Thank you for contacting me to express your concerns about the current crisis in our financial markets and the state of the economy. I appreciate hearing from you.
As you well know, our financial markets have become increasingly volatile over the past weeks. The collapse of major financial institutions and a giant insurance company sent a clear signal that we were on the brink of a major financial catastrophe. Something had to be done in order to prevent the problems of our financial markets from leaking into other sectors of our economy. Secretary Paulson and President Bush offered the first solution to the exacerbating economic decline as an attempt to get the dialogue flowing. However, many, including myself, believed that this plan was not sufficient. The House amended the original plan in an attempt to protect taxpayer's interest, prevent exuberant executive packages for participating entities, and provide more oversight. Even with these additions, the plan failed to pass the House, and that day the Dow Jones Industrial Average fell nearly 778 points, the biggest single-day point loss in history.
As you, I am deeply troubled by the financial situation we are facing. We did not get here because of any one decision or policy - these problems were years in the making. For example, in the late 1990s, the Clinton Administration began pressuring Fannie Mae and Freddie Mac to purchase loans to subprime borrowers. We are seeing the consequences of a long series of policy errors, both in private and public sectors, which have combined to create a "perfect storm" of financial problems. In my view, one thing was for certain, inaction was not an option. We had to provide relief quickly because the consequences of inaction far outweighed the cost of the provisions in the legislation.
If we had not addressed this problem, we would be ignoring a much greater danger. For everyone who has a savings account, retirement savings, or a job, inaction placed these lifelines in jeopardy. For anyone who needs a mortgage loan, to borrow for a car, or to finance an education, the prospects had significantly worsened. With business expansion and job creation, there is a need for credit in order to make our economy work.
The Senate version of the Emergency Economic Stabilization Act, HR.1424, which ultimately passed the Senate and the House and was signed into law on October 3rd, broadened the ability of the federal government to revitalize our economy. The legislation is designed to help secure retirement savings, help small-business owners meet payroll and help restore the American people's confidence in their own financial well being. Furthermore, the Senate added specific provisions to curtail the jobless rate and promote investment. Among the added provisions was a set of extensions to expired and expiring tax provisions, including the research tax credit and the Alternative Minimum tax (AMT). While it is estimated that 70 percent research tax credit dollars are used for wages of R&D employees, the AMT relief will free 23 million Americans, including hundreds of thousands of Utahns from having to pay the unfair AMT.
This legislation, while not perfect, will have a greater impact beyond Wall Street into Main Street. I believe that one reason why the financial rescue legislation failed to pass in the House the first time was because the American people were not convinced that the bill would help them personally. Along with this, I believe that many Americans failed to see the connection with the current crisis with our financial markets and their own future economic well being.
While the Economic Stabilization Act may hold off an impending economic meltdown, it must now be followed up with decisive action on our part. Foremost, we need to change the way the financial sector works. The Federal Reserve needs to rethink its definition of good monetary policy and determine whether its existing policy tools -- such as reserve requirements, oversight capabilities, and reporting rules -- are adequate. In addition, Congress must reconsider what it has charged the Federal Reserve to do. The Fed has been charged with two goals: 1) providing a sound currency with stable purchasing power, and 2) maintaining steady economic growth with low unemployment. At this point, it is obvious that an aggressive, excessively easy monetary policy in pursuit of short-term growth is self-destructive in the long-run. It leads only to inflation and speculative excesses in the credit markets that harm the economy. Only by focusing on a stable currency can the Federal Reserve achieve both its objectives.
We also need to completely rethink Fannie Mae and Freddie Mac. As we've heard countless times over the last few weeks, in creating these two government-sponsored enterprises, we have made sure that the benefits of their investments are private while all the risks are public. Put simply, this is bad policy, with considerable moral hazard. Fannie Mae and Freddie Mac together represent an immense government-created and government-coddled duopoly. In the years since their creation, they have focused mainly on their own expansion, recklessly urged on by many in Congress who believed this was a way to make home ownership more affordable for lower income families. However, as a recent Fed study has demonstrated, most of the benefit of the previously implicit - now explicit -- federal guarantee of their debt has gone to their shareholders as higher earnings, not to reducing costs for new homeowners. In their efforts to expand, Fannie and Freddie took too many unwarranted risks. They needed an ever-expanding supply of new mortgages to package and resell and to hold for income. Others fed this expansion effort with unsound lending. The recent Federal rescue package of these institutions requires an immediate step: Congressional oversight. It is a little late in coming, but, as of right now, it is essential.
The regulatory and rating agencies also need to be reviewed. We need to ask whether they have enough resources for adequate supervision and whether they've failed to recognize the evolutionary changes in the credit markets and the new business arrangements that reduced transparency in financing. These and other questions will have to be explored as we move forward.
I believe that we clearly need to reform our financial markets and refine the powers of the Federal Reserve in order to ensure crises like this don't happen again. And, though I hesitated to support the idea, it is not unreasonable to conclude that government intervention can provide immediate relief and prevent any more catastrophic losses in the near future and give the financial market time to sort out the mess. But, if we don't adopt policies that are pro-growth, pro-business, and pro-job creation, we won't be able to ensure long-term economic security for our country, no matter how many bad mortgages we purchase with taxpayers' money.
In order to address these concerns, Congress must be very careful as we work to solve this crisis. We must meet the demands of taxpayers and restore confidence in our financial markets.
Again, thanks for writing.
Sincerely,
Orrin G. Hatch
United States Senator
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