Why I voted against the Bush-Paulson bailout
This past Wednesday evening, President George Bush asked the American people for $700 billion to toss a lifeline to Wall Street. The President warned that the alternative to government intervention would be "a long and painful recession" which would include job loss, bank failures and the continued slide in home prices.
The consequences of inaction would be severe. However, I wanted to make sure that Congressional actions protected the taxpayer and did not allow the Wall Street executives who got us here to rack up big golden parachutes with taxpayer money. The heavy-handed push from the Bush Administration and this Democrat majority places too great a burden on taxpayers with no guarantee of success. The plan voted on in the House incorporated watered down aspects of executive compensation limits and a portion of a solution which would use more private capital, but ultimately I was disappointed the Congress could not come together and provide solutions that keep our economy on track without exposing taxpayers to extraordinary risk. I voted to protect the taxpayer.
Although the Bush-Paulson bailout was crafted seemingly overnight, it took years of poor economic decisions to get us into the current crisis we face. These bad choices, coupled with rising fuel and food prices, have sent a ripple through our entire economy. In order to dig ourselves out of this hole, we must understand how we got here in the first place.
Over the past eight years we have had an unprecedented push toward increased home ownership - on the face of it, a good thing. During this time the Federal Reserve kept interest rates artificially low to spur growth, especially after the terrorist attacks of 2001. While this policy helped the economy recover temporarily, it contributed to an ease of access to credit for housing, regardless of one's ability to pay the loan. Together with a lack of oversight of market activities, homeownership rates climbed to new levels.
In most recent years, there was an explosion of financial innovation that allowed increasingly risky mortgages to be originated. Lenders began bundling loans into what are called Mortgage Backed Securities (MBS) and selling those risky loans through Wall Street. This allowed banks to clear loans off of the books and provide additional liquidity for more loans, but also created a distance between the originator and the performance of a loan, which further contributed to relaxed lending standards.
The MBS ultimately are only as valuable as the underlying stability of the mortgages comprising the MBS, meaning the stability of the financial instrument is dependent on the ability of borrowers to make timely payments. When housing prices declined, many homeowners found themselves with houses worth mush less than what they owed. Increasing defaults and foreclosures shredded the balance sheets on Wall Street and lead to a restriction in credit availability, which is sending a ripple throughout the entire economy.
Unfortunately, much of the financial innovation and loosened lending was predicated on a near-universal belief that housing prices would never decline. The optimism that defines the American spirit regrettably blinded many regulators who did nothing to keep lending practices in check. The promotion of homeownership saw this accelerated growth as an advancement of our economy, rather than a phenomenon to be approached with a cautious regulatory eye.
We now face one of the most serious financial crises since the Great Depression, and we must take action, but at what cost?
I am a firm believer in the free market. Our nation was built on the premise of economic freedom - the freedom to succeed and the freedom to fail. Everyday hardworking Illinois 6th District families make tough financial decisions. We ought not take advantage of this prudence to cover the misdeeds of Wall Street. That's why I pushed for bipartisan solutions that would have leveraged private funds, not taxpayer dollars, to fix the logjam that plagues our financial markets.
Unfortunately for the taxpayer, Congress pressed on with its plan to impose the largest corporate bailout in American history over my objections. Passing the buck - literally - to the American people is a disservice to the majority of families, senior citizens, veterans and small business owners who pay their bills every month and make their budget work.
Ultimately, we need a regulatory overhaulnot more regulation, but more effective regulation. Our new millennium financial system is regulated by a New Deal regulatory structure. Many of our difficulties today stem from the fact that our regulatory infrastructure could not contemplate and hold in check robust financial innovation. We will see our way through to the other side of this crisis. When we do, I will be committed to advancing a bipartisan agenda to ensure taxpayers are never again asked to shoulder such a burden. These are trying times with enormous challenges, but challenges we can meet.