves over the weekend, the Fed bailed out a collapsing Bear Stearns through government-backed loans from JP Morgan Chase & Co., then facilitated the faltering bank’s sale to JP Morgan at a fire sale price of $2 a share. The swift sale, approved by regulators Sunday night, left one of Wall Street’s oldest investment banks worth just one-tenth of what its value was on Friday.
The Fed’s bailout of Bear Sterns via JP Morgan represented the first time it has used such an arrangement since the Great Depression. Treasury Secretary Henry Paulson said the unusual arrangement was justified in the name of bringing “stability” to Wall Street and world markets.
Former Securities and Exchange Commission Chairman Harvey Pitt said Monday that the current financial crisis reveals an “enormous loss of confidence” and that he doesn’t know yet whether the Fed’s actions to date will be enough. Like everyone else, he’ll be watching Tuesday’s meeting of the Fed and, he said, “keeping a close watch on what’s going on with Lehman Brothers.”
In Monday’s trading, major indices escaped relatively unscathed, despite volatility. The Dow Jones Industrial Average ended the day up slightly; the Standard & Poor’s 500 and Nasdaq Composite Index both fell slightly. But stocks for financial firms — with the exception of JP Morgan — nose-dived on fears that other investment banks could share Bear Stearns’ fate.
In brief remarks Monday morning, President Bush tried to calm frazzled nerves. “One thing is for certain: We’re in challenging times,” he said. “But another thing is for certain: that we’ve taken strong and decisive action.
“In the long run,” Bush said, “our economy is going to be fine.”
Not surprisingly, the administration’s confidence failed to soothe congressional Democrats. Indeed, leaders in both parties reiterated calls Monday for more aid to the housing market, which Schumer said was “at the bull’s-eye” of the credit crisis.
Already, the latest developments in the unfolding economic crisis seem to have boosted the momentum for a proposal — floated by Frank and Senae Banking, Housing and Urban Affairs Committee Chairman Chris Dodd (D-Conn.) — under which the federal government would guarantee home mortgages after lenders have voluntarily marked them down. The hope: With the promise of a Federal Home Administration guarantee, lenders will see an incentive to take action to work with borrowers and avert foreclosures.
Dodd said that he would work with Frank to get legislation ready to go when Congress returns.
Senate Majority Leader Harry Reid (D-Nev.) has said that he plans to bring a failed housing package back to the Senate floor after the recess. Dodd has said that he may try to attach the mortgage-guarantee proposal to that bill.
On the House side, aides said they’re aiming to hold a hearing on Frank’s proposal April 9, with the goal of moving it to the floor by early May.
Although the president has warned previously against massive government intervention in the mortgage mess, Dodd said in a conference call Monday that there may be “greater receptivity to this idea [within the administration] than there was 48 hours ago.”
Democrats will stress that, while the administration moved quickly to address the Bear Sterns problem, they’re more interested in helping individual families struggling with rising mortgage payments and plummeting property values.
“This administration is very good at responding to the big and powerful and concentrated and not so good for the small, not powerful and scattered,” said Schumer. “The little homeowner who got duped by the mortgage lender deserves no less than the Bear Stearns investor.”
Reid offered a similar sentiment in a statement released by his office, saying that the president has “shown his willingness to bail out Wall Street at taxpayer expense.”
Sen. Johnny Isakson (R-Ga.), who worked in real estate for 33 years, said the Frank-Dodd proposal is worth a look but that he would oppose a government-funded bailout.
“What we need to do is incentivize the market to get us out of this problem,” Isakson said.
Financial-sector lobbyists are still studying the Frank-Dodd proposal but indicated Monday that it’s something they can live with. One lobbyist said he expects the Congressional Budget Office to score the proposal’s cost at close to zero, which would allow lawmakers to argue to the public and the White House that they’re not giving homeowners a bailout.
Even so, intervening in housing markets is a big step beyond most government benefit programs, which are typically tailored to individual needs such as health care or nutrition and are accompanied by tight income limits.
Just this past year, Congress found itself locked in prolonged debate over how far up the economic ladder to climb in providing health insurance for children. In another arena, the White House is pressing for a strict cap that would disqualify farmers from getting government subsidies if their adjusted gross income exceeds $200,000.
Contrast this with Frank’s draft. While his program would be limited to homeowner-occupied primary residences with loans that fall within FHA-conforming loan limits, it would not have any strict income-eligibility limits. One indication of the size and scope of the program Frank envisions: His measure would authorize the FHA to make as much as $300 billion worth of new guarantees, potentially enough to lead to refinanced mortgages on between 1 million and 2 million homes.
Frank acknowledges that there are downsides to such an approach. “People who have been imprudent are going to benefit; I don’t dispute that,” Frank said. “But we have to do it for the better good.”
Schumer, echoing progressive economists, argued that the markets will benefit, as well, if there is some promise of government intervention to cut the rate of foreclosures around the country.
In addition to forclosure measures, House Speaker Nancy Pelosi said Congress needs to consider extending unemployment benefits, expanding food stamps and sending money to cash-strapped states, many of which face budget deficits.
Bush and Paulson have both argued that lawmakers should give the first economic stimulus time to work before jumping on a second bill. “In contrast to the president,” Pelosi said in a statement, “we believe that further decisive action is needed now.”
Schumer said that lawmakers will consider moves to tighten the regulatory leash on lenders and investors. The House has already passed stricter underwriting rules for mortgage originators and servicers. Lawmakers are reportedly mulling new rules for the credit-rating agencies that gave the troublesome exotic securities high quality ratings.
“We’re paying the price now” for the failure of regulators to keep pace with changes in the financial industry, Schumer told reporters Monday. “Regulators are fragmented and not in keeping with the current system.”
Of the four major recessions he experienced while working in the housing industry, Isakson said that each had “the same root, and that was easy credit and shoddy underwriting. And that’s exactly what you’ve got with the subprime [crisis] here.”
While Isakson said that overregulation would be dangerous, he acknowledged that Congress needs to look at standards of underwriting and transparency. “This is a Wall Street-rooted problem, there’s no question about it,” he said.
Ryan Grim and Eamon Javers contributed to this story.