United States Senate, Washington, DCFriday, September 26, 2008

 
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.