The Economy

Floor Speech

THE ECONOMY -- (Senate - September 18, 2008)

Mrs. CLINTON. Mr. President, we have seen the financial landscape in our country reshaped overnight. The titans of Wall Street have been rendered insolvent or even bankrupt. These are firms that survived the Great Depression, world wars, the attacks of September 11, but were no match for a mounting credit crisis that was allowed to escalate in the shadows of our financial system.

The Federal Government has taken over Fannie Mae and Freddie Mac. Bear Stearns had to be rescued by JPMorgan Chase, after the Federal Government guaranteed J.P. Morgan's investment. While they are in talks to keep part of the company viable, Lehman Brothers has declared the largest bankruptcy in U.S. history. Merrill lynch has been purchased by Bank of America, and the Federal Government has agreed to rescue AIG.

This past Monday, we saw the largest drop in the Dow Jones Industrial Average since 9/11. Now even money market funds are affected; for only the second time in our history, one has been valued at less than 100 cents on the dollar. Alan Greenspan called this a ``once in a century event.''

In my State of New York, tens of thousands of hard-working employees have lost their jobs. The livelihoods of tens of thousands more who depend on Wall Street's economy are threatened as well.

New York City and New York State, already facing serious economic and fiscal challenges, will now be forced to contend with a battered Wall Street, the lifeblood of our State's economy. The sudden collapse of these firms and the Government takeover of some has shaken our markets and buffeted the economy as a whole. Many are now asking: What is next? I know that New Yorkers and other Americans are deeply concerned and more than a little bewildered. As our markets have grown more complex and interconnected globally, so, too, have the crises that have emerged. We are still sorting out the details.

One of the consequences of the secrecy and lack of oversight under the Bush administration is that we do not know what we do not know. But it is important to recognize what we do know about what went wrong so we can assess what needs to be done right now to make it right.

What we have seen over the course of the last 8 years is an administration that refused to recognize the threats that lurked in our economy--no matter what lurked just beneath the surface or what problems were facing middle-class families.

We know that many CEOs are paying lower tax rates than their receptionists. We know that President Bush and those who carry his mantle seek to lower those taxes even further. Middle-class families have seen their wages decline, even as the cost of living has skyrocketed. This administration has the worst job creation record in 70 years. Millions of families were locked into ballooning and unaffordable adjustable rate loans as this administration stood by denying there was a crisis. Regulations designed to keep pace with the markets have been steadily chipped away by Washington Republicans even as companies experimented to the tune of hundreds of billions of dollars in ever-more complex and risky financial instruments. Now, we were reassured that the risk was too diversified and investments too sophisticated to put our economy in jeopardy. Meanwhile, behind closed doors, the cracks were showing as the value of mortgage-based securities slipped day by day. And the President and his supporters in Congress repeatedly chanted--and still chant today--the mantra that the fundamentals of our economy are strong.

The administration waxed philosophic when middle-class families started facing foreclosures at record levels. The administration and its allies derided my proposals over the last 2 years to offer assistance to troubled homeowners seeking refinancing as a ``bailout.'' They dismissed my concerns and the concerns of millions of Americans even as the storm clouds gathered. They said they didn't believe the Government should intervene and provide borrowers an affordable opportunity to avoid foreclosure.

Even when I and others warned the Bush administration repeatedly from the start of this crisis, that decisive action was demanded immediately to help families stay in their homes, that that was the best way to stave off a deepening economic crisis, their only responses were predictions for a ``soft landing'' and that the crisis could be contained.

As I traveled throughout our country, I could see that no soft landing was forthcoming. Many families, hundreds and even thousands of miles from Wall Street, were having their lives turned upside down by the home mortgage crisis and the ripple effect being felt throughout the economy as a consequence of the broken economic policies of the last 8 years.

Unfortunately, the Bush administration waited until this past summer to admit that massive housing relief was necessary. The administration finally supported, in concept, much of what I had proposed--mortgage modifications, freezes for unreasonable mortgage rate increases, and an expanded role for the Federal Housing Administration. But their response was halfhearted, without adequate resources or a commitment to enforcement. So the home mortgage crisis slowly but surely eroded the value of risky debt instruments upon which Wall Street firms were dependent. The house of houses of cards began to fall. My proposals, as well as those of others, were falsely greeted as too much, too soon. Now we are forced to reckon with too little, too late.

When giant Wall Street firms revealed their dire straits and turned to this administration for the exact same help as we had sought for middle-class families--discounted loans, loan modifications, and Government-backed lending to weather the storm--Adam Smith was nowhere in sight.

Taxpayers have loaned these banks upwards of half a trillion dollars. After years of laissez-faire policies for the middle class, the Bush administration has acted on behalf of Wall Street, with the largest and most significant Federal interventions in the history of our modern financial system. The largest banks in the world could have closed-door meetings with the White House and Federal Reserve and Treasury Department to discuss their bailout options, but millions of homeowners with mortgages worth more than their homes or who are facing default and foreclosure don't have the same opportunity.

This administration seems to be, once again, paralyzed. I represent both the workers and the homeowners and the investment firms. I wish we had taken action long before this, for the sake of all of my constituents. But now we must have a concerted, focused effort. I don't believe we can wait until the next President. I am extremely hopeful and optimistic that we will have a President who will work with us to resolve our economic challenges, but I don't think we can wait.

However, I do believe we can avoid a deepening crisis. We can take steps right now to address the root causes of what is taking place in our economy to stem the tide of foreclosures, mortgage defaults, and the aggregating consequences in the credit markets, on Wall Street, and throughout the global economy. But we must cast aside the haphazard, halfhearted approach of this administration and bring every stakeholder to the table to seek out and implement the right solutions.

We must be as vigilant on behalf of homeowners and middle-class families as we are on behalf of Wall Street firms. We must chart a new course based on the facts at hand, not the ideology at work for 8 long years. We have tried being reactive. It is now time to be decisive.

No option should be off the table--certainly not because they don't fit into a narrow ideological prism that this administration has abandoned for some at the first sign of trouble. Ideologues in Washington or in the market who thought that the only danger to the marketplace was the Federal Government are now going hat-in-hand to that same Government seeking help to stay afloat.

So to those who suggest that the steps taken thus far are enough, let me be clear: We may need to take even more significant steps to avoid a self-sustaining cycle of depressed home prices and foreclosures, with the consequent effect on the entire marketplace. We have already pumped hundreds of billions of dollars of liquidity into the markets, but we still cannot see the end of this crisis.

The biggest problem now is that our entire financial market is anchored by the mortgage securities that are untouchable. We have seen the banks and the financial institutions that had the largest exposure to these instruments among the first to fail. Now we have begun to see some of the mightiest institutions--even those making a profit--fall by the wayside and the market thrown into upheaval, and others the target of predatory short-sellers.

The Federal Reserve has used virtually every arrow in its quiver, from rate cuts, opening its lending windows, and, in desperation, has even created some new arrows through its new lending facilities. By some estimates, the Fed has put out more than half a trillion dollars through discounted loans, bailouts, and takeovers to stabilize the market and the economy. While necessary to prevent even deeper disaster, we have seen that the benefits of these actions have had limited effect.

This situation reminds me of that old fable where people are standing by the side of a river and they keep seeing babies being rushed down the river in the current. They desperately reach out and try to save as many babies as possible. Day after day, they are reaching out. They get new tools, they build a bridge, they get a ladder, and they are constantly trying to get to those babies, hoping they can save many of them. Finally, someone walks up and says: Who is throwing them in? Go upriver and find out the real problem and stop that.

The real problem has always been the way our home mortgage system got totally out of whack, with new kinds of instruments that were sold many times over, with very little regard to the realities of life, human nature, and the inevitable ups and downs in the economy, with the result that until we reach in and fix the home mortgage crisis--and we can bail out everybody from here until kingdom come--we will not get a handle on this economic crisis.

Here is what I believe we should do:

First, in light of historic bank failures, even with the largest Federal intervention in the history of the mortgage market, we need a government entity, a modern-day homeowners loan corporation, referred to as HOLC, or we need to build on the Resolution Trust Corporation created to help deal with the savings and loan crisis. I personally believe and was among the very first to suggest that a HOLC, a homeowners loan corporation, could be a preferable way of unfreezing and beginning to fix our struggling mortgage market.

Some of my colleagues and many other respected economists and Government officials have called for the creation of an entity like the Resolution Trust Corporation which was created after the savings and loan crisis to liquidate in an orderly way the virtually worthless assets that the failed S&Ls held.

Yesterday in the Wall Street Journal, Paul Volcker, Eugene Ludwig, and Nicholas Brady made such a proposal. They said a HOLC, RTC--we have to come up with an entity that will assume these debts and burdens and begin to work our way out.

Last spring, when I called for a modern version of the HOLC--that is the Depression-era entity that bought up old mortgages and issued more affordable ones in their stead--most people didn't pay much attention. But I think it is important to note that by the time the HOLC closed its books, that agency had turned a small profit and helped over a million people keep their homes. And this was 70 years ago.

Our population has grown dramatically. Obviously, if we did it right, we would be able to save a lot of homes, and I think if it is administered correctly, it could be actually a net expenditure or even winner for the Federal Government.

With the FHA reforms I long championed and adopted this past summer in our omnibus housing bill, the FHA could be a modern home ownership lending corporation. But we need to look to new ways to revive and, if necessary, create a new market for mortgage securities based on sound accounting, transparent recordkeeping, and responsible lending.

The PRESIDING OFFICER (Mrs. McCaskill). The Senator has used 10 minutes.

Mrs. CLINTON. I ask unanimous consent for an additional 10 minutes.

The PRESIDING OFFICER. Without objection, it is so ordered.

Mrs. CLINTON. Madam President, I did not know I had a time restraint.

A new government entity such as the HOLC with focus on attacking the source of the problem can serve a purpose of clearing a lot of those toxic mortgage securities from the market. We know there will not be any semblance of a normal or orderly marketplace until we have found a way to resolve these mortgage securities that are metastasizing in the bottom of our markets.

By taking this paper out of the market and quarantining it in this new entity, we will give the market breathing room to recover. We also will be able to set the stage for an orderly sale of these securities and in return allow some of them to recover and regain some of their value. Perhaps as importantly, not only would our financial markets stabilize, but so would our housing markets.

This is an extraordinary measure, but it is not without precedent. This is the greatest market upheaval since the Great Depression. We are, indeed, in crisis, and in times of crisis there are opportunities for leadership. Congress can show the American people that leadership by working with the President to embrace this bold proposal to take immediate action to address the abusive and manipulative short-selling practices that are rattling the markets, threatening firms and jobs, and sending shock waves across the broader economy.

I commend the SEC for yesterday tightening rules against manipulative short selling. The SEC's rulings are a positive step in curbing the heightened volatility casting uncertainty on domestic markets and financial institutions. However, the Commission did not go far enough.

As a Senator from New York, I have a special duty to represent the workers of the financial services industry and to try with all my might to retain New York City as the financial capital of the world. The abuses that have disrupted the markets today will impact the lives of so many far beyond New York. So I think it is necessary for the SEC to take steps similar to the emergency rule it imposed this past July when the Commission ``concluded that there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets.''

Conditions now pose a greater threat than they did in July. Several of the institutions that the Commission sought to insulate from abuse do not even exist or certainly not in the same form they did 2 months ago.

The situation is evolving rapidly, so we need to stay a step ahead, not a step behind.

I urge the Commission, as I expressed yesterday in a letter to Chairman Cox, to move toward a temporary moratorium on all the abusive and manipulative short-sale practices associated with ``substantial financial firms,'' such as those the Commission identified in July.

A temporary moratorium would allow the marketplace to take a step back, take a deep breath, and it would allow the Commission and other regulators to identify and weed out the sources of these abusive transactions.

Moreover, the Commission should give close consideration to the many calls for the immediate restoration of the uptick rule, whose repeal has been linked to the recent market volatility and proliferation of these short-sale transactions.

I know there are technical problems in moving toward digitalized trading, but we ought to figure out how to handle that.

Third, I am calling on President Bush to convene an economic summit that brings together leaders in the administration and Congress with lenders, consumer advocates, nonprofits, financial institutions, and all the stakeholders. Such a summit, I believe, would restore confidence and demonstrate that the entire country is focused on solving the problem we face.

Fourth, I want to propose once again that we aggressively pursue and encourage mortgage modifications. I have introduced such legislation. I believe it is important. Madam President, 10 million homeowners are underwater today, carrying more than $2 trillion in mortgage debt. That is a huge anchor on our markets and our economy. Modification done right is a strategy that serves lenders and borrowers, as well as the broader markets.

Fifth, it is clear that for too long, the rapid evolution of the securities and banking industry overwhelmed our regulatory framework, resulting in an entire shadow banking system that operated outside of oversight and without accountability.

It is not enough to shift responsibility or move lines on a flow chart. We need a new regulatory framework. We have been living off the one from the Great Depression. Now is the time to create a new framework.

Sixth, I proposed the Corporate Executive Compensation Accountability and Transparency Act to impose new transparency rules on executive pay and the accounting techniques that hide compensation and provide shareholders a say in executive compensation packages.

Finally, and seventh, I am proposing that we require any financial institutions borrowing money from the Federal Reserve's new lending facilities to open their books and ensure accountability and transparency to identify unsound practices.

These banks and other entities have tapped the Fed's new lending windows for over $300 billion in capital. They shifted a lot of that risk onto the backs of our taxpayers. These are unprecedented interventions, and we should make sure these companies are not using taxpayers' dollars to subsidize golden parachutes or risky investments, throwing your good money after bad. If we are bailing you out, we deserve to know exactly your liabilities, and you have to be part of this new regulatory framework.

This crisis has not abated. It is time for us to start acting like Americans again. There isn't anything we can't solve once we put our minds to it. For that we need leadership. I know that our leader, Senator Reid, has said the Senate will remain in pro forma session. We are ready to work with the administration, to work with the other stakeholders to change course and end the failed economic policies and failure of regulatory oversight that brought us to this point.

There is much more we need to do. Individuals have to take responsibility, we know that, but in this dynamic environment, we must work together to stabilize the market, tackle the root causes that have festered too long, and restore confidence in our economy.

We will weather this storm, but let's do it sooner instead of later. Let's try to save as many boats in the water right now instead of cleaning up the wreckage on the banks. I believe we can do that.

I thank you, Madam President, for your attention. I hope we will be able to start seeing action very soon.

I yield the floor.

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