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The New Economy

US bailout backlash: the horror movie?

By / March 25, 2009

Treasury Secretary Timothy Geithner (left) and Federal Reserve Chairman Ben Bernanke testified Tuesday before the House Financial Services Committee.

Evan Vucci/AP

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If the Obama administration's economic recovery package was a movie, it would play like "Frankenstein."

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The scientist at Treasury (with help from his Fed assistant) sews together stimulus package, interest-rate reduction, mortgage-holder aid, bank bad-asset plan, and regulatory overhaul, then throws the switch.

The creature stirs. The scientist thinks it will save the economy. Others think it's a monster."A road to hell," said the latest critic, European Union President Mirek Topolanek, in a speech to the EU Parliament Wednesday.

Still others – like the International Monetary Fund – are urging more US-style stimulus action to combat the downturn, especially in Europe. "Measures are still needed to restore financial stability," the IMF said Thursday. (Is Europe stepping up? Click here.)

Bailouts and pitchforks

Congress's anger over the AIG bailouts last week tapped into simmering anger among the townspeople of America. For months, the biggest problem facing America appeared to be those toxic bank assets. We had to sell the assets, quarantine them – just do something to inoculate the banks from their evil influence.

So AIG, the banks, and the regulators began to detoxify the balance sheets.

Then a curious thing happened. Because of those AIG bonuses, Americans' attention and worry started shifting from the problem to the way the government was trying to solve the problem.

The bailout itself is in danger of becoming politically toxic even as bank balance sheets are becoming financially less toxic.

Aware of the rising public anger, many of the bonus recipients decided to give them back. Goldman Sachs thinks the bailout money is so radioactive to confidence in the banking system that it hopes to give back its $10 billion next month. Other financial institutions are expected to follow. Even weakened General Motors announced last week that it wouldn't take this month's $2 billion in federal aid.

A toxic fallout?

This leaves three dangerous possibilities:

No. 1: Regulators warn that toxic assets could still bring down the system, but congressional anger over the bonuses will make it harder for Treasury Secretary Timothy Geithner to ask for more money to keep the system afloat.

No. 2: Weaker banks may feel forced to give back bailout money they still badly need, writes New York Times' columnist Andrew Ross Sorkin.

No. 3: The investment community may be so put off by the AIG furor that they won't partner with the government to buy up those toxic assets. Private-sector participation is key to Mr. Geithner's plan to sell off those troubled assets.

Can the markets rescue us?

There is one glimmer of hope: Positive economic and market forces could keep all this from turning into a horror movie.

A string of not-as-bad-as-expected economic reports this week on housing and durable goods has buoyed investor confidence. The stock market's strong rally since the announcement of Treasury's toxic-asset plan is also a big endorsement of the administration's recovery package, undercutting conservative criticism that it's antibusiness.

"This plan will work," Secretary Geithner told the House Financial Services Committee on Tuesday. "It just requires will. It's not about ability. And we just have to keep at it. And we will need to work with Congress to make sure that we can do this on a scale that will make this work."

In other words, the creature that has emerged from Dr. Geithner's laboratory may not look pretty, but it is the administration's best plan for restarting the economy. And Congress is weighing whether to let it do its work.

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