Spurred by the mortgage crisis and stress in US financial markets, Congress is ramping up to have its own say in how to revive the economy, even as the Bush administration warns against congressional overreach.
Fixes in the works on Capitol Hill range from new bankruptcy rules to help homeowners facing foreclosure – including allowing courts to rewrite the terms of a mortgage – to an overhaul of how Washington regulates the financial sector.
Congress also wants to know more about how the Federal Reserve engineered this month's resscue of investment bank Bear Stearns – and what that might mean for other firms or groups at risk in a struggling economy. Lawmakers are asking: Did this deal set a precedent that expands the Federal Reserve's role and was it politically motivated?
Also, if the Fed can run to the aid of an investment bank, shouldn't Washington help out more homeowners and others facing big losses?
Despite the difficulty of consensus in an election year, there is broad agreement on some elements of the pending legislative agenda including the need to complete bills to strengthen the capacity of the Federal Housing Administration and government-sponsored enterprises, such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, to respond to the mortgage crisis.
"There is bipartisan interest in bolstering our economy, maintaining stable and orderly capital markets, and helping struggling homeowners," said Treasury Secretary Henry Paulson in a speech at the US Chamber of Commerce's Annual Capital Markets Summit on Wednesday.
"New ideas and solutions can come from either side of the aisle," he said. But later, in response to questions, he added that "most of the other ideas I've seen would cause more harm than good."
Last week, Rep. Barney Frank (D) of Massachusetts, who chairs the House Financial Services Committee, called for establishing a "financial services risk regulator" to assess risk across financial markets and intervene when appropriate.
"Since the repeal of Glass-Steagall, a host of new players have emerged and old ones are doing new things. To the extent that anybody is creating credit, they ought to be subject to the same type of prudential supervision that now applies only to banks," he said in a March 20 speech to the Greater Boston Chamber of Commerce.
Congressman Frank and Sen. Christopher Dodd (D) of Connecticut, who chairs the Senate Banking, Housing, and Urban Affairs Committee, are also negotiating legislation to help subprime borrowers refinance with FHA-insured loans and give states at least $10 billion in loans to address the foreclosure crisis.
What really alarms the Bush White House and most Republicans on Capitol Hill are pending changes in the bankruptcy law that would allow judges to change the terms of loans on primary homes to avoid foreclosure.
The Senate narrowly rejected a procedural vote to move to this bill last month. The Feb. 13 vote failed 48 to 46, but Senate majority leader Harry Reid says that the Senate will take another vote on the bill next week. "We'll see if the events of the last two weeks will force Republicans to change their position," says Jim Manley, a spokesman for Senator Reid.
In the run-up to Congress's return next week, President Bush has been making the case that such proposals will do more harm than good. "The temptation is for people, in their attempt to limit the number of foreclosures, to put bad law in place," he said in a March 14 speech to the Economic Club of New York.
The prospect of a bankruptcy judge rewriting mortgage terms will likely increase mortgage interest rates. "That would exacerbate the problem, not correct it," says White House deputy press secretary Tony Fratto.
Meanwhile, Democratic leaders in both the House and Senate are gearing up for a second stimulus package. Aides say plans could include funding for infrastructure development, the extension of unemployment insurance, and the extension of eligibility for food stamps.
"The economy continues to squeeze a lot of folks. If the unemployment numbers come back next week very high, we could get a second stimulus package," says Nadeam Elshami, a spokesman for Speaker Nancy Pelosi.
Business groups are watching the next moves on Capitol Hill with interest, especially moves to rewrite bankruptcy laws. "In an election year of significance to both parties in terms of not just who controls the Hill but the White House, there is political impetus in Congress to do something. They do not want to be sitting on their hands, doing nothing," says Bruce Josten, top lobbyist for the US Chamber of Commerce.
"Clearly, there's a lot to be done and some new regulator structures are being evolved, but let's be cautious here and not overreact," he says. A provision to rewrite mortgages, such as is likely to be taken up in the Senate next week, "retroactively ends the sanctity of the contract and would make mortgages more expensive for you and me," he says.