fast-growing financial crisis — headlined by tumbling stocks, panicked credit markets, fearful investors and the spectacular collapse of the nation’s fifth-largest investment bank — leaves members of Congress little choice but to consider the sort of economic intervention Washington hasn’t weighed since the Great Depression.
As the Federal Reserve moved quickly over the weekend to engineer an emergency sale of Bear Stearns, Democratic lawmakers said they will focus their attention on the faltering housing market when they return from their spring recess next month. They also vowed to push forward a second economic stimulus package that’s likely to include an extension of unemployment insurance and possibly an increase in infrastructure spending, and to take a hard look at strengthening regulation of industry.
But like the Fed itself, Democrats admit that on their first order of business — a housing market that has rattled the nerves of middle-class voters — they are moving onto uncertain ground and trying to create a safety net mechanism unlike anything lawmakers of this generation have written.
“This is macroeconomics, not for the individual,” House Financial Services Committee Chairman Barney Frank (D-Mass.) told Politico. “We are in uncharted territory. We are all in uncharted territory.”
New York Sen. Charles Schumer (D-N.Y.), a member of his party’s Senate leadership, added: “It’s a brave new world.”
In a series of historic moves over the weekend, the Fed bailed out a collapsing Bear Stearns through government-backed loans from JP Morgan Chase & Co., then facilitated the faltering bank’s sale to JP Morgan at a fire sale price of $2 a share. The swift sale, approved by regulators Sunday night, left one of Wall Street’s oldest investment banks worth just one-tenth of what its value was on Friday.
The Fed’s bailout of Bear Sterns via JP Morgan represented the first time it has used such an arrangement since the Great Depression. Treasury Secretary Henry Paulson said the unusual arrangement was justified in the name of bringing “stability” to Wall Street and world markets.
Former Securities and Exchange Commission Chairman Harvey Pitt said Monday that the current financial crisis reveals an “enormous loss of confidence” and that he doesn’t know yet whether the Fed’s actions to date will be enough. Like everyone else, he’ll be watching Tuesday’s meeting of the Fed and, he said, “keeping a close watch on what’s going on with Lehman Brothers.”
In Monday’s trading, major indices escaped relatively unscathed, despite volatility. The Dow Jones Industrial Average ended the day up slightly; the Standard & Poor’s 500 and Nasdaq Composite Index both fell slightly. But stocks for financial firms — with the exception of JP Morgan — nose-dived on fears that other investment banks could share Bear Stearns’ fate.
In brief remarks Monday morning, President Bush tried to calm frazzled nerves. “One thing is for certain: We’re in challenging times,” he said. “But another thing is for certain: that we’ve taken strong and decisive action.
“In the long run,” Bush said, “our economy is going to be fine.”
