By Emily Kaiser - Analysis
WASHINGTON (Reuters) - With Main Street up in arms over a proposed $700 billion financial bailout of Wall Street, lawmakers turned to top U.S. officials to make the case for them that failure to act would unleash a financial armageddon.
While most congressional leaders have conceded something must be done to avert an economic crisis, they have had little success so far in explaining to the electorate why Wall Street’s misfortune could soon spread far and wide.
Grim economic outlooks from Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Congressional Budget Office Director Peter Orszag drew a clear link between financial market turmoil and real-world pain. The White House announced that President George W. Bush would give an economic address to the nation on Wednesday evening.
Less than six weeks away from elections, with the entire House of Representatives and one-third of the Senate up for grabs, congressional leaders were fielding angry phone calls from voters who felt they were essentially being asked to pay for Wall Street’s mistakes.
“The problem is, the people asked to clean up all the broken furniture, they didn’t even get invited to the party,” said Rep. Lloyd Doggett, a Texas Democrat. “That’s why so many of the people that are contacting me ... are not just against this bailout, they’re very angry.”
The Treasury Department has asked for the extra funding so it can buy hard-to-value and nearly impossible-to-trade debts off of banks’ books in the hope that they will then resume normal lending and boost the broader economy.
Bernanke and Paulson have repeatedly stressed that the cost to taxpayers would probably be far less than $700 billion because the government would intend to resell the assets -- perhaps even at a profit -- once market conditions improve.
Sen. Charles Schumer, the New York Democrat who chairs the Joint Economic Committee, said he agreed Congress should act and act soon, “but let us be clear: Americans are furious.”
“I am sure that every single one of my colleagues on both sides of the aisle has heard what I have heard from my constituents -- amazement, astonishment and intense anger. And they are right to be astonished and very angry,” he said.
That ire has compounded economic worries and given a boost in the polls to Democratic Sen. Barack Obama in what has been a tight presidential race against Republican Sen. John McCain. McCain said on Wednesday that the bailout plan was unlikely to pass in its current form and he was suspending his campaign to return to Washington to help with negotiations.
Rep. Steven LaTourette, an Ohio Republican, drove home the problem facing lawmakers in selling the massive bailout plan, in an exchange with Fed chief Bernanke at Wednesday’s hearing.
“Over the weekend, all the leadership left the White House. They were all ashen faced. They were using words like ‘Armageddon,'” LaTourette said.
“I need you to tell that guy on his couch, when he watches the 6 o’clock news, what happens if we don’t do this -- to him, not to the markets, not to the guys on Wall Street,” he added.
Bernanke was blunt in his reply: ”It’s all esoteric Wall Street stuff. It doesn’t have any meaning to people on Main Street, but it connects very directly to their lives.
“Credit is the lifeblood of the economy,” Bernanke said. “If the credit system isn’t working, then firms cannot finance themselves, people cannot borrow to buy a car, to send a student to college, to buy a house.”
In his most stark assessment since the credit crisis exploded 13 months ago, Bernanke said Congress must move quickly “to address the grave threats to financial stability that we currently face.”
“When worried lenders tighten credit, then spending, production and job creation slow,” he added.
Goldman Sachs economist Jan Hatzius said Bernanke’s tone was unusually blunt.
“The term ‘grave’ is extremely strong language for a Fed chairman and makes clear the degree of concern that he -- and presumably others at the Fed and in the government -- have with respect to the ongoing financial turmoil,” he said.
Wall Street economists point to an alarming spike in borrowing costs across debt markets that fund everything from credit cards to short-term business loans as evidence that the credit crisis is moving well beyond its housing-market roots.
“If businesses and households are cut off from credit, and the economy is not creating jobs, there is no fuel for spending,” said Michael Darda, chief economist at MKM Partners.
The Congressional Budget Office’s Orszag took it a step further. If Congress failed to approve the rescue package, he said, “there is a very substantial risk of utter financial market chaos.”
“You would have a financial market meltdown that would cause very severe dislocations ... maybe on the magnitude of the Great Depression,” he added.
Editing by Leslie Adler