Bunning Floor Speech On Wall Street Bailout Proposal

[audtatious]

Thank you, Mr. President. I rise to speak about the current economic situation and the bailout bill that will soon be coming to the Senate floor.

Let me start by saying that I am just as concerned about what is going on in the financial markets and the economy as everyone else. I know there are extreme tensions in the credit markets and those problems could soon have an impact on businesses and individuals who had nothing to do with the mortgage mess. However, I do not agree that the bill coming to the Senate will fix those problems.

I also strongly disagree with the Senators who have come to the floor and declared that this crisis is a failure of the free markets. No, the root of this crisis is a failure of government. It comes from a failure of regulation and, most importantly, monetary policy. In the long term we certainly need to update our financial regulation to reflect the realities of our modern economy, but it is just plain wrong to blame failures of our regulations and regulators on the markets.

A little history is in order here. Our financial regulations are based on structures put in place during the Great Depression. Our laws simply do not reflect the current landscape of the financial markets. Once upon a time, banks may have been the only institutions that were a danger to the entire financial system, but it is clear that other institutions are now so big and connected that we can not ignore them in the future. Also, many of today’s common financial instruments did not exist twenty years ago, much less when our laws were written.

But our regulatory structure is not the only problem. The real fuel for the fire of this crisis has been the monetary policy of the Federal Reserve. I have been a vocal critic of the Fed for many years, and have been warning that their policies would hurt Americans in the short and long term. For most of those years I did not have much company, but I am glad that many economists and commentators have recently joined me in criticizing the Fed.

During the second half of his time at the Fed, former Chairman Alan Greenspan tried to micro-manage the economy with monetary policy. Any economy is going to have its ups and downs, and it was foolish to try to stop that. But Chairman Greenspan did it anyway. By trying to smooth out those bumps, he over-shot to the high and low side, creating bubbles and then recessions.

I have spoken many times on the floor about the Fed’s policies that led to the housing bubble, but a few parts are worth repeating. Everyone remembers the dot-com bubble, which was itself partly a result of easy money pumped into the system by the Fed in the late 1990’s. Well, Chairman Greenspan set out to pop that bubble and kept raising interest rates in the face of a slowdown, driving the economy into recession.

In order to undo the problems created by his tight money, he then overshot, taking rates to as low as one percent for a year, and below two percent for nearly three years. In turn, that easy money ignited the housing market by bringing mortgage interest rates to all time lows. Low-cost borrowing encouraged excessive risk-taking in the financial markets, and led investors to pump borrowed funds into all kinds of investments, including the various mortgage lending vehicles.

In 2004, he encouraged borrowers to get adjustable rate mortgages because of all the money they would save. Four months later, he started a series of 17 interest rate increases that helped make those mortgages unaffordable for the hundreds of thousands of borrowers who listened to his advice. I warned him about this advice the day following his speech, but that warning fell on deaf ears.

Then in 2005, rising interest rates and house price appreciation overcame the ability of borrowers to afford the house they wanted. To keep the party going, borrowers, lenders, investors, rating agencies, and everyone else involved lowered their standards, and kept mortgages flowing to less creditworthy borrowers, who were buying ever more expensive houses.

Chairman Greenspan also let investors and homeowners down by failing to police the banks and other lenders as they wrote ever more risky loans. Regulated banks were allowed to keep their most risky assets off the balance sheet. Even worse, he refused to use the powers Congress gave the Fed in the Home Ownership and Equity Protection Act in 1994 to oversee all lenders, even those not affiliated with banks. His refusal to reign in the worst lending practices allowed banks and others, including Fannie Mae and Freddie Mac, to write the loans that are now at the center of the mortgage crisis. Chairman Ben Bernanke finally issued rules under that law in July, but that was far too late to solve the problems.

Before turning to the coming legislation, I want to mention a few more failures of government that directly contributed to this mess. Federal regulations require the use of ratings from rating agencies that have proven to be wrong on the biggest financial failures of the last decade. The Community Reinvestment Act forces banks to make loans they would not otherwise make based on the credit history of the borrower. The Securities and Exchange Commission under former Chairman Donaldson failed to establish meaningful oversight and leverage restrictions for investment banks.

Fannie Mae and Freddie Mac used the implied backing of the government to grow so large that their takeover by the government effectively doubled the national debt. And they were pushed by their executives and the Clinton Administration to loosen their lending standards and write the loans that drove the companies to the point of being bailed out by the taxpayers.

Finally, the same individuals who have come to this building to ask for the latest bailout set the stage for the very panic they are using to justify the bailout. The Secretary of the Treasury and the Fed Chairman set expectations for government intervention when they bailed out Bear Stearns in March. The markets operated all summer with the belief that the government would step in and rescue failing firms. Then they let Lehman Brothers fail, and the markets had to adjust to the idea that Wall Street would have to take the losses for Wall Street’s bad decisions, not the taxpayers. That new uncertainty could be the most significant contributing factor to why the markets panicked last week. What is more, the panic today is a result of the high expectations set last week when the Secretary and Chairman announced their plan. When resistance in Congress and the public outrage over the plan became clear, the markets walked back to the edge of panic.

Now I want to talk about the bailout bill that we expect to have on the Senate floor soon. The Paulson proposal is an attempt to do what we so often do in Washington – throw money at a problem. We cannot make bad mortgages go away. We cannot make the losses that our financial institutions are facing go away. Someone must take those losses. We can either let the people who made bad decisions bear the consequences of their actions, or we can spread that pain to others. And that is exactly what Secretary Paulson proposes to do – take Wall Street’s pain and spread it to the taxpayers.

We all know it is not fair to ask the taxpayers to pick up Wall Street’s tab. But what we do not know is if this plan can even work. All we have is the word of the Treasury Secretary and the Fed Chairman. But they have been wrong throughout this whole housing mess. They have previously told us that the subprime problems would not spread and that the economy was strong. Now they say we are on the edge of a severe recession if we do not pass this bill.

Well, I am not buying it, and neither are many of the nation’s leading economists. If some sort of government intervention is needed to fix the mess created by the government failures I talked about earlier, we need to get it right. Congress owes it to the American people to slow down and think this through. We need to know that whatever we do is going to fix the problem, protect the taxpayers, not reward those who made bad decisions, and make sure this does not happen again. But we can not do that in one week as we are all trying to rush home. Congress needs to take this seriously and stay here until we find the right solution, not just throw 700 billion dollars at Wall Street as we walk out the door.

Now, Mr. President, before I yield the floor, I ask unanimous consent that the two letters I mentioned from economists opposing the bill, along with an article from the New York Times from 1999 about the Clinton Administration pushing Fannie Mae and Freddie Mac into risky loans, be printed in the record following my remarks.

I yield the floor.

[Eikon]

Who's speech is this?

[mtcookson]

Looks like Senator Jim Bunning from Kentucky.

[audtatious]

[96Qowner]

This might be a good time to ask Eikon and any others in the field about the Japanese real estate bubble and how the central bank dealt with it. I remember hearing a lot of criticism about it on the financial channels at the time. They tried to shelter the economy and prop up assets, but only prolonged the agony.

Worst of all for Japan, financial authorities likely prolonged their country’s troubles with a series of policy blunders. After the property bubble burst, economic growth averaged just 0.6 percent a year from 1992 to 1994, compared with 5 percent between 1986 and 1990. That could have been the end of the misery. Indeed, growth picked up again in 1995 and 1996.

But the government failed to clean up the banking system. In 2002, banks were still hobbled with at least 42 trillion yen in bad loans outstanding. The government also raised the consumption tax in 1997, plunging the nation into recession, and later creating corrosive price falls known as deflation.

The Bank of Japan had deliberately popped the bubble with high interest rates. But when deflation set in, the BOJ followed a cautious monetary policy out of fear of sparking inflation.

As a result, what would have been a downturn lasting three years or so turned into the "lost decade" of recessions and financial crises. "The government (was) resolutely knocking the economy back down every time it tried to get back up," says Adam Posen, senior fellow at the Institute for International Economics.

Still, even assuming U.S. authorities avoid Japan’s mistakes, a decline in wealth from a house-price crash would hurt consumption. The effects of that could be worse in the U.S., because consumption accounts for a greater part of the economy than in Japan. U.S. consumers are also the driving force of the world economy, stoking the economies of Asia and Europe by sucking in exports.

http://archive.mailtribune.com...z.htm

I heard a couple people on TV last night say that we'd be better off letting the market adjust - let the pain be felt rather than throwing 700 billion at it, and our economy would be the better for it. Any expert opinions?

[AZhitman]

A few thoughts:

1) I'm intrigued that all the Dems bellyaching about "Bush's failed policies" are now lining up to support a bailout, and the RIght is resisting like a mule in deep mud.

What's up with that? Could it be that he's not as retarded as they've been saying?

2) Why is Paulson not being Tazed and cuffed? He brags that he "warned us" a year ago about this coming down the pike. I find no mention of such, and if he KNEW and said nothing, then he should be canned for dereliction of duty.

3) Where is the outrage about Raines, who was "cooking the books" at Fannie Mae, and is now an Obama economic advisor? WTF?

4) If this is the beginning of an imminent collapse, why is gold not skyrocketing (or even increasing)? Why is the market not tanking (up 121 points today)?

5) Why is this being pinned on the Right, when for YEARS, the Left has been hammering away for "home ownership for everyone", despite their credit history or socioeconomic status?

Before you dispute this, here's a couple facts:

It's one of ACORN 's primary goals... they fought more stringent credit requirements AND picketed banks who attempted to deny loans to low-income buyers, AND attempted to block expansion of new brances of said banks....

6) Also, why is it that the cities with the highest foreclosure rates are also home to the highest Hispanic populations? Recall that many banks were sued for attempting to require thorough financial documentation and EVEN citizenship proof (on the grounds of "racism and discrimination" during the easy-credit boom).

I'd like some answers from the Left. This ain't making sense one bit, and I hope McCain asks ALL of these questions tonight.

[Jimefam]

1. This is partly due to "Bush's failed policies" such as his America's Homeownership Challenge which told mortgage companies to reduce the amount of downpayment required for low income borrowers and simplification of the loan process, i.e. no-doc loans in which a borrower with strong credit history has to merely state his income and provide no proof. But mostly as with every other problem in his presidency its due more to his lack of supervision and foresight. His people should have seen this coming much sooner and acted earlier. Also, the right is not resisting. The republican president with his republican sec tres. proposed it and the senate republicans are on board as are the republican candidates for pres and vp so were the house republicans at first. Then they realized that they go up for election in less than six weeks and they better make a fuss. The first person to actually voice disapproval of the proposal was democratic u.s. senator dodds who said the proposal effectively handed paulson a $700 billion dollar check with no supervision(again the bush theme) and no tax payer relief or protection. Of course they will come around because at this point everyone both democrat and republican realize that it is a necessity. But with the little posturing the house rep did it may help them come election time.

2. I dont know. Probably because he is to involved at this point to be removed and replaced by someone else.

3. That is simply a lie.

4. Where do you get your info from??? http://business-standard.com/i...35166 gold has been going through the roof. 15% increase in the last week!!

5. See #1

[AZhitman]

1. This is partly due to "Bush's failed policies" such as his America's Homeownership Challenge which told mortgage companies to reduce the amount of downpayment required for low income borrowers and simplification of the loan process, i.e. no-doc loans in which a borrower with strong credit history has to merely state his income and provide no proof. But mostly as with every other problem in his presidency its due more to his lack of supervision and foresight. His people should have seen this coming much sooner and acted earlier. Also, the right is not resisting. The republican president with his republican sec tres. proposed it and the senate republicans are on board as are the republican candidates for pres and vp so were the house republicans at first. Then they realized that they go up for election in less than six weeks and they better make a fuss. The first person to actually voice disapproval of the proposal was democratic u.s. senator dodds who said the proposal effectively handed paulson a $700 billion dollar check with no supervision(again the bush theme) and no tax payer relief or protection. Of course they will come around because at this point everyone both democrat and republican realize that it is a necessity. But with the little posturing the house rep did it may help them come election time.

2. I dont know. Probably because he is to involved at this point to be removed and replaced by someone else.

3. That is simply a lie.

4. Where do you get your info from??? http://business-standard.com/i...35166 gold has been going through the roof. 15% increase in the last week!!

5. See #1

#1 - I'll concede part of your point there, but let's not forget the Lefty organizations suing and pressuring banks to write loans for people who have no business owning a home, citing "discrimination". See my #5.

#2 - Umm, no. No one is ever that important.

#3 - I'll concede that his role as an advisor is a stretch:

...If we are to believe Raines, he did have a couple of telephone conversations with someone in the Obama campaign. But that hardly makes him an adviser to the candidate himself

...but there's no question as to the first part.

#4 - Ummm, no. This doesn't look anything like "going through the roof":



Nice work, J.