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Press Conference With Rep. Jeb Hensarling And Other House Republicans - Wall Street Bailouts And The Economy

Press Conference

Location: Washington, DC

Also Participating: Rep. Tom Price; Rep. Michele Bachmann; Rep. Tom Feeney; Rep. Scott Garrett; Rep. Marsha Blackburn

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REP. HENSARLING: (In progress) -- off the sidelines and put it into the economy to give struggling American families greater job security and job growth. And because of that, House conservatives again are sending a letter to our Federal Reserve chairman, our secretary of Treasury and say no more bailouts. The bailout we are interested in today is bailing out the American taxpayer.

At this time, we will hear from Tom Price of Georgia.

REP. PRICE: Thank you, Jeb. My name's Tom Price. I represent the 6th District of Georgia and also am a member of the Financial Services Committee.

The line -- the line between the government and the private sector has become blurred. What's public? What's private? Until that distinction is clear, we will continue to see instabilities in the market. An expectation has developed that the government is the lender of last resort. Just like with Fannie Mae and Freddie Mac, this causes unnatural distortions within the market. We must clearly and demonstrably stop bailouts and end this unacceptable burden on the American taxpayer.

Risk is an integral part of our economic system. I would not hesitate to remind individuals that this is the most successful economic system in the history of nations. It allows reward, but with reward comes risk. There must be both. When we don't allow corporations to fail, we're privatizing profit and socializing risks on the back of the taxpayer.

Secondly, clarity is absolutely necessary with regard to how the Federal Reserve will act. The lending authority of the Fed may, in fact, be a useful tool, but not when used arbitrarily. What conditions must be present for the Fed to act? This policy should be transparent in order to properly protect taxpayers and their hard- earned money.

And finally, moving forward, we must closely examine the relationship and the apparent collusion between the Federal Reserve and the Department of Treasury. They've obviously been working in cooperation, but they've yet to involve all of Congress in their decision-making process. The Federal Reserve seems to have an unchecked access to the taxpayer dollar. Our system of government must operate with openness and transparency and we demand that transparency.

This is bailout mania. As Mr. Hensarling mentioned, it's time to bailout the taxpayer. I would suggest it's time to return to solid economic principles.

Next up, the gentlelady from Minnesota, Ms. Bachmann.

REP. BACHMANN: Thank you, Mr. Price.

I'm Michele Bachmann from Minnesota's 6th Congressional District. And my kudos to the Chairman Hensarling for his leadership on this important issue. We are all -- our heads are spinning right now with the bailout mania.

First we were told that Bear Sterns was too big to fail. Then we were told that Freddie, Fannie were too big to fail. Then we were told AIG was too big to fail.

What's next, Starbucks: too big to fail?

We don't know where this is all going to end. Our current United States financial meltdown painfully demonstrates to us why government should not sponsor a private enterprise then wink and nod to shareholders that should a future bailout be needed, that pushover Uncle Sam would be standing at the ready to pay for GSE-created messes with the sweat of the brow of the forgotten man, the beleaguered American taxpayer.

My kudos to the chairman.

REP. GARRETT: Good morning. I'm Scott Garrett from the 5th District of the State of New Jersey. I just come to make just three points.

First of all, I concur with my colleagues here and the letter that we'll be signing to the administration, the secretary and the chairman with regard to our concern about their expansive use of essentially spending tax dollars to bail out these institutions.

Secondly point being made is this, is that after each one of these instances occurred, there was an obvious kneejerk optimism that resulted from it. After Bear Stearns, for a period of time, all the talking heads on TV said this was the greatest thing necessary, greatest thing possible. That lasted for about a week to 10 days and was gone.

Same thing happened, kneejerk optimism, after the GSEs. That lasted for a short period of time. It would have occurred after this instance, just this past week, but for the fact that you had the circumstances occurring of a breaking of the buck, which sent some sort of trauma through the marketplace, so you did not see that optimism right afterwards, but it would have occurred here as well.

The problem therefore is clear that just by taking these actions, as the Fed and the Treasury have taken in the past, has not addressed the fundamental underlying problems in the economy.

Now, Jeb has already alluded to some of them. And that is the tax rate policies. And Jeb and others here can speak more on that, as far as the economic growth package and other tax packages that the RSC has already put forth, as far as addressing capital gains tax, corporate taxes and expensing, what have you, which would go a long way to addressing the fundamentals for what has occurred over the last six months, since March 14th, when the Fed became involved here. None of these fundamental issues have been addressed.

The third point to be made here is this, that in addition to the work going forward that this letter would do, to encourage the administration not to take these actions in the future, we have dropped in a bill last night, a bipartisan piece of legislation, that would set a select committee to investigate both prospectively and retrospectively.

To look back retrospectively to see essentially how we got here, what role government and politics played in here, the chasing of the dollar, if you will, the campaign dollar and the foundational dollar contribution, how that may have impacted the effect on putting in place proper regulation and oversight in some of these institutions and prospectively to see what should be done in the future, to make sure that we're not put in this place in the future.

And with that, again, I commend my colleagues for the work and leadership that they have already taken on this. And one of the leaders in this area is the gentleman from Florida, Mr. Feeney.

REP. FEENEY: Thanks, Mr. Garrett. And to my colleagues, I'll note the irony that a hundred or so years ago, a lot of Americans thought the buggy whip industry was too big to fail. And perhaps bailouts would have protected the buggy whip industry from the auto industry and other innovations.

The other irony is that it was JPMorgan, the major central banker in America, before there was a Federal Reserve, that was bailing us out of credit crisis. As Morgan Stanley today apparently is looking for ways to get help out of its crisis, the questions remains. If there's no private sector left to bail out the taxpayer, and the taxpayers are the lenders of last resort, who bails out the taxpayer?

There's simply nobody left on the hook when, as was said earlier, you have privatized all of the risk-taking, encouraged people to take risk in search of higher returns or higher rewards, for Wall Street executives, and you have socialized, on the back of hard-working, prudent and responsible taxpayers, all of the risk.

So the rewards are privatized, the risk is socialized, and now it's the average man and woman or small-businessperson that is being asked to bail out and pay for the adventurous pursuits of Wall Street speculators and investors.

I will also say that the people in this room have been prescient in a number of regards. It's the people in this room that have said for a long time that Fannie Mae and Freddie Mac needed to be reformed, if not absolutely privatized; we needed to completely do away with the implied guarantee. The moral hazard that we have talked about, when you come in and bail people that have behaved irresponsibly out, means that the next day more people will be encouraged to take these risks. Where is the line drawn? One of the questions we have is that there is an ad hoc crisis administration, where tens or hundreds of billions of dollars is put on the line without any real rationale or transparency for the American taxpayer who is expected to do this.

And finally I will say, speaking about a history lesson, every single major market collapse in the United States and other free markets in history has been preceded by a easing of credit, easy money, and then followed by a credit contraction which prolonged the crisis. It also, if you look at the 1929 episode after the stock market bubble -- this was, you know, the most recent problem, was preceded by a subprime mortgage bubble.

The truth of the matter is, Herbert Hoover suggested highly progressive tax rates and they passed. That's exactly what the Democrats are doing. Hoover passed the worst anti-free-trade bill in history, Smoot-Hawley. It's exactly what the Democrats are doing by killing free trade. Hoover collectivized -- actually, Roosevelt collectivized a lot of private companies, then utilities and others, over regulated. Essentially that's what we did with AIG yesterday, is the American taxpayer became the largest -- the largest shareholder, or one of the largest shareholders, in the largest insurance industry, and we are regulating folks to death.

So, look, if a foreign power wanted to impose economic collapse on the United States, they would kill free trade, they would kill energy policy that's (American based ?), they would regulate to death, and they would put the taxpayer on the hook for the behavior of people that run major corporations. We are doing exactly what a foreign power that wanted to destroy America would do if they attacked our economy.

Q What is -- oh, I'm sorry. I'm sorry.

REP. BLACKBURN: Thank you so much. I'm Marsha Blackburn from Tennessee. And we'll get to those questions in about two seconds, because I'm not going to be long.

I will tell you I was talking with a constituent and they said, "I feel like I'm watching a series of "Survivor of the Worst Kind." And they said, "I feel like I'm waiting to see who's next and who's going to be able to remain a free-market entity." And that, I think, is where many of our constituents are, because they are deeply concerned about this. As one of my constituents said, you know, in other countries they just call this nationalizing.

And I think Mr. Garrett's points about how we go about this and the legislation he's bringing forth is so important. If you don't want something to happen in the future, you have to know what the cause is. We know what the effect is, but you have to know what the cause is and what the -- where you went wrong.

And as we talk about reviewing and reforming the regulatory entities, it is going to be an imperative that we look at what is an appropriate regulation and that the right questions be asked by regulators, and the right focus be put on the rules and regulations that are there to be enforced.

And also it is imperative, as Ms. Bachmann said, that we remember the taxpayer in this. The taxpayer is becoming the forgotten man, if you will. And they are being left with this burden, not at their choice, but they are being left with this burden, and it is imperative that we remember that taxpayer.

And I will return it back to Mr. Hensarling, so that you can ask your questions. Thank you. (Chuckles.)


Q Mr. Hensarling, this all happened under a Republican administration, supposedly one of your fellow conservative -- fellow Texas conservatives. What does that tell you about the Republican Party and the future? Next year are you guys going to have a major policy debate about the future of the party, whether Senator McCain's elected or not?

REP. HENSARLING: Well, number one, we could sit around and spend a lot of time on the blame game. My guess is, there is a lot of blame to go around.

But as Tom Feeney of Florida mentioned, one of the great reasons that we are in this economic pickle that we're in is because of these financial Frankensteins born in a government laboratory, called Fannie and Freddie, which have been protected by the Democrat Party and unfortunately a handful of Republicans for years. They presented a level of systemic risk to the economy that never would have occurred in a competitive free-market system. And you can look at how powerful Fannie and Freddie were, the kind of campaign contributions they spread around, the kind of Democrats that came off of Capitol Hill to go run those companies. And the type of securitization of those mortgages, which has now blown up, would not happen but for Fannie and Freddie. So as we're sitting here and assessing blame, I can certainly point to a lot of blame -- to the Democrats.

But more importantly than assessing blame, it's where do we go from here. And the Democrats are saying we're in tough economic times, so let's impose the single largest tax increase in American history on hardworking American families; at a time when people can't afford to fill up their tank, let's make sure that we look upon our oil and gas reserves as toxic waste sites and not as valuable natural resources; let's make sure we increase taxes on employers, and somehow that's not going end up costing jobs in America; let's have a trade war, and somehow this is going to help the American economy.

Again, House conservatives have put forth the economic growth plan of '08, which, number one, would lower the corporate tax rate, competitive with the EU -- we have the second-highest corporate tax rate in the industrialized world, save Japan -- it would take the inflationary gain out of capital gains, lower the maximum capital gains for business entities to that of individuals. It would unleash -- it would unleash, I believe -- a trillion dollars of capital into the economy at exactly the time we need it.

And again, the antidote to our problems is not taxpayer bailout. It's getting capital off the sidelines. And if you look at economic history, when we've had significant reductions in capital gains, we've promoted economic growth and -- AND -- increased tax revenues.

Anybody else want to --


Just as a footnote, the current administration did try over and over again to reform the GSEs, Freddie and Fannie. They were stopped at every turn by Chris Dodd and by Barney Frank. Chris Dodd and Barney Frank have been the biggest protectors of the current GSEs that are out there. John McCain has statements on the floor of the Senate in 2005 calling for reform of Fannie and Freddie. He foresaw what was going to happen. There's a lot of people out there that did foresee that, but there were protectorates that were built up here in Capitol Hill. And you have to look at Barney Frank and you have to look at Senator Dodd.

REP. FEENEY: If I can sort of add to that on Fannie, Freddie -- you know, before Fannie and Freddie were created, the average American homeowner put down between 30 and 40 percent on his or her house. As Fannie and Freddie collapsed, in some neighborhoods the average homeowner put down about zero percent on their house. When you have put down zero percent and you've taken out a loan that's going to adjust to a point that you can't pay it, you didn't buy the house. You took out an option to buy the house. You've got no skin in the game.

And unfortunately, this is what happens as the slippery slope of regulatory control of the private sector occurs. Because the Democrats and liberals have been beating up lenders, especially Fannie and Freddie, who on the one hand they've given this implied guarantee to. So Fannie and Freddie get to borrow money cheaper because of this implied guarantee. They dominate the market.

In return for that, they were told this: You have to go out and make everybody who wants to be a homeowner a homeowner, regardless of whether or not they've got income to cover the cost of the loan, regardless of whether or not the loan is a credible or a valuable loan. You're discriminating against this group or that group. You are punishing people that are poor. You're not helping the lower middle class. Put people into homes or we will revoke your specialized taxpayer guarantee status.

So these companies did exactly what they were told to do, and the left-wing Democrats were the first one to turn on Fannie and Freddie and lenders for making loans that the Democrats demanded they make that should never have been made in the first place. That's the simple truth of what happened.

Q Just talk to me for a second about how you feel -- as Congress being the fiduciary, you're watching over the Treasury. And Democrats will tell you, you know, they feel left out of this process as well. I mean, as people sent here to Washington to watch over that -- (off mike) -- whether you be a Democrat or a Republican, Congress has been cut out of this deal.

REP. HENSARLING: Well, when you say Congress has been cut out of this deal, they just passed a bill to give the secretary of Treasury carte blanche on the American taxpayer checkbook when it comes to Fannie and Freddie, upwards of $5 trillion of debt. Now, I don't think the taxpayer will ever be called upon to pay $5 trillion, but that was a Democrat Congress that made that decision. So if they feel left out of it, maybe they should look in the mirror.

REP. GARRETT: Just to illuminate on that point, too -- when that legislation came through just before we broke for the August break, the discussions that were being held were being held through the administration and principally, in the House, at least, through Barney. And it was the Barney housing bill basically that was the caveat, that they had to get that in order to get the reform that the administration was seeking at this point in time.

As you recall, when the vote actually finally did come down, I think probably everyone here ended up voting against that piece of legislation because we were saying the same thing on the floor that day as we've been saying for the five years that we have been here of the problems that would occur.

Now that this has all occurred, you would see that still as the administration has come forth and the Treasury secretary has come forth and said what they plan as far as downsizing or changing the structure of GSEs and trying to put some limitations on and the 10- year phaseout of the portfolio size, Barney's response to that was: That ain't gonna happen. And his second comment was, the Treasury statement there as far as downsizing at 10 percent a year is just a sop to the conservatives, because that isn't going to happen. I hope it's not a sop to the conservatives. I hope it's actually going to happen.

REP. FEENEY: Let me follow up on that, because Congress has different roles here. The Fed is a congressional creation. We can repeal it at any time. We can modify its charter at any time. One of the things this group has asked for is to have hearings on whether or not they ever had the authority to do the Bear Stearns/Morgan buyout bailout, because I don't read that in their charter. But we want to find out, number one, whether they have the authority; and number two, under what terms they'll exercise it in the future.

With respect to Treasury, I think all of us voted against this massive Fannie-Freddie bailout. The GAO estimated it would only cost American taxpayers $20 billion. Some of us said it would be more like two or four or six hundred. But nobody without a crystal ball on the housing market can tell. It was disingenuous for anybody to use a figure of 20 billion (dollars) when the total exposures is up to 5.7 trillion. Not all of that will happen, but it's somewhere between 20 billion and 5.7 (trillion), and nobody can tell you till you see when we reach the bottom of the housing market.

But here's the problem from the Treasury perspective, that we don't have as much direct control of. You had the secretary say, as he asked for this power, that he expected he would never use it. Well, "never" was about 30 days. That's the "never" time span in Washington, unfortunately. And so even members that got tricked into voting for the Fannie-Freddie bailout proposal can argue that they were sort of misled by the fact that this was a, you know, last-resort feature that probably would never be used. That's essentially what we understood.

Q What, exactly, would you have the Treasury and the Fed do? What do you think they should do? Nothing?

REP. HENSARLING: We just - that's what the purpose of this press conference is. We said stop, stop the bailout, stop the taxpayer bailout.

Q (Off mike.)

REP. HENSARLING: Ultimately, though, economic policy is largely controlled by the Fed and by Congress. We've already put a proposal before a Democrat-controlled Congress. They have another plan. It's a trade war. It's tax increases. It's lawsuit abuse. That's their plan. We have the economic growth plan of '08. So I would ask that Treasury would embrace that plan.

And as the Federal Reserve balance -- when their balance book is stretched thin, again, we believe that any short-term gain by bailing out one other financial institution is not worth the long-term pain of the moral hazard in taking us down Japan road to a lost decade of economic growth.

Q I understand you're saying to stop the bailouts. But what I'm asking is -- the remedies you're suggesting are fairly long term. But what I am asking is, what do you think they should be doing in the short term to stop what appears to be a global meltdown?


Q Should they stand back and watch? What should they do?

REP. GARRETT: Well, each case has to be taken individually, as I think we had some conversation already with regard to how the GSEs could have been handled and -- could still have been handled.

I'll just speak on the Bear Stearns situation, and I'll preface this by saying this, is that after the fact, after the interjection by the -- intervention by the Fed or the Treasury in each one of these cases, it's very easy for them to stand up here and say, well, but for us taking this action, calamity would have occurred in the world -- because you have no evidence to say otherwise -- but for that intervention. We can, though, look back for the -- point of this discussion is Bear Stearns -- and look back and say what else could have been done at that time.

Some of the experts that I talked to at that time said, you know, you did have an alternative. You had the opportunity for an expedited -- an expedited bankruptcy proceeding because we changed the bankruptcy code some time back ago. The only problem at that time was the counterparty obligations. And so some of the people on Wall Street that we had been talking to way back when that was happening was -- go through that -- go through that proceeding. You could have basically had the simplified term of sale of the company, taken care of the counterparty obligations and you would not have had the worldwide disaster or collapse that would have occurred.

Now here we stand up here, and the Federal -- and the Fed would say, "Yes, it would have happened." Only, you know, historians, I guess, in the future will be able to go back and analyze that and make that some sort of a study in some business school in the future.

Q So you're suggesting that AIG should have been allowed to go bankrupt here?

REP. : Go on and finish.

REP. GARRETT: Well -- the situation AIG is slightly different from that of Bear Stearns. Secondly, with -- as we know, the reports that AIG did have an offer some two days prior to the sale -- or prior to the intervention. I don't have all the information as I stand here because, for one reason, we don't get all the information, as was already indicated from the Treasury and the Fed chairman.

Q Is this part of the problem, that you all couldn't respond fast enough? (Off mike.)

REP. GARRETT: Not necessarily. I would like to know -- on that instance, I would like to know exactly what was the terms of the offer and why that didn't go through. Is it just as some of the experts say on the street right now, that the tender offer was -- $8 billion after the sale -- was an insufficient amount, that they were thinking that they could still go forward?

If fact, if you look at the case with AIG right now, they are not happy, as you know, with the way that the Fed intervened in this -- or rather the Treasury intervened in this situation. So that may be an explanation on that case.

And I guess the only one I didn't touch upon is the GSE situation, as far as the bailout there. But I guess -- I guess we already talked about what we could have done in that sort of circumstance.

REP. HENSARLING: Well -- and again, if I could add, the tools that are available to the Fed and the Treasury are either, A, limited, or there's not many of those tools left in the toolbox.

And when you say, well, you know, what you're talking about, Congressman Hensarling, is a much longer-term solution, let me add that this Democrat Congress has shown us this week they can write a 240-page bill at 2:45 at night and pass it the next day. We could address this global capital crisis overnight if the Democrats want to. They have chosen not to.

REP. FEENEY: And let me make a point, because, you know, you say it's either/or, long-term solutions or just a short-term reaction to a crisis.

Let me react by saying that there are two ways at this point to infuse cash in the economy.

One is to inflate the currency. Last night the world -- central banks put another $180 billion into the currencies in Western Europe and the United States of America.

The other way is, as we been calling for, for some time, renew the tax cuts, so that investors in America and around the world know that the place to create jobs and do prudent investments is the United States of America. We've been -- have the second-highest capital -- corporate tax rate in the world. If you ask yourself why investors are fleeing America and investors are fleeing job-creative activity, one of the reasons is the impending tax increases on corporations and on the capital gains rate. Obama says up to 28 percent is sufficient. We know what that will do to job creation.

And so in -- there are two ways to infuse cash into the economy. Either give it to the productive class in the form of tax cuts that will create jobs, or what you do is essentially inflate the currency and bail out risky hedge fund speculators on Wall Street. Unfortunately, we've decided to inflate the currency, hurt consumers and bail out the risky speculators, not to stimulate prudent job- creative activity.

REP. HENSARLING: I don't know about these folks, but I've got another appointment. So last question -- we'll give it to the hometown -- (chuckles) --

Q So in the future, if there are crises, do you see a regulatory regime that is in any way different than what we have now, or -- and I understand the macro points you're making that if certain rules were in place and policies, then this kind of thing wouldn't be so bad. But do you want something different for the future to prevent crises?

REP. HENSARLING: Well, I think the short answer is probably yes. Now I don't think anybody on Capitol Hill, including myself, can look you in the eye and tell you exactly what that needs to be.

But I am -- when people say we have to have more regulation, I don't agree we need more regulation. We may need different regulation. We may need smarter regulation. We may need modern regulation. But we don't need the overall regulatory burden on the American family, our financial services industry and the American free enterprise system to necessarily be greater. But there may be opportunities to add greater transparency. There may be greater opportunities to ensure that fraudulent activities do not take place in the market. There may be a modernization of kind of this alphabet soup regulatory structure that still has its roots in the New Deal. And I believe that we should take a thorough examination of that.

So I'm not necessarily saying that the regulatory status quo has served us well. It clearly did not serve us well in the case of Fannie and Freddie. And the consensus is, that will cost American families $100 (billion) to $200 billion.

So I think, as House conservatives, we are very open to finding ways to have smarter and better regulation. But as my friend Tom Feeney -- I believe it was -- from Florida pointed out, regulators and public policymakers don't always get it right. Any economic historian worth their salt would tell you the Great Depression would have been a garden-variety recession had it not been for a trade war, had it not been for the Fed allowing the money supply to contract by, I believe, 25 percent, and if -- had they not increased taxes. Everything that regulators and legislators could possibly do to make the situation worse, they did.

I've been in private business for 10 years. I've been in government for six. I haven't found that people in government are inherently smarter than people in business. Both can make mistakes.

(Cross talk.)

REP. FEENEY: On the regulatory issue, two points I'd make.

Number one, nobody in the private sector or public regulators has explained how this paper wealth creation, in derivatives and in hedge funds, where people trade a worthless promissory note or speculation, and somebody else considers that an asset, and they turn around and invest it.

That's the problem with AIG and others, who have literally used these speculative, paper-created assets. And at a time of economic growth, when you're getting return on your investments, that works great. But as soon as the bubble bursts, you're the ones that pay the price. Nobody understands that and they won't all tell you that.

Number two, we have a regulation in place that was supposed to save us from any massive problems on Wall Street. I would note that Sarbanes-Oxley hasn't saved one company from the sort of speculation that the regulators or the people making these investments simply do not understand.

Sarbanes-Oxley was supposed to be the cure-all and the save-all. It hasn't saved taxpayers one nickel. And in fact, this crisis is much worse than WorldCom and Enron.

(Cross talk.)

REP. BACHMANN: There's pain aplenty in this situation. And the one thing that we don't know is whether the pain would have been abbreviated had another solution been taken. And if you look at the unprecedented use of the Federal Reserve Act, in this situation, and if you also look at the GSE enabling creation act, in 1932, we've seen a door blown open and the power that has been exhibited, both by the Federal Reserve chair and by the Treasury secretary.

Those are questions that we need to answer, because right now we are seeing a tiger by the tail. And we're all worried when a Friday night rolls around, because it's usually on a Friday night and over a weekend, when we're all back in our districts, when we come back to find out yet another hundred billion of taxpayer money is on the hook.

So what we need to do is get a grip on these two acts and get a grip on the Treasury secretary and on the Federal Reserve chair so that over some weekend, they aren't committing the taxpayers to yet another hundred, two, three, $400 billion, because it's just not there in the bank. Pretty soon we're going to open up the cash drawer, and feathers are going to fly out. So we're concerned about this situation.


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