[Congressional Record (Bound Edition), Volume 154 (2008), Part 15]
[Senate]
[Pages 20100-20103]
[From the U.S. Government Publishing Office, www.gpo.gov]




                              THE ECONOMY

  Mr. HATCH. Mr. President, I rise today concerned about the current 
crisis in our financial markets and the state of our economy. I am also 
concerned about the course that is being

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laid out by both the administration and the congressional leadership.
  Specifically, I fear that the magnitude of what we are undertaking is 
being swallowed by the concerns of an election campaign and, quite 
frankly, I don't believe that is any way to govern. Of course, the 
sense of urgency being expressed by my colleagues is warranted given 
the circumstances.
  In the last year, price increases, particularly in food and energy, 
have exceeded our income growth. The unemployment rates have edged up. 
Already we have lost some 700,000 jobs. Obviously, the fallout was 
particularly severe in the housing sector. But it should be noted that 
some of the slowdown is due to the aging of the economic expansion and 
the completion of the capital investment spurred by the 2001 and 2003 
tax cuts. Clearly, these need to be renewed and expanded to encourage 
growth in the economy at large.
  However, we are dealing with more than a sputtering in our economy. 
Losses on mortgage-backed securities, coupled with the loss of 
confidence in the financial sector, threaten to turn a predictable 
economic slowdown into something far worse. Indeed, we are in the grips 
of a financial panic of monumental proportions.
  The sharp decline in confidence has led to runs on many institutions, 
most apparently among our investment banks that operated largely on 
borrowed money at high rates of leverage. Most of these institutions 
have either sought merger partners or are being sold to stronger firms. 
Others are reconstituting themselves as commercial banks in order to 
obtain additional Federal deposit protection and regulation.
  Many investment banks were too shaky to survive, unable to absorb 
losses on housing-related securities that exceeded their capital and 
having insufficient time to obtain an infusion of capital from new 
investors.
  Most financial institutions here and around the world have suffered 
manageable losses. Except for the uncertainty which has made our banks 
reluctant to deal with one another or to issue new loans, they are 
otherwise in good condition.
  Banks and other financial institutions around the world have 
considerable assets but cannot access them. Normally, an institution in 
need of cash would sell some of its assets to others. But at the 
current time, entire classes of assets cannot be valued properly and, 
as a result, there is no functioning market for them. These 
institutions cannot wait for the market values to be sorted out because 
they owe money now that is due for repayment.
  We have to buy the banks enough time to properly sort out their 
assets. When the sorting is complete, they will likely find that their 
assets still have considerable value, perhaps between 70 cents and 90 
cents on the dollar. Delinquency rates on mortgages are significantly 
up from a year ago, from about 2.4 percent to a bit over 8 percent as 
of the end of June. However, the homes and the land are still in 
existence and have retained much of their intrinsic real value. Most of 
the borrowers are paying their mortgages, and most of the mortgage-
backed bonds are still paying interest. Unfortunately, if the bonds 
have to be resold today in this unstable, panicky market, they will 
yield far less than their real value. If the bonds can be held until 
the crisis is sorted out, the losses will be greatly decreased. 
Certainly, the losses will be substantial and inconvenient for many 
institutions and for a number of individual investors, but they will be 
manageable.
  These are not insurmountable problems. We have dealt with financial 
crises before. We overcame the devastating stagflation of the 1970s, 
halting inflation and renewing economic growth through a mix of new 
monetary tax-and-spend policies enacted in 1981. We solved the savings 
and loan crisis of the mid-1980s, even as income and unemployment rose 
rapidly, without resorting to renewed inflation.
  In short, our greatest fear should not be the crisis itself but the 
possibility of an inappropriate response to the crisis.
  In order to determine the best course going forward, we need to 
examine what got us here. While it would be easy, especially during the 
campaign season, to lay the blame at the feet of certain individuals, 
the actual problems we face are simply too complex to be pinned on a 
single actor or party.
  Right now, we are seeing the consequences of a long series of policy 
errors, both in the private and public sectors, which combined to 
create a perfect storm of financial instability. Many of our problems 
stem from our monetary policy at the Federal Reserve. From 1988 to 
1999, the Fed pursued a relatively stable monetary policy. However, in 
anticipation of serious problems with the financial sector's computer 
systems as the year 2000 approached, the Fed flooded the system with 
money in 1999. This contributed to the ``dot com'' bubble, and 
subsequent efforts to take out the excess cash contributed to the 
recession of 2001.
  In order to spur the economy, the Federal Reserve held short-term 
interest rates too low for too long, well below the expected rate of 
inflation. The money that subsequently poured into housing and 
commodities created excessive demand, contributing to the housing and 
commodity price bubbles, both of which burst due to the most recent 
efforts of the Fed to return to a less-inflationary stance.
  The easy credit made available from these policies was quickly 
steered into the housing sector, facilitated by increased availability 
of adjustable rate mortgages, rising demand for mortgage-backed 
securities, and the globalization of financial markets.
  The proverbial plot thickened as loan origination companies and many 
banks continually borrowed at the prevailing low rates and resold the 
mortgages to Fannie Mae and Freddie Mac or other firms generating 
mortgage-backed securities, all of which planned to sell the mortgages 
rather than keep them on their books. So they had little reason to be 
concerned with the quality of loans or the borrowers' ability to repay.
  As a result, lending standards fell. Subprime loans were given to 
many debtors who could not, under normal conditions, qualify for or 
afford the debt they were taking on. These people were offered 
adjustable rate mortgages with low teaser rates, borrowing on the 
assumption that they could always refinance at the same low rates later 
on. In effect, low-income buyers became speculators in the midst of a 
bubble. Borrowers and lenders assumed that real estate prices would 
rise indefinitely. Therefore, many assumed that, even if they could not 
refinance, they would be able to sell their houses later on at a 
profit.
  The infusion of money into the housing market increased demand and 
drove up housing prices, leading to overconstruction. Eventually, the 
prices had to come down to Earth, leading to the losses and defaults 
that we are facing today.
  Make no mistake, we are facing difficult times. But I must urge my 
colleagues to maintain some perspective about the overall state of our 
economy. True enough, these were unprecedented challenges, but given 
what is at stake, the American people need an accurate portrayal of the 
obstacles we face. Once again, our current problems are difficult but 
not fatal, and contrary to the claims of some of my colleagues, this is 
not 1929 and America has not become a country of Tom Joads.
  While, once again, the financial failures have placed us in an 
extremely tenuous position, the overall economy has not collapsed. As a 
result of the reduction in tax rates beginning in 2001 and 2003, we saw 
more than 4 years of strong economic growth. After a single quarter of 
negative growth at the end of 2007, our economy has continued to grow 
this year, though at a slower rate. Productivity has been on the rise 
and inflation has been on the decline. Of course, these facts are not 
likely to comfort those in our country who are struggling through the 
uncertainties, but they should give us cause to believe we can weather 
this storm.
  Yet what we hear from some Democrats regarding these matters are more 
partisan attacks and fingerpointing. The country is in shambles, and 
President Bush and John McCain, they say,

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are entirely to blame. Of course, these attacks are simply ridiculous, 
just as it would be ridiculous for me to stand here and lay the blame 
entirely on Democratic congressional leaders. The stakes are simply too 
high on this issue for our response to be muddled by campaign rhetoric 
or election-related agendas. I sincerely hope we can move past any 
partisan wrangling and address these matters in a sensible, bipartisan 
fashion.
  This week we are working on, and are likely to pass, an economic 
relief package that, if it resembles what has been advertised, will put 
the American taxpayers on the hook for about $700 billion--$700 
billion--and the American taxpayers will become the proud owners of a 
mountain of questionable mortgages. The fact that this gargantuan 
number can be discussed in these Chambers without causing all of us to 
shudder says a lot about how detached from reality many of us have 
become.
  The Secretary of the Treasury, Henry Paulson, whom I greatly respect 
and admire, announced a proposed bailout last Friday. According to the 
current agenda discussed among congressional leaders, they hope to be 
able to finalize the package and have it on the President's desk by the 
end of the week.
  To sum up, we are preparing to authorize $700 billion in new spending 
and to fundamentally alter the balance between the Government and the 
private sector, and we will not take longer than a week to debate and 
discuss the legislation.
  I know many of my colleagues are anxious to get back on the campaign 
trail so they can blame President Bush, Senator McCain, or anyone with 
an ``R'' next to their name for the financial crisis. But I think the 
American people expect more out of us. Indeed, if we are going to spend 
$700 billion of their money, we had better be certain it is the right 
thing to do.
  The proposal clearly has the potential to work. Under the plan, the 
Secretary will be given authority to spend up to $700 billion to 
acquire large quantities of questionable mortgage-related debt that 
have caused the financial markets to freeze. Fortunately, from what we 
have been told, that $700 billion figure is only the gross cost of the 
program. The assets acquired by the Treasury will eventually be sold. 
If--and this is a big if--all goes according to plan and the assets are 
purchased at appropriate discounts, there is a chance the Treasury will 
recoup the taxpayers' investment or even turn a profit.
  As we heard from Secretary Paulson and Chairman Bernanke on Tuesday, 
this outcome cannot be guaranteed and, at this point, much uncertainty 
remains. However, as we all know, the cost of doing nothing could be 
much greater. By failing to act, we may inflict even greater hardship 
on the working people, small business owners, and retirees throughout 
the country.
  In addition to the inherent risks in the program, a number of other 
factors must be considered. First of all, we need to remember that 
Secretary Paulson will not be running the Treasury for much longer. 
That is a possibility. In fact, it is a probability. Given the sheer 
size of this proposal, passage of this bill, coupled with the start of 
a new administration in January, the choice regarding the next Treasury 
Secretary will suddenly become one of the most important political 
appointments in a generation. We would be passing on to an unknown 
administration unprecedented powers over the financial markets and the 
private sector. While I have great confidence in the leadership and 
abilities of Secretary Paulson, such uncertainty gives me pauses.
  Second, there is a conspicuous lack of transparency, oversight or 
accountability in the Secretary's proposal. Instead, it contains 
explicit provisions exempting his decisions from any kind of review. No 
consultation is required for any purchase, nor is there a requirement 
that either his decisionmaking process or his decisions themselves be 
made public. The shudder I feel over the $700 billion price tag grows 
exponentially if there is going to be no accountability.
  If Congress is to approve a bailout of this magnitude, we must take 
proper precautions to ensure we do not compound the inherent 
uncertainty of the plan with more uncertainty in the legislation. We 
need to include some sort of guidelines or oversight in order to ensure 
that this administration and the next one do not abuse or misuse such a 
huge grant of trust.
  Finally, we need to consider any response to the current crisis in 
the context of our long-term economic needs. While the proposed bailout 
may hold off an impending economic meltdown, any action we take now 
will be meaningless if it is not followed up with decisive action on 
our part.
  Foremost, we need to change the way the financial sector works. The 
Federal Reserve needs to rethink its definition of good monetary policy 
and determine whether its existing policy tools--such as reserve 
requirements, oversight capabilities, and reporting rules--are 
adequate. In addition, Congress must reconsider what it has charged the 
Federal Reserve to do. The Fed has been charged with two goals: No. 1, 
providing a sound currency with stable purchasing power; and, No. 2, 
maintaining steady economic growth with low unemployment. At this 
point, it is obvious that an aggressive, excessively easy monetary 
policy in pursuit of short-term growth is self-destructive in the long 
run. It leads only to inflation and speculative excesses in the credit 
markets that might harm the economy, and probably will. Only by 
focusing on a stable currency can the Federal Reserve achieve both its 
objectives.
  We also need to completely rethink Fannie Mae and Freddie Mac. As we 
have heard countless times over the last few weeks, in creating these 
two government-sponsored enterprises, we have made sure the benefits of 
their investments are private while all the risks are public. Put 
simply: This is bad policy with considerable moral hazard.
  Fannie Mae and Freddie Mac together represent an immense government-
created and government-coddled duopoly. In the years since their 
creation, they have focused mainly on their own expansion, recklessly 
urged on by many in Congress who believed this was the way to make home 
ownership more affordable for low-income families. However, as a recent 
Fed study has demonstrated, most of the benefit of the previously 
implicit--now explicit--Federal guarantee of their debt has gone to 
their shareholders as higher earnings, not to reducing costs for new 
homeowners. In their efforts to expand, Fannie and Freddie took too 
many unwarranted risks. They needed an ever-expanding supply of new 
mortgages to package and resell and to hold for income. Others fed this 
expansion effort with unsound lending.
  The recent Federal bailout of these institutions requires an 
immediate step: an end to their lobbying to Congress. It is a little 
late in coming, but as of right now, it is essential. We need to stop 
insisting that Fannie and Freddie have an ever-expanding role in the 
housing market. We should also consider breaking each of them into 
separate pieces to promote more competition and to ensure that no one 
part of them will ever again be too big to be allowed to fail.
  The regulatory and rating agencies also need to be reviewed. We need 
to ask whether they have enough resources for adequate supervision and 
whether they have failed to recognize the evolutionary changes in the 
credit markets and the new business arrangements that reduced 
transparency in financing. These and other questions will have to be 
explored as we move forward.
  Congress must also recognize its responsibility to help the economy 
grow. I, for one, would like to see some willingness among the 
Democratic leaders to enact policies that are actually intended to spur 
long-term economic growth in our country. It is simply appalling that 
the United States has the second highest corporate tax rate in the 
industrialized world. Yet it is almost sacrilegious among Democrats to 
consider reducing those rates in order to spur growth among our 
Nation's businesses and employers. Capital

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gains in this country are taxed at a higher rate than they are in many 
countries throughout the world, and all we hear from Democrats are 
proposals to increase taxes on capital gains and dividends, which, as 
history has shown, creates disincentives for investment. During these 
months of slow economic growth, it has been our exports that have kept 
our economy afloat. One would think this should incentivize Congress to 
promote free trade with our allies throughout the world. Yet we have 
consistently seen efforts to open our exports to foreign markets 
stalled by the Democrats in Congress.
  Finally, we spend $700 billion a year to purchase oil from outside 
the United States. But if you looked at any of the so-called energy 
bills we have considered in Congress, they do not contain any 
provisions that will actually increase oil production at home, except 
the bill we Republicans offered here a month or so ago.
  We clearly need to reform our financial markets and refine the powers 
of the Federal Reserve in order to ensure crises such as this don't 
happen again. And though I hesitate to support the idea, it is not 
unreasonable to conclude that the proposed bailout can provide 
immediate relief and prevent any more catastrophic losses in the near 
future and give the financial market time to sort out the mess. But if 
we don't adopt policies that are pro-growth, pro-business, and pro-job 
creation, we won't be able to ensure long-term economic security for 
our country, no matter how many bad mortgages we purchase with the 
taxpayers' money.
  These are indeed difficult times for our financial markets and the 
housing sector of our economy. I agree with my colleagues that we need 
to act fast. I only hope that, as we work toward a solution, we do so 
according to a timetable that is appropriate to the problems we face 
and not one based on election year expediency. I also hope that we can 
consider the long-term implications of our actions and consider the 
future as well as the present.

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