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Bernanke, Paulson defend rescue plan
U.S. Treasury Secretary Henry Paulson (L) and Federal Reserve Board Chairman Ben Bernanke before the Senate Banking, Housing and Urban Affairs Committee
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Kai Ryssdal: From the Frank Stanton Studios in Los Angeles, I'm Kai Ryssdal. It's Tuesday today, the 15th of July. Good to have you with us, although I'm afraid the news isn't much changed from yesterday, Or from the end of last week, for that matter. Investors are running away from Fannie Mae and Freddie Mac stock about as fast as they can. To say traders are skeptical of the government's rescue plan misses the mark pretty widely. Fannie Mae lost 27 percent of its value today. Freddie gave up 26 percent.
President Bush led off his press conference this morning trying to restore confidence in the housing market. At about the same time Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson were on Capitol Hill, where they were pitching the administration's proposal to the Senate Banking Committee. Our Washington bureau chief John Dimsdale reports.
John Dimsdale: Paulson and Bernanke are asking Congress to temporarily increase the government's line of credit to Fannie and Freddie. Committee member Sen. Jim Bunning, a Republican from Kentucky, says he and others will vote against the idea.
Sen. Jim Bunning: The taxpayers have reacted and the market has reacted to your plan, Secretary Paulson, by driving down Fannie Mae shares 26 percent today.
Henry Paulson: It's not something I don't think any of us can do, is stabilize the stock price. We're focused on the underlying credit and...
Bunning: (Interrupts Paulson) Are you trying to stabilize Freddie and Fannie?
Paulson: We are and...
Bunning: (Interrupts again) Well your plan is not being accepted.
If the government does give Fannie and Freddie money, taxpayers will be first in line to recover any profits once the housing market turns around. Stock owners would be second. Fed Chairman Bernanke says that's probably why investors are skittish.
Ben Bernanke: I think at this point there is probably a lot of uncertainty by shareholders as to exactly what is going to happen and to what extent that will affect their value of their shares.
But Secretary Paulson is betting the government's promise of federal backing for the mortgage giants will be enough to boost market confidence and the government will never really have to step in.
Paulson: If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka, and people know you've got it, you may not have to take it out.
Congressional leaders might tack Treasury's proposal onto a housing bill headed for the House floor this week.
In Washington, I'm John Dimsdale for Marketplace.
Tuesday Bernanke testified to the Senate Banking Committee that there are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified.'' That’s his circumlocution for the economy is entering stagflation. Of course, that was obvious to less wealthy Americans a few years ago even if it wasn't evident to Bernanke last month. But he's in denial because monetary policy is helpless to combat stagflation. The important thing is Bernanke and Paulson rescued their pals on Wall Street even if doing so was unprecedented and probably illegal. But we've learn from George Bush that if one is powerful enough the law is whatever one says it is.
Yuck, I don't know about all that. If you noticed, Bernanke was very careful -not- to use the word "recession," but things like "the economy has continued to expand." What exactly does that mean? I was pretty entertained by this translation of BB's speech: http://www.236.com/news/2008/07/15/federal_reserve_chairman_ben_b_1_7732...
