Paul Wellstone Mental Health and Addiction Equity Act of 2008

Floor Speech

PAUL WELLSTONE MENTAL HEALTH AND ADDICTION EQUITY ACT OF 2008 -- (Senate - October 01, 2008)

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Mr. HATCH. Mr. President, I rise today to express my great concern about our economy. Time is of the essence. We must usurp the opportunity to be proactive, instead of reactive to our financial situation.

On Monday, my colleagues on the other side of the Capitol voiced the opinion of their constituents and many Americans. If we are going to spend up to $700 billion in taxpayer dollars, we need to reach out beyond Wall Street and into Main Street. Many people fear that the economy is facing a perfect storm. While this fear may be justified, we need to make sure that the next step we take, is a step in the right direction.

There have been several proposals discussed since the House rescue bill failed to pass. While there have been disagreements as to the type of plan, everyone agrees that something must be done immediately. Economists, professors, and government officials all are in concert that the consequences of inaction far outweigh the cost of a plan to stabilize the economy.

The Economist magazine pointed out that the current situation ``cannot last long without causing immense damage. Companies will be unable to raise new money, and more importantly, refinance old loans. Corporate bankruptcies will soar. Consumers will also find it difficult, or expensive, to borrow. The result will be a sharp downturn in demand that will push the economy into a deep recession.''

Scott Schaefer, a professor of finance at the University of Utah's School of Business, agrees that the ``idea of `do nothing' isn't feasible--when banks fail they necessarily fall in the lap of the FDIC. So the losses from failed banks fall on taxpayers.''

Kristin Forbes, an MIT professor and former member of the President Bush Economic Counsel, has stated that while this may not be a perfect bill, ``the risks of not passing it are greater than passing it. If we wait too long, it might cost us much more.''

Hussan Ally, an economics professor at Ohio State University, sees the failure to act as resulting in ``the whole economy being in a depressed state for a long time. We're talking about the Great Depression all over again.''

I believe that one reason why the financial rescue legislation failed to pass in the House was because the American people are not convinced that this bill would help Main Street America or them personally. Along with this, I believe that many Americans fail to see the connection with the current crisis with our financial markets and their own future economic well being. To better illustrate how our failure to address this situation could affect everyday Utahns, and Americans everywhere, I want to discuss three hypothetical families.

First is Anne Wilson, a single mother of two high schoolers whom she hopes will be college-bound in a few years. Anne earns $55,000 per year as an executive assistant. Through hard work and sacrifice, she purchased her own home a few years ago. However, she recently refinanced with an adjustable rate loan. With the savings on her monthly mortgage payment, Anne set up a 529 college savings plan to begin saving for her children's education. Even though Anne knows the cost of education is rising rapidly, she has a plan to see that her children can go to college. With decent returns on her investment in her 529 account, combined with student loans and possibly scholarship money, she believes it will be possible.

However, our failure to provide a financial rescue plan could put Anne's dream of college for those kids in jeopardy. First, we can expect the securities in which she has invested through the 529 plan will be growing much slower or possibly not at all. In fact, there is a good chance that she will lose some of the money she now has invested. Second, education loans may not be available because of the credit crunch, which could grow far worse without the actions of the federal government.

Until the housing crisis, Anne had some equity in her home that she might have tapped to help with the college costs. But that equity has evaporated, and even if it had not, it might be very difficult to get a loan. Anne will certainly have to readjust her plan, or even abandon the hope of providing college for her kids altogether. Moreover, if interest rates continue to increase, which is likely in the absence of action on a rescue plan, her mortgage payments will go up, adding to her anxiety.

Next, let us consider, John Baker, a 64-year-old sheet metal shop supervisor, who hopes to retire in 2 years. For the past 25 years, John has put the maximum amount of money in his company's 401(k) plan. Over the years, this nest egg has grown into a tidy sum. In fact, combined with the Social Security he plans to receive and the earnings from a part-time job, John thought he was all set. Now, however, things have changed drastically. His investment portfolio in his 401(k) took a nosedive and is not likely to recover anytime soon.

Moreover, with rising unemployment, he is not as sure as he used to be that he can get the good part-time job he was planning on. All in all, John is having serious second thoughts about retiring and is wondering if he needs to keep working to age 70 or maybe beyond. Now a new worry is crossing John's mind. He heard his company's CEO say the other day that if business does not pick up, there will have to be some layoffs in his shop. Given his age and relatively high pay, John is nervous that he might be one of the first to be let go.

Finally, we have Amanda and Derek Peterson, who five years ago started a small flower shop. With Amanda's business background and Derek's artistic imagination, the business soon took off and they now have three locations and a total of 15 employees. The Peterson's had been talking of expanding the business to two more locations in a nearby city, but such a move would take an investment of at least $500,000. Based on their track record so far, getting a business expansion loan would not have been a problem before the financial crisis.

Now, however, Amanda cannot find a single bank that will extend them a loan. Moreover, they recently have had to rely on credit card financing for running the day-to-day operations of the business. Their new worry is that their credit card limit will not be reduced or that the interest rate does not increase. Tragically, instead of making plans to expand their business, the Petersons are now talking about which employees they will have to let go if business does not soon improve.

The families in these scenarios, as well as all Utah and American families, have a great deal to lose if we do not act to build confidence and ease the credit crisis. Jobs and livelihoods are at stake.

This financial rescue is not a question of bailing out wealthy Wall Street bank managers who made bad investment decisions. It is about staving off a financial crisis on Main Street that threatens every one of us and our plans for our families, our hopes for the future, and the growth we all depend on to keep American what it is.

While the failed bill would have saved the banking industry, we could be more proactive in jumpstarting the economy. The failed plan was only a remedy to a crisis and not a cure for the economy. In order to cure the economy, we must spur job growth and investment. The most obvious and substantial way to achieve this is by providing tax relief to Americans. Let's put money back into the pockets of taxpayers.

That is why I have proposed including the tax extenders legislation for several reasons. First, it is long overdue. Businesses and individuals depend on these tax incentives in order to invest. Businesses invest in research and technology which in turn creates jobs. Individuals invest in retirement savings, college tuition, and health care costs.

Adding the AMT patch would protect 23 million additional American families from the clutches of the alternative minimum tax for this year. The research credit, which is vital to U.S. economic growth and job creation, and the energy tax incentives, which will also add many new jobs and help us move to energy independence. It is estimated that the solar and wind tax credits alone are predicted to create more than 116,000 jobs. I have also proposed other tax incentives aimed at encouraging private investment of troubled mortgage-backed security instruments.

In order to build more confidence in our banking system, I have suggested increasing the FDIC insurance limit. This insurance limit has not been adjusted since 1980 and increasing it will give individuals much-needed assurance that their deposited savings are secure.

We can do more to improve the economic situation. I do not believe the answer is providing one bailout over another bailout. I do not believe we should be handing out rebate check after rebate check. I believe we need to assist in slowing the inevitable route our economy is heading and providing incentives for investment and job growth. That is why I have proposed including the tax extenders, providing incentives to invest in mortgage-backed securities, and raising the FDIC insurance limit.

Instead of stabilizing the economy by only injecting cash into the system, we should reverse the direction the economy is headed by laying the groundwork for a strong economic future. Extending these tax credits will provide for more growth, innovation and job demand into the future.

I would like to now spend some time and drill-down into some of the finer points in this legislation and address some of the broader concerns raised by our current economic situation.

As I noted before, we should move ahead with the package to support the consumers of the financial sector's services--depositors, check-writers, credit card users and the merchants who rely on them, people who need to transfer cash or who need to borrow working capital for their businesses--not the shareholders or managers of the institutions in trouble. We must unfreeze the credit markets in a manner that lets depositors have the full use of their money, and that allows the check-writing and payments mechanisms to function. Otherwise, perfectly solvent individuals and businesses will not be able to pay bills or pay their employees, even though they have cash.

Toward that end, the Federal Reserve should be willing to let banks use the impaired securities as collateral at the discount window, at some fraction of their face value that represents a reasonable first guess at the real value of the assets. The banks will be responsible for repaying the Federal Reserve the amount they borrowed, whether the bonds turn out to be worth more or less than this amount later on. This will tide the financial system over until the Treasury purchase of the distressed assets gets under way.

The proposal before us would have the Treasury arrange for the evaluation and unbundling of the mortgage-backed bonds. The process will have to determine which of the loans are performing, and which are not. As the content and status of the mortgages' underlying assets becomes known, people will know what the securities are worth, and the market can then attract private capital to take them over.

Ultimately, banks that do not have enough capital to be able to function will either have to raise additional funds in the market, or the FDIC must step in to close them or arrange a sale or merger to a stronger bank.

I support the increase in the amount of deposits covered by the FDIC. While the uncertainty over the health of the banking system continues, I would like to go further and extend deposit insurance temporarily to all checkable deposits, including money market funds. All institutions so protected should be charged a fee, such as the banks pay now, to replace any losses the FDIC incurs.

The FDIC is allowed to borrow from the Treasury. That borrowing facility should be reaffirmed and enlarged as needed. The limit on the national debt will be increased under this bill, to enable the Treasury to purchase assets. If further increases are needed to allow for additional borrowing by the FDIC, they should be forthcoming. However, expansion of FDIC coverage might well discourage withdrawals from bank and money market accounts, and render the additional assistance unnecessary.

Other steps need to be taken in the short and long run. Urgent regulatory changes must be made to support this program. More broadly, Congress must insist that there be better coordination between regulatory, monetary, and tax policy in this country in the future.

We still need to come to grips with Fannie Mae, Freddie Mac, and the rest of the Federal agencies that intervene in the housing sector. Relying on the institutions that contributed to the financial chaos to clean it up does not strike me as the best approach.

Part of the current problem stems from the unfortunate interaction of two regulatory excesses: minimum capital requirements for financial institutions, coupled with a blind, rigid mark-to-market rule for valuing assets on a bank's books. The SEC and the Financial Accounting Standards Board, the latter a private entity, are discussing changes in these areas. In my view, they need to move at once to suspend mark-to-market rules and to ease capital requirements.

When markets malfunction, and trading in a class of securities simply stops, it is wrong to force institutions to pretend that assets have no value, when, in the longer term, they are clearly worth something close to their face amount. This is especially damaging when the forced write-downs cause the institution to fall below minimum capital requirements. They must then be closed or merged, often at fire sale prices. This further shakes confidence in the financial system, discouraging lending among banks, lowering asset prices further, and making more institutions run afoul of the regulations.

Down the road, Congress needs to hold hearings to review the damage that mark-to-market rules and capital requirements have done in the present situation, and what changes would be advisable. We also need to consider the process that generated these rules. We need to examine why these difficulties were not foreseen when the regulations were written, and whether some alternative arrangements for input by the Treasury and the Federal Reserve, as well as the business community, might produce better results in the future.

The rest of the economy is in urgent need of attention too. This package fails to address broader economic problems. The long economic expansion is aging, as the stimulus to investment and hiring enacted in 2003 has run its course. Investment spending is slowing, which would lower productivity gains and wage growth. We need to keep business fixed investment in new plant and equipment and commercial construction moving forward. That would help keep employment, productivity, and wages growing, and keep the rest of the economy healthy.

The 2008 stimulus package contained one progrowth investment incentive. That was bonus expensing, immediate write-off of one half of investment in equipment undertaken by the end of 2008. We should extend that provision through 2010. Ideally, this reduction in the tax burden on creating and operating capital in the United States should be made permanent, as should the 15 percent tax rates on dividends and capital gains. These steps would raise real returns to people doing business fixed investment, leading to stronger growth. It would raise returns to savers and lending institutions as well, aiding in the financial recovery.

Congress has paid too little attention to the impact of taxation and regulation on economy activity and expansion. We have been content in recent years to dump responsibility for economic growth on the Federal Reserve, while we have let fiscal policy run amok, letting taxes rise and spending the proceeds several times over. Those few recent tax changes that were aimed at promoting saving, investment, and hiring are scheduled to expire. We need to remember that it is Federal tax and regulatory policies that primarily affect real economic activity. Lowering the tax and regulatory barriers to growth helps to expand the private sector. Government spending largely displaces private activity, and forces higher taxes that retard growth.

We have tasked the Federal Reserve with maintaining stable prices and low unemployment. In fact, an overly simulative monetary policy that generates inflation and weakens the dollar ultimately raises tax rates on investment, destroys growth and jobs, and injures people on fixed incomes. Any initial expansion of real output quickly decays into speculative bubbles in commodities, housing, or an inflation of the general price level. The Federal Reserve can hit both targets only by focusing on the goal of stable prices and a sound currency.

Unfortunately, beginning in the late 1990s, the Federal Reserve abandoned a decade of reasonably steady monetary policy, and indulged in a policy of go-stop-go. It eased excessively after financial disturbances and the Y2K panic of the late 1990s, contributing to the dot.com bubble. It tightened too much in 2000, contributing to the recession. It eased too much, and held short term interest rates too low too long, following the recession, contributing to the commodity and housing bubble, and the weak dollar. Now, we have seen the resulting imbalances force the economy to a stop.

We need to have a reconsideration of the Humphrey Hawkins Act, which gives the Federal Reserve a congressional mandate to pursue apparently conflicting goals. At least, they conflict if the conventional wisdom of the 1930-1980 period is applied, in which printing more money and encouraging a little inflation is considered beneficial, rather that counterproductive. We need to have a heart-to-heart discussion with the Federal Reserve about keeping to a stable policy, and keeping its eye on the long-term prize.

The country would have been better served if the 2003 tax changes had been enacted in 2001 in place of the Federal Reserve's aggressive easing in the 2002-2005 period. The correct policy mix, then, now, and always, is sound money, low tax rates at the margin on work, saving, and investment, and a sensible regulatory scheme in which the pieces do not conflict and the costs are kept to a minimum. That policy mix rescued us from the stagflation of the 1970s. It can do the same today.

Unfortunately, Congress deals with these issues on a piecemeal basis. The executive branch is divided into many departments and agencies that have their own narrow focus and push different agendas. Differing views on how the economy works add to the confusion. Somehow, we need to get some coordination and oversight of this whole process, and make certain that all the players understand the broad objective and the role that each must play to make it work. I intend to push for that in the year ahead.

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