Sept. 24 Hearings on the $700 Bailout (Deniece's Notes, Part I)

House Chairman Shuler suggests this morning a three step "THO" plan to consider as the $700 Billion is handed out: Taxpayer, Homeowner, Oversite. In that order he suggests priority be considered. He went on to say that this economy needs to stop being considered a casino where the prudent bail out those who take the high risks.

Bernanke: US economy confronts substantial challenges. We have a weakening job market. The implications for broader economy can be worse. Downturn in housing market has a lot to do with this. Lower interest rates should help the housing market. The AIG bailout collateral is the company itself. It's CEO has been replaced. Lehman's default combined with AIG's bailout caused substantial instability. Reciprocal currency arrangements were made by the Fed to address liquidity pressures. Available credit restricting is hurting the market. Private payroll shed 100,000 jobs in August. Unemployment reduced to 6.1% in August. Weakness of real income and tighter credit has caused a clear reduction in retail spending. Car purchases have dropped sharply.

Lower mortgage rates should provide support for demands in housing market in coming months.
Inventory is still high. Single housing starts dropped. Reducing prices have dropped equity for homeowners. Decrease in income and tightening of credit are going to slow down commercial building.

Inflation rose in July reflecting higher prices for goods and services including energy. Recently dollar is up from midsummer lows and easing of inflation expectations. Nevertheless the inflation fluctuation outlook remains uncertain.

Shuler admits, "Clearly we have a financial crisis." He asks what Bernankes' thoughts are on providing all of this money at one time, and why so much is needed. He asks Bernanke what he would put the money to pay for.

Bernanke's comments include: Markets need sufficient force to have an effect.

Shuler asks if $150Billion would have an effect in the next few months.

Bernacke's answers it is a question to ask a psychologist, not an economist. Fed's involvement in Bear Stearns and AIG were done with reluctance. The $700Billion is an acquisition of assets exposes the taxpayer to significant risk. The biggest part of the $700 Billion program is to improve market functioning.

Ms. Maloney asks if buying existing assets is wiser than providing new loans.

Bernanke's answer suggests we have to ungum current frozen lenders. However, providing new mortgage backed securities is a good idea too.

She asks how did they arrive at that figure?

Bernacke's response, "It's not science.. There is $14Trillion of residential and commercial mortgages outstanding. It is 5% of that. It is not a fiscal stimulus. Doesn't expect effect on inflation."

Mr. Brownback wants to know conditions involving loans and stock interest not just at incept, but over time as things change.

Bernacke: Two situations: 1) Bank failing needs injection of captial. 2) Return liquidity to markets. The bailout is choice two. The way to protect taxpayer is providing competition for the money which will reduce price of purchasing the product. Federal reserve does not want to take a position on bankruptcy.

What causes the most pause incomparing this to Great Depression?

Sophistication of our financial system and size are not comparable. One lesson to draw is when there are major dislocations in financial sector, it can have significate implications on growth.

Congressman Cummings (Maryland) we need to "make sure we don't have motion, commotion, emotion and no results." Public sees government spending people's money and not seeing how it is making things better, actually feel it is making things worse. Cummings is convinced we have to do something, but it must include Main Street. "Are we seeing any upturn in housing market?"

Bern: Housing market central to this whole situation. Few signs of stability, but they are tentative until mortgages unfreeze. We should see some bottoming out of construction decline. Large inventories of homes both new and existing. Large numbers of foreclosures. All this causes house prices to decrease. If mortgage credit is not available, a longer decline in housing is expected.

Cummings brings up stimulus package saying it has immediate effect. Suggests bailout on Wall Street must have safety net for Main Street. Asks how do you say to Main Street the effect it will have on them?

If credit markets remain in their current condition, or worsen, small businesses will not be able to get loans, less people will be able to get cars, auto workers will have less employment, housing market will come under more stress. Our modern economy cannot provide jobs, housing and more unless we stabilize credit markets and lead ourselves to growth.

Senator Sununu, saying loans are part of credit market which keep the economy going. What is relationship behind mortgage backed securities and consumer credit markets like school loans, auto loans, etc.?

Banks are critical to overall credit system. In order to make loans they have to have capital. Losses from delinquencies and foreclosures havce caused global financial institiutions to write down their capital by $500Billion. If banks don't have the capacity to increase their lending they have to contract their lending. We need to find a way to have banks have more capital to have more money to lend to the economy. First, take burdens off of balance sheets, and giving them more money, it will reduce uncertainty of value of banks, cause more people to invest in them, provide more money to markets to lend.

Sununu suggests if there is any gain that we don't offer more money, but pay down debt. If the treasury pays at a fair price this will work. Are there participants in the marketplace who are willing to sell below the hold to maturity price?

Bernacke says it would seem very logical.

Mr. Doggett (Texas) says that when we are talking about buying assets, they are assets that do not have a specific value because they are considered "junk" assets. Doggett suggests that is why the taxpayer is asking to make the bailout, not Wall Street. No one knows what a price can be on these junk assets.

Bernanke says the assets are being valued at a price which would be considered were the markets more normal. (Hmmmm... Is that what they government would be paying as well?)