The Financial Rescue Plan: Congress about to make things worse with unintended consequences?

MarketWatch’s article chronicles the devil in the details for the US Financial Rescue Plan… now stalled. And from what I’ve read… I’d like to stall it considerably even longer.

On one side we have Henry Paulson and Ben Bernanke putting some serious pressure on Congress for swift passage… and warnings not to load it up with controversial amendments.

On the other, we have a bipartisan crew of lawmakers in varying stages of skepticism. For those that are in support of most… indeed, even of the concept of the US Treasury becoming an unregulated real estate investor for the taxpayer… they’re arguing over piddly details.

Rep. Barney Frank, chairman of the House Financial Services Committee, said Monday that the Bush administration and Democrats have agreed to additions to the plan, including creating an independent oversight board and aid for homeowners facing foreclosure.

However, there’s uncertainty over a proposal to allow the government to take an equity position in companies that participate in the U.S. program. Frank, D-Mass., said that the Treasury had agreed, but reports later Monday afternoon said the Treasury hadn’t.

Bernanke and Paulson state they want both healthy and troubled financial institutions to participate in the plan, saying the equity warrants would limit participation.

Paulson also rejected a Democratic proposal that the government get equity warrants in return for the assistance, saying that it would limit participation. Treasury wants both healthy and wobbly financial institutions to participate, he explained.
In his testimony, Bernanke also came across as a strong supporter of the Treasury’s plan to buy bad assets off Wall Street’s books.
With global markets under “extraordinary stress,” there could be “very serious consequences for our financial markets and for our economy,” according to his prepared testimony.

“Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions.” Read Bernanke’s statement.

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Paulson didn’t come offering an olive branch to the legislators. He said that his mortgage rescue plan must be designed to hit the ground running, a clear signal that he will oppose any changes that he believes would slow down implementation.

The Treasury secretary said that he believes it has solid support from members of both parties. Paulson said that amendments to his package that would also cause controversy must be left out.
Congressional approval of the plan would “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy,” he said. Read Paulson’s testimony.

Paulson opposed a suggestion from Sen. Charles Schumer, D-N.Y., that the $700 billion be given to Treasury in tranches, calling it a “grave mistake.”

Even Chris Dodd isn’t complete sold, calling it “stunning” in it’s lack of detail.

“It would do nothing in my view to let a single family save a home. It would do nothing to stop a CEO from dumping billion dollars of toxic assets on the back of American taxpayers,” said Dodd.

“It is not just our economy at risk but our Constitution as well,” Dodd said, because it would allow Paulson to spend $700 billion “with impunity.”

GOP Richard Shelby stated this plan was not going to be “rubber stamped”… others even more emphatic, calling in (deservedly so, IMHO) “unAmerican”.

Shelby complained that there had been no time to consider alternatives.
And opposition was plainly seen among the backbenchers.

Sen. Mike Enzi, R-Wyo., said the plan would cost $2,300 per taxpayer. “This committee would not be doing its job if that were allowed to happen,” Enzi said.At that point, spectators in the audience of the hearing broke out in applause.

Sen. Jim Bunning, R-Ky., called the Paulson plan “financial socialism” and “un-American.”

There is no doubt that such a move… putting so much of the taxpayers’ earnings in the hand of virtually one man… is beyond risky. It is the antithesis of America’s economic foundation.

While Bernanke and Paulson argue it’s necessity, I have to wonder if they’ve thought of the most immediate repercussions… an instant devaluation of the dollar. The mere consideration of this plan has dropped the US dollar to a record low against the Euro since it’s debut in 1999.

The dollar suffered record losses against the euro on Monday as the potential negative consequences of the government’s $700 billion rescue effort weighed heavily on the currency.

The greenback’s weakness helped push equities sharply lower, including a loss of 373 points on the Dow, and sent crude oil prices to its biggest one-day price increase ever.

The dollar was down 2.33% to $1.4802 per euro as of 4:22 p.m. EDT. At its lows, the dollar was down to $1.4435 per euro, the lowest level since late August.

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The Treasury’s $700 billion rescue would allow the government to buy and hold toxic assets currently stuck on banks’ balance sheets. The plan is aimed at restoring confidence in the financial system and allowing banks to return to lending to businesses and individuals.

Pushing the nation’s debt level to new heights is among several potentially negative consequences of the massive bailout. Purchasing the illiquid assets from banks could push the government’s debt ceiling up by 6.6%. Even before the Treasury plan emerged, the Congressional Budget Office was already forecasting a budget deficit of $438 billion for the next fiscal year.

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The dollar has also been hurt by raised expectations that the Federal Reserve will increase interest rates before the end of the year. The new hopes for a rate cut have been fueled by the latest turmoil in the financial sector, including the bankruptcy of Lehman Brothers (LEH: 0.13, -0.17, -56.66%) and an $85 billion emergency loan to American International Group (AIG: 5.00, +0.28, +5.93%).

An interest rate cut would have negative consequences for the already-weakened greenback. The Fed has slashed interest rates by 3.25 percentage points since a year ago as the economy has slowed.

And we all know what happens with a weak dollar… astronomically high oil prices, which cascades into every arena of the taxpayer’s daily expenses… from transportation to food, from purchasing power to the ability of businesses to stay in business, and keep employees on payroll.

And indeed, late this afternoon comes an AP article saying many believe… with the recent ups and downs of nervous speculators and contracts… it appears poised for another hefty rise amidst concerns over the US financial situation and dollar value.

It was crude’s first down session in five days. Some decline was to be expected after crude soared 16 percent on Monday — the biggest one-day gain ever — partly because of a technical fluke.

Still, oil market watchers say crude is showing early signs that it may be poised for another big climb. They say tightening global supplies, weakness in the dollar and nervousness about the U.S. government’s $700 billion financial rescue plan could soon prompt edgy investors to shift funds out of equities and send a burst of capital back into safe-haven commodities like oil — potentially pushing prices back toward record levels and causing consumers more pain at the pump.

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“We could be back on the road toward $150 a barrel,” said Stephen Schork, an analyst and oil trader in Villanova, Pa. “If we can’t get any stability in the dollar and there’s further weakening in the economy, my fear is that it’s deja vu all over again. We’re going to see a lot of money piled back into commodities as an inflation hedge.”

There are a few analysts also saying it could go the other way… like from their lips to the oil gods’ ears, please. But they are basing that on the economic woes resulting in a severe useage drop by US cconsumers. Fact is, how much can we all “curtail” and still go about our daily tasks?

I think many of us are mulling over just what to do. But I’m rapiding coming to the conclusion that whatever we do, this US Financial Rescue Plan is *not* the answer.