Next step in economic crisis: a giant resale agency?
Some lawmakers and economists are calling for the US to absorb damaged assets of firms.
Washington's response to the credit crisis so far has seemed to rely on daily improvisation. Perhaps it now needs something more organized: a new US government resale agency that would absorb and then dispose of the assets of damaged firms.
That is the opinion of key lawmakers and some private economists as a week of unprecedented US intervention in the marketplace draws to a close.
For regulators, establishment of such a temporary entity might be a trip back to the future. In the 1980s the largely taxpayer-financed Resolution Trust Company (RTC) seized and liquidated savings and loans.
But the S&L crisis was a brush fire compared with today's financial four-alarmer. An RTC redux would have to deal with many tough political and policy issues, and could represent yet more government intrusion in private markets.
Scrambling to try and ease the worst credit crunch since the 1930s, the Federal Reserve on Sept. 18 pumped billions of dollars into the world financial system.
The New York Fed injected $55 billion into US markets, while the central Fed increased lines of cash for foreign central banks by some $200 billion.
The moves were intended to counter a spike in the overnight lending rate between banks, an increase which threatened to worsen already tight credit conditions.
World "central banks continue to work closely together and will take appropriate steps to address the ongoing pressures," the Fed said in a statement.
Seeking to reassure nervous citizens, President Bush announced that he had canceled a trip to stay in Washington and consult with his economic team.
The government has taken "extraordinary measures" in recent weeks to try to stem the crisis, said Bush. Yet the markets continue to deal with "serious challenges," he said.
The thinking behind the buzz goes something like this: the US government is already carrying out such a function in an ad hoc manner. With its bailouts of Bear Stearns, Fannie Mae and Freddie Mac, and AIG, Washington now has become a dealer in damaged companies.
A second RTC presumably would buy up the mortage-backed financial instruments that now are sinking financial institutions. This would provide liquidity in a securities market now frozen with fear.
The government would hold those assets for some period of time, allowing home prices to settle and thus the underlying value of the mortgage-backed securities to rebound. Then it would sell them, perhaps even making a profit.
So goes the theory, in any case. Among the luminaries who have publicly backed some version of this approach are Nicholas Brady, who was secretary of the Treasury from 1988 to 1993, and Paul Volcker, chairman of the Federal Reserve from 1979 to 1987.
"Apparently. the private market is so messed up ... it may not be able to function unless there is a more systematic federal relief in the sense of taking over some of the bad assets," says Mr. Frank.
Frank adds that in his belief the current crisis is a result of "an absence of regulation." His panel will hold hearings next week on a "more systematic" approach to government intervention, he says.
The Senate Finance Committee is scheduling similar hearings for the week of Sept. 22. Committee chairman Sen. Christopher Dodd (D) of Connecticut says a new RTC is "an interesting idea, and the Federal Reserve's already doing that in many ways."
But Senator Dodd is withholding approval until he hears the opinion of the White House. "We ought to wait and see if the administration is willing to support the idea," he says.
The current situation is far more complex than the savings and loan problem of the 1980s, and a new resale agency thus might not be an exact duplicate of the RTC.
One big problem, says Mr. Truman of the Peterson Institute, would be determining the purpose of the new agency. Would it be a mop-up operation, dealing with broken assets already purchased? Or would it represent a market support operation in which the government purchases more and more parts of floundering firms?
If it becomes the latter, "that could short-circuit the operations of the market," says Truman.
Conservative Republicans in Congress are set against the idea, seeing it as yet another bailout that will cost taxpayers billions.
• Material from the Associated Press was used in this report.