WASHINGTON - Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke struck a conciliatory tone yesterday, assuring members of the House Financial Services Committee both that the primary goal of their $700 billion bailout plan is to protect Americans at the "lunch-bucket" level and that the administration will need Congress' help and oversight with the plan.
"I think maybe we haven't communicated as clearly as we could about the program," Paulson told committee chairman Barney Frank, D-Mass., in the second of two days of hearings on Capitol Hill where he and Bernanke tried to sell the bailout plan to skeptical lawmakers.
During the hearing, President Bush announced that he would address the nation about the importance of the emergency legislation to deal with the financial crisis - a move called for several of the committee members as well as Senate Majority Leader Harry Reid, D-Nev.
At the same time, presidential hopeful Sen. John McCain, R-Ariz., suspended his campaign to return here and focus on the "historic" crisis facing the U.S. economy and called for his opponent, Sen. Barack Obama, D-Ill., to do the same. McCain wanted to postpone the debate scheduled for Friday night in Mississippi and Obama disagreed, saying it is more important than ever to debate the issues.
At the hearing Paulson told the committee: "I'm not looking for extraordinary power. We need and want oversight, transparency and protection [for taxpayers] and we need it in a way that will make this program effective."
"We have ideas but nothing like this has ever been done before and we're going to need help and advice," he said. "Clearly, we'll be working with the transition and the next administration."
The secretary stressed that if Congress does not act quickly to give Treasury broad authority to purchase mortgage-related assets from financial institutions, the economy will spiral downward, jeopardizing taxpayers' retirement savings, the ability of small businesses to continue to exist, and the availability of individuals and businesses to get housing, auto, farm, and other loans.
Benanke said that if nothing is done the nation will be headed for a recession: "higher unemployment, fewer jobs, and more foreclosures."
"This is going to have real effects at the lunch-bucket level," he added.
The Fed chairman said that Japan had a 10-year economic slowdown after its attempts to address its financial crisis, by putting government capital into financial institutions, were not effective.
In that case, the Japanese government was essentially running the institutions, Paulson said. "This is a different situation than anything historically," he said. "What we want to get at is price discovery [of troubled assets and] private capital to flow."
When lawmakers raised concerns about whether the bailout will benefit Wall Street more than Main Street, Paulson said: "It's not the trickle-down theory. What I'm trying to do is to stop the spigot from being cut off. Our whole focus is not the big financial institutions, the focus is on the victims, the focus is on the people."
Bernanke told committee members the same thing he told members of the Joint Economic Committee earlier in the day - that the bailout program must do three things. It must be big enough and aggressive enough to deal with the problem, it must "protect the taxpayer as well as possible," and it must not benefit anyone unduly who was involved in creating the problem, he said.
Several committee members pushed for staggering the funds that would be provided to the administration under the plan, and there was widespread support for restricting the compensation of the executives whose companies participate in the bailout program.
Rep. Jeb Hensarling, R-Tex., saying he was representing a group of conservative Republicans, called for suspending both the capital gains tax and the mark-to-market accounting rules.
Bernanke said later that tax cuts "are certainly something for Congress to decide, but I don't think that changes to the tax code by themselves would be sufficient to address the issue."
Frank emphasized the need to protect community banks. "I hope that we could give all those [community banks] that hold preferred stock [of Fannie Mae and Freddie Mac] appropriate tax relief .... They've got to be given some consideration in this program."
Bernanke said that at some point in the future, the administration or Congress must develop a "resolution regime" that can provide relief to non-bank financial institutions in crisis. The regulators and lawmakers must take steps that will assure that a big financial firm can fail without hurting the whole financial system.
Bernanke told members of the Joint Economic Committee that the $700 billion represents only about 5% of the $14 trillion of outstanding residential and commercial mortgages.
Meanwhile, Peter R. Orszag, director of the Congressional Budget Office, told members of the House Budget Committee that Treasury's proposal "is not without risks to the taxpayers and to the economy."
"Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," he said. "Establishing clearer prices might reveal those institutions to be insolvent."
Orzag also said that, given the lack of specificity about how the plan would be implemented and what asset classes would be purchased by Treasury, "CBO cannot provide a meaningful estimate of the ultimate net cost of the administration's proposal."