Paulson Defends Bailout Policies Despite Congressional Criticism and Continuing Economic Woes

Treasury Denounced Over Bailout, New York Times
US Economy Chiefs Say Policies Bear Fruit, Financial Times
Wall Street Falls On Latest Economic Data, New York Times

Wednesday brought a new pair of troubling indicators of the continuing deterioration of the U.S. economy and an accompanying slide in market indices. Markets slid lower in response to both the announcements that October housing starts had fallen 4.5% compared to the same month in 2007 and that core consumer prices had fallen 0.1% since September. The fall in consumer prices, which is the largest drop in the history of the measurement, is causing the greater concern within the financial community, as it may indicate the possibility that the U.S. economy is headed toward a period of deflation.

With the apparently worsening economic predicament as a backdrop, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke were called to testify before the House Financial Services Committee about that status and effectiveness of the bailout legislation. At the hearing, Democrats on the committee accused the Secretary Paulson and the Treasury of ignoring congressional intent by refusing to provide aid directly to homeowners facing foreclosure or to the U.S. auto industry.

In spite of the intense criticism of the Treasury's bailout strategy by the congressional committee, Secretary Paulson maintained that the Treasury's actions are having a significant effect. Paulson said that the decision to focus the investment of the $700 billion bailout package on the infusion of capital/liquidity to U.S. financial institutions has caused the financial community to "turn a corner."

Responding to calls for inclusion of relief to individual homeowners and the struggling automotive industry, Paulson said that these actions, not the current path that the Treasury Department has taken, would violate the intent of the bailout legislation. The bailout package, according to Paulson, was intended to be directed specifically to the financial services industry. It was not, Paulson stated, supposed to be a generalized economic stimulus package, under which investment in homeowner relief or loans to the automotive industry would be appropriate.

Discussion Questions:
1) Has the Treasury Department's enactment of the bailout legislation been effective? Has it been true to the intent of the legislation?
2)Should homeowner relief and/or bailout of the U.S. auto industry be included in the existing bailout plan? Or should these types of relief come from additional legislation?