Financial Times

Plan Reawakens Congress Suspicions

By Alan Beattie, Daniel Dombey, Stephanie Kirchgaessner, James Politi in Washington

The secretary of the US Treasury and former head of Goldman Sachs is not used to being called a socialist and invited to do remedial homework. Still less might he expect that criticism to come from congressmen and senators in his own party.

But in an extraordinary week in Washington, the White House’s bail-out plan for Wall Street has been batted about and sometimes mauled in the hearing rooms of Capitol Hill. There have been dramatic scenes: hours of grilling in packed hearings by lawmakers expressing outrage at the extraordinary powers the administration is seeking; interruptions by protesters holding up placards decrying corporate welfare; the vice-president being “ripped into shreds”, in the words of one lobbyist, behind closed doors by furious Republican lawmakers.

Deborah Pryce, a Republican on the House of Representatives financial services committee, on Wednesday told Hank Paulson, Treasury secretary, and Ben Bernanke, Federal Reserve chairman, to “prepare for an advanced macroeconomics class” on their plan. Jim Bunning, senator from Kentucky, called it “financial socialism” and “un-American”.

The saga of the bail-out underlines how, even with a tough and admired Treasury secretary, the decaying authority of the Bush administration and the parlous state of the public finances have deepened resistance in Congress to writing the White House a blank cheque.

The game plan was clear from last weekend: produce a simple, clean proposal for clearing up the mess in Wall Street with a specific price tag and point to the sense of panic in the markets as the overwhelming imperative to get it done. But the very simplicity of the plan was one of its weaknesses. By sending up a three-page proposal to Capitol Hill that essentially gave the US Treasury $700bn to spend as it wished, the White House reawakened all Congress’s suspicions and criticisms of the way it has conducted business for eight years.

Chris Dodd, Democratic chairman of the Senate banking committee, summed up the mood of many in Congress when he said: “After reading this proposal, I can only conclude it is not just our economy that is at risk but our constitution as well.”

Critics of the administration draw comparisons with the extraordinary powers it sought after the September 11 attacks. Steve Clemons of the liberal-leaning New America Foundation think-tank said this week risked being a “9/11 replay” and urged Congress to stand firm: “We saw abuses of power, the expansion of secrecy and the promulgation of norms that seemed to be the very antithesis of what America stands for,” he said.

The Democrats’ fear of being blamed for squabbling while the US financial system imploded gave way to concern about placing public money and their own legacy in the hands of the Bush administration. As it became clear from polls taken early in the week that the American public shared some of their reservations, they became emboldened. Although by no means averse to government intervention in the financial markets (or in housing), they were extremely wary of being saddled with a corporate welfare hand-out.

Even on Thursday morning, as the outline of a deal was coming together, some lawmakers continued to rail against it. “What President Bush is now asking Americans to do is pay for the equivalent of 4,500 Alaskan bridges – a trillion dollar, gold-plated, diamond-encrusted ‘Bridge to Wall Street’,” said Lloyd Doggett, a Texas Democrat, referring to the notorious $400m Alaskan “Bridge to Nowhere” which has become short-hand for misdirected government spending.

As political cover, the Democrats on Capitol Hill needed their Republican counterparts to join them. But some Republicans had reservations of their own, rediscovering conservative principles of fiscal stringency and free markets. The formerly ferocious Republican party discipline on the Hill has long dissipated. Even the dispatching of Vice-President Dick Cheney, the White House’s chief enforcer, to win round the Republicans ended in testy exchanges rather than sullen acquiescence. Richard Shelby, the Republican senator from Alabama, marched out of a White House meeting yesterday to announce: “There’s still a lot of different opinions. Mine is it’s flawed from the beginning.”

More than any Republican leader in office it was Newt Gingrich, the former House speaker, who captured the frustration of his party. He encouraged John McCain to reject the plan: “I think it is a very, very bad idea, and I would argue is a very un-Republican idea,” he told National Public Radio.

Indeed, it was not just the Hill Republicans whom the Democrats needed to pull behind any plan. Harry Reid, the Senate majority leader, said: “We need the Republican nominee for president to let us know where he stands on what we should do.”

The political impact of this episode has only just begun. If it fails, or looks like a bail-out for wealthy and feckless financiers, the compromise proposal being stitched together yesterday has the potential to cause lasting damage. The fall-out will continue long after the departure from office of the administration for whom, critics say, it provides a legacy: seeking power and money without accountability.

Copyright The Financial Times Limited 2008

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