Updated from 2:46 p.m. ESTTreasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke defended their shifting bailout strategy to Congress Tuesday, resisting calls to use remaining funds to aid homeowners and automakers before the Obama administration takes charge in January. Paulson told the House Financial Services Committee that buying rotten assets -- the original intent of the $700 billion bailout effort that was scrapped last week -- would have required a "massive commitment" the government just couldn't make. The remaining $350 billion of the initial authorization "simply isn't enough firepower," he said. So far, the Treasury Department has pledged $250 billion for banks from the Troubled Asset Relief Program, or TARP, and has agreed to devote $40 billion to troubled insurer American International Group ( AIG - Get Report) -- its first slice of funds going to a company other than a bank. That leaves just $60 billion available from Congress' first bailout installment of $350 billion. While Paulson and Bernanke are opposed to using funds to help the troubled U.S. automakers and homeowners who are at risk of foreclosure, Congress seems intent on passing some type of package in its lame-duck session. General Motors ( GM - Get Report) warned that it will go under unless it gets government help. Its Detroit peers Ford ( F - Get Report) and Chrysler are in troubled waters as well. There are calls from several quarters to do something to help stabilize the housing and labor markets, as foreclosures and unemployment continue to rise. As with any debate in Washington, the issue is drenched in conflicting ideologies and opinions about how to most effectively repair the economy.
There are many camps advocating for or opposing a variety of different measures. The auto industry is seeking $25 billion for emergency loans, and House Speaker Nancy Pelosi (D., Calif.) has tapped Rep. Barney Frank (D., Mass) to draft an aid package. Supporters fear that the failure of a huge company like GM could be disastrous for workers, debt holders and other companies along the automotive supply chain. But others contend the industry has simply lost its competitive edge, and doesn't deserve taxpayer dollars to bail it out of a problem that was long in the making. Critics also point to examples like Delta ( DAL - Get Report) and UAL ( UAUA), which filed for, then emerged from Chapter 11 without the government's help. "We let the airline industry go bankrupt and we still see planes in the air," says Steve Stanek, a research fellow at The Heartland Institute, a free-market advocacy group. In addition, bailing out automakers could also be a slippery slope: What about retailers coping with cash-strapped consumers, or newspaper publishers, or commodity-linked companies that suffer when prices rise or fall? Robert L. Porter, an assistant professor of finance at Quinnipiac University, says that the financial industry should stand alone when it comes to taxpayer-funded support. "We absolutely must have a well-functioning financial system if we hope to have economic prosperity," says Porter. "But, in my opinion, we don't need to have an auto industry that has their headquarters located in the U.S. Foreign auto makers seem to be doing quite well in the U.S. market and I question the relevance of where the headquarters are located."
Besides the auto heavyweights, states coping with budget deficits are also seeking a piece of TARP. Others, like Federal Deposit Insurance Corp. Chairwoman Sheila Bair, are pushing for swift aid to homeowners who are struggling to make mortgage payments. Bair recently broke with the administration to advocate for using $24 billion to help some Americans avoid foreclosure. Before Congress on Tuesday, she said that the U.S. is "clearly falling behind the curve" as foreclosures escalate. But, by and large, the Bush administration has opposed any plans that include automakers or mortgage-restructuring. Officials say future decisions about spending should be left up to President-elect Barack Obama, his advisers and the new Congress, who will take power in January. George Simon, a partner in Foley & Lardner's Financial Crisis Response Team, says that supporting the housing market would be a good strategy, because it would help both the consumer and the bondholders behind the mortgage. He believes state governments will have to enact their own fiscal discipline without federal aid, though the auto sector will likely receive support. But Simon asserts that a strategy is unlikely to emerge, or be approved, before Obama takes office in January. "The Republicans are pretty staunchly not in favor of it, the administration is not in favor of it, so it seems like nothing is going to happen in the short term," says Simon. "The Democrats may propose a bill, but it's unlikely to pass." Jeswald Salacuse, a professor of commercial law at Tufts University's Fletcher School, says that in light of the ad-hoc approach to the financial crisis so far, that might be a blessing in disguise. The financial crisis requires a solid solution that is crafted after carefully assessing the situation and spending dollars in the most effective way to help the economy, he says. An immediate solution might provide less bang for the buck.
"I don't think we should panic into putting this money into places that will do us no good," says Salacuse. "I think we need a lot more discussion and a lot more thought. The markets have already taken a substantial hit because of the crisis, and haste is not going to turn things around." Salacuse adds that lawmakers need to ignore the special interest groups -- whether automotive or financial -- to "start thinking about the national interest." In fairness, the Treasury's capital injection program was intended to spur banks to lend more freely and build reserves against further losses. However, banks are not required to use the money for those purposes, and some have used it for other things, like buying competitors or paying dividends. That has touched a nerve with some lawmakers. Treasury and the Federal Reserve are also exploring a bailout-funded loan facility to help companies that issue credit cards, make student loans and finance car purchases. Whatever plan emerges, it is unlikely to soften the blow of a dismal holiday season and weak economic news that will continue through 2009, according to the most optimistic economic predictions. On the Hill Tuesday, Bernanke indicated that the groundwork has been laid to repair the financial crisis. Paulson called the capital-injection program "key to getting the economy going," but added that "it's going to take a lot of work and time."