President George Bush's address to the nation on Wednesday night was the kick-up-the-behind that Congress needed, after almost a week of increasingly rancorous debate which had threatened to unravel the administration's economic rescue package. But even the gathering consensus on the wording of legislation yesterday could not disguise gaping questions that remain about the operation of the plan.
Assailed by Republicans furious about the profligate use of taxpayer dollars, and Democrats who wanted to ensure that bankers are punished for the mess they have created, a hapless Hank Paulson, Treasury Secretary, had demonstrably failed to sell the idea at the heart of the proposal. Namely, that unless taxpayer money is used to prop up the markets, everyone will suffer, in soaring unemployment and the collapsing value of savings.
Lawmakers' anger reflected their constituents' anger. Polls showed that Americans are viscerally opposed to writing a $700bn cheque to the very people on Wall Street who got rich from the risky investments that are now coming home to roost. Some lawmakers said 96 per cent of constituents calling them were opposed to the bail-out.
In testy hearings in Congress on Tuesday and Wednesday, Mr Paulson and Ben Bernanke, chairman of the Federal Reserve, tried to explain that the consequences of inaction would be worse, but stopped short of setting out exactly what those consequences might be.
"Mr Bernanke, Mr Paulson, they are all afraid to say things like that," says Kevin Logan, senior US economist at Dresdner Kleinwort. "You can't have the chairman of the Fed saying that without the plan there could be the biggest depression since the 1930s, that the stock market could plunge, that you won't be able to get your money out of money-market funds. Guess what'll happen the next day. Everyone would pull their money out of money-market funds. He's got to present a more calm and reasoned demeanour."
It is worth recalling just what was happening in the financial markets on Thursday of last week, the day that Mr Paulson and Mr Bernanke calledparty leaders together on Capitol Hill to insist that action was vital. The Fed chairman warned that meeting that they might have just days to avert a financial collapse.
Many savers have their investments and their pensions tied up in the stock market, and a mid-day plunge by the Dow Jones Industrial Average was just the visible tip of an iceberg that went much deeper that Thursday. In the much larger credit markets, there was chaos. Hundreds of billions of dollars were being withdrawn by institutional investors in money-market funds – supposedly the safest of all kinds of investment vehicles – because one of their number had suffered big losses on the collapsed investment bank Lehman Brothers. Many firms keep their cash in money-market funds, and millions of Americans use them as bank accounts. The $3.4 trillion (£1.85 trillion) industry relies on investors' trust that one would get a dollar back for a dollar invested.
As money-market funds liquidated their assets, they made their plight even worse, and the Fed feared many would shortly have to shut their doors, preventing people from having access to their money – something that would have started a panic.
Meanwhile, many companies, large and small, rely on money-market funds to buy the short-term debt that they use to fund their day-to-day operations, including to pay wages. Money-market turmoil could very quickly have turned off the funding taps to business, who would then lean on traditional banks – only to find that the banks had no access to extra funds either. The consequences for jobs and the economy would be disastrous.
Such was the picture painted for lawmakers that night, when Mr Paulson said that he would bring forth a plan to stabilise the markets. Such was the picture painted again this Wednesday, as President Bush fought to save the proposal.
The trouble with the plan is that it does indeed hand taxpayer money to the Wall Street banks who have lost money on their foolish investments – and the details remain so sketchythat Mr Paulson has little in the wayof response to the critics beyond:"Trust me."
The Treasury Secretary has sought broad authority to buy up the toxic mortgage assets still lurking, cancerously, at the heart of the financial system. Up to $700bn could go into the banking system, to get money moving again. The figure was chosen because it is 5 per cent of outstanding US mortgage debt, and deemed enough to satisfy the financial markets, but it is not a precise science. The eventual losses to be shouldered by the US taxpayer will be considerably less than $700bn, but with the underlying housing market in freefall, quite what the amount will be is anyone's guess.Reuse content