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Old 09-20-2008, 09:08 PM   #1
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Default Backlash Over Bailouts Grows in Congress, Wall Street


Backlash Over Bailouts Grows in Congress, Wall Street

By Matthew Benjamin and Brian Faler

Sept. 19 (Bloomberg) -- As the U.S. government takes stronger measures to stabilize financial markets, some former Federal Reserve officials, lawmakers and Wall Street executives are saying too much has already been done.

``Every time they intervene, they do more harm than good,'' said Peter Schiff, president of Euro Pacific Capital in Darien, Connecticut, a brokerage that manages $1 billion.

Critics of the rescues agree that government actions, such as those that prevented the failures of Fannie Mae, Freddie Mac and American International Group Inc., can't postpone the inevitable worsening of housing and financial markets. They say the bailouts by the Fed and Treasury also encourage future reckless risk-taking by investors.

``If we don't stop now, there will be no end,'' said Gerald O'Driscoll, a former vice president of the Dallas Fed and now a scholar at the Cato Institute in Washington. He joins Vince Reinhart, former director of the Fed's monetary affairs division, and Marvin Goodfriend, a former official at the Richmond Fed in questioning the market interventions.

They're getting support from Republican lawmakers, who are stepping up their efforts to put a halt to further rescues. Yesterday a group of 100 lawmakers released a letter asking Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson to ``refrain from conducting any additional government-financed bailouts for large financial firms.''

`Let the Markets Work'

``We may just be prolonging the housing slump,'' said Congressman Scott Garrett, a New Jersey Republican. ``We should let the markets work.''

The Fed or Treasury first stepped in to rescue investment bank Bear Stearns Cos. in March, followed by the takeover of mortgage companies Fannie Mae and Freddie Mac in September. This week the Fed put up $85 billion to keep insurance giant AIG afloat, and Congress is mulling tens of billions of dollars in loans to Detroit automakers.

The ranking Republican on the Senate Banking Committee, Richard Shelby of Alabama, said he wants the Fed to let markets work rather than opt for bailouts, even if the consequences are ``brutal.''

``Where do we stop, where do we draw the line?'' Shelby said in a Bloomberg Television interview. ``I don't know what road'' the Fed ``is going down,'' he said. ``If they don't watch what they are doing, they are going down a path of no return.''

Minority View

To be sure, only a minority of lawmakers, financial professionals and former government officials have voiced opposition to further rescues. Prominent figures -- ranging from former Fed chief Alan Greenspan and his predecessor at the central bank Paul Volcker to presidential candidates Barack Obama and John McCain -- have called the Treasury and Fed actions necessary.

And rather than scaling back its involvement, the government is taking even broader steps to ease the crisis. ``We're talking hundreds of billions,'' Paulson said in a press conference today. ``This needs to be big enough to make a real difference and get to the heart of the problem.''

The Treasury tapped all $50 billion in the country's Exchange Stabilization Fund to insure money-market mutual fund holdings, and the Fed expanded lending to commercial banks, in moves aimed at preventing the collapse of the credit markets.

Paulson and Bernanke are seeking to help banks remove illiquid mortgage-related assets from their balance sheets. Congressional leaders said they intend to pass legislation within days.

New Realization

``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Senator Charles Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington last night.

McCain today said that while he opposes the Fed's playing a role in financial rescues, the government needs to be involved. The Arizona Republican said the central bank ``should get out of the business of bailouts'' yet also proposed creating a government ``trust'' to oversee mortgages and financial firms to help restore investor confidence.

Doug Elmendorf, a former economist at both the Fed and Treasury, said he doesn't oppose government interventions, though he's ``opposed to doing it wrong.''

`A Major Challenge'

``I think it would be a major challenge for the government to design a fair and effective program to inject funds into financial institutions,'' said Elmendorf, now a senior fellow at the Brookings Institution. ``Structuring either of those in a way that doesn't reward mistaken private investments is very difficult.''

Peter Boockvar, an equity strategist at Miller Tabak & Co in New York, agreed. Bailing out Bear Stearns and creating lending facilities for investment banks, he said, ``gave financial companies a false sense of security that they had time to de-lever at their leisure.''

Unless the central bank stops interfering with market discipline, Wall Street's problems will continue, he said. ``The market can get to the right price on its own,'' Boockvar said. ``Anything that prevents it from happening is just prolonging the inevitable.''
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