What's Next In The Rescue Plan?

Sen. Judd Gregg (R-NH), one of the key Republican negotiators on the financial rescue bill that failed Monday, says the same measure needs to be voted on and approved. "We don't have too many options here," he says. Gregg says the House vote was "unfortunate," adding it aggravated the situation dramatically.

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MELISSA BLOCK, host:

And we're joined now by the Chief Senate Republican negotiator on the bailout, that's Judd Gregg of New Hampshire. He's also ranking member of the Senate Budget Committee. Welcome back to the program, Senator Gregg.

Senator JUDD GREGG (Republican, New Hampshire): Well, it's a pleasure to talk to you again.

BLOCK: You know, it seems like it was longer ago than this, but it was actually just Friday that we were talking and it seemed, at that time, that you were quite confident that this would all work out fine. What happened?

Senator GREGG: Well, I guess my optimism was misplaced, obviously, Melissa. The House vote was a surprise to me and I think an unfortunate event because as we saw, the stock market dropped 770 points there, and as a result, $1.2 trillion of American worth went out the window, which - I mean, its pension funds, IRAs, 401Ks, people's basic savings were dramatically hit. And then of course, we're continuing to see the rashing down of credit and unfortunately you may hit payrolls which would mean people won't get paid or they all have to lay people off. This is a very serious situation and to understate the seriousness of it would not be appropriate. And as a practical matter, the House vote has aggravated the situation dramatically.

BLOCK: And we just heard in you in David Welna's report there, saying it would be totally irresponsible of the Congress not to take action. You sound like you're blaming the House squarely for this failure.

Senator GREGG: Well, where did the bill fail?

BLOCK: Are you blaming House Republicans in particular?

Senator GREGG: No. I mean, there are a lot of people who didn't vote for it in the House who must have had some reason for doing that, which I'd love to have them explain to me.

BLOCK: In that House vote yesterday, about 60 percent of Democrats voted for the bailout, but less than a third of Republicans did. Doesn't that point to some issue within your party that you need to resolve? You need to give them something to bring them on board.

Senator GREGG: Well, in the Senate, we probably have the reverse situation. I know we have not had a vote yet, but I know we have a very strong Republican support in the Senate and I'm not sure how strong the Democratic support is. I hope it equals ours. You know, I would think that after watching what happened for a day or so, people would say to themselves, really, this was not a good idea to kill this package, that they wouldn't need more sweeteners. They certainly shouldn't get ear marks or anything like that, walking around money, so to say.

BLOCK: If I'm hearing you right, it sounds like what you're saying is essentially that more or less the same bill needs to get voted on again and it needs to pass or everything will fall apart.

Senator GREGG: That's pretty accurate. I mean, we don't have too many options here, and what we know is that we're heading into a very serious situation. It's sort of like that "Thelma & Louise" scene where they stepped on the gas and head for the cliff. I don't really think we want to go over the cliff.

BLOCK: But if these folks have voted against the bill in the House were so concerned about what they were hearing from people back home, what would make them change their mind? Aren't they still getting those exact same calls of people saying, don't bailout Wall Street.

Senator GREGG: Everybody is suspicious of the government, they should be. Gosh, that's a good attitude, in my opinion, to be suspicious of government. But you ought to have good facts when you make your decision and unfortunately, a lot of the information that's put out there was inaccurate. This idea that it was $700 billion being thrown out the window to help out fat cats in Wall Street. You know, what it was, the $700 billion to buy assets that had real value, which we can then basically help people who have those mortgages maybe stay in their homes, and then as a result, when the economy gets a little better, sell those assets back into the market and make a little money or at least breakeven. It's something that was misrepresented, I think rather grossly by those who had a different agenda. And it ended up costing Americans a lot of money to have this bill go down, a lot more than $700 billion, even if we were risking $700 billion, which we're not.

BLOCK: We've been talking with Republican Senator Judd Gregg of New Hampshire. Senator Gregg, thanks very much.

Senator GREGG: Thank you.

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No Rescue? Economists Explore What's Next

The House of Representatives' defeat Monday of a $700 billion financial rescue package may have come as a surprise to President Bush and top administration officials. But economists who have been watching the process say the package had some shortcomings and these became hurdles to its passage.

As political leaders ponder what to do next, here's a look at what some economists think lies ahead.

Dean Baker
Co-director, Center for Economic and Policy Research

Baker says the rationale for the rescue package — to prevent a "meltdown" in the financial system — remains a viable concern: "We're at risk of that. There's clearly a lot of stress," he says. "I'm sure we will see more upheavals, most likely following bank failures."

His primary concern is not the ups and downs of the stock market but what's happening in the credit markets and financial firms' access to credit. Baker says he wasn't a fan of the proposed legislation because it was a "very indirect way" of addressing problems in this arena — namely, that firms lack the capital they need to support their operations. "It would have made much more sense just to inject capital directly into the financial system," he says.

And the underlying issue, Baker says, is that the U.S. has lost close to $4 trillion in housing equity. The toxic assets at the heart of the financial meltdown are mortgage-backed securities. But with house values plummeting, it's impossible to gauge how much these securities are worth.

"This is the story of the downturn and of course, the bailout does almost nothing to counter this drop in demand," Baker writes in an article published Monday on the Talking Points Memo blog.

Baker says the government should have taken an approach akin to what it did with the insurance giant American International Group, infusing capital in exchange for a large share of the institution. Instead, the bailout package advocated an indirect approach focused on buying troubled assets, he says.

Baker says he would like to see a "qualitatively different proposal" but thinks there will be intense lobbying to get the additional votes needed for the passage of the current bill.

Simon Johnson
Senior fellow, Peterson Institute for International Economics

Johnson, who is a professor at MIT's Sloan School of Management and served as the economic counselor for the International Monetary Fund, says the rescue package wasn't "ideal," but it would have bought time and "stabilized the markets." He expects some form of the legislation to pass later this week.

Like Baker, Johnson says the crux of the problem is declining house prices. Regardless of whether the rescue legislation goes through, Johnson says the two key issues that need to be addressed by any follow-up plan are mortgages and banks' lack of capital.

Johnson also remains concerned about what's on the horizon in Europe. He warns that the "cracks in the financial system" extend beyond the U.S., but European lawmakers have been reluctant to acknowledge that. "In fact, they're saying, 'We don't have a problem. It's an American problem.' ... That is known as sticking your head in the sand."

Michele Gambera
Chief economist, Ibbotson Associates

Given that all 435 House seats are up for re-election, Gambera says he was surprised that House members felt they could afford not to act in favor of a financial rescue plan. "I don't know how they will be able to go back to their electoral district with their hands empty," he says.

The bailout plan proposed by Treasury and modified by Congress was "clearly imperfect," Gambera says, and he acknowledges that voter anger was high over what many saw as "free money" for Wall Street. Still, he says lawmakers failed to make it clear that under the plan, the government would actually be acting like an investment bank or a "bottom feeder," swooping in to buy troubled assets on the cheap, with the potential of making a profit when — and if — prices recover.

Gambera agrees that the priority for banks remains capital — not a path for selling assets. Once banks have capital, they can write off bad assets and "come clean," he says.

The big problem for banks is that they "don't know who will be in business next week," Gambera says. As a result, they are not lending to each other — or to households or small and medium-sized businesses. Instead, they're keeping a lot of cash on their balance sheet to show that they remain solvent.

Ultimately, Gambera thinks the U.S. economy might be stuck in "second gear" for a while. The outlook for the U.S., compared with Europe and Japan, is worrisome, he says, because Americans have low rates of savings and their salaries, on average, have not increased; they've just grown enough to cover inflation. "American households have very little flexibility — they have no elasticity to take any hits."

International spillover is already a factor. Gambera says banks across the world have tightened their lending standards. Because the U.S. remains a huge importer, if the economy here continues to slow down, it will have an adverse effect on companies overseas.

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