By John W. Schoen Senior producer
msnbc.com
updated 9/23/2008 5:07:24 PM ET 2008-09-23T21:07:24
ANALYSIS

What Congress hasn’t been able to do for a year, it is now trying to cram into a week.

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The debate that created this summer’s housing relief bill is being replayed with the stakes considerably higher this time. Members of Congress and White House officials all say they’re trying to settle their differences in a matter of days and come up with an emergency package to save both American homeowners and the global credit market.

Here’s a look at the key issues at the heart of the debate:

Congress is supposed to recess this Friday, and the election is just weeks away. What’s the rush?

After a year of debate, some members are balking at the idea of creating — in a week — a new program that would be roughly as big as the Defense Department. Given the complexity of the situation and the wide disparity of opinions about what needs to be done, some members of Congress warn that a poorly crafted solution could do more harm than good.

The Senate Banking Committee Tuesday took up the first of three hearings this week with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke.

Sen. Elizabeth Dole, R-N.C., told the committee the proposed bailout plan was “incredibly expensive and hastily concocted.”

In a separate meeting of House Republicans, Rep. Joe Barton, R-Texas, said, "Just because God created the world in seven days doesn't mean we have to pass this bill in seven days."

But Bernanke stressed that the government has no time to waste in freeing up the flow of capital, and he presented the costs of delay in stark terms.

“The financial markets are in quite fragile condition and I think absent a plan they will get worse," Bernanke said. "I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal healthy way no matter what other policies are taken."

Why should the government be involved in cleaning up this mess in the first place?

Some conservatives have already criticized the government’s use of hundreds of billions of tax dollars to take over Freddie Mac and Fannie Mae and rescue private insurance giant AIG.

"I have long opposed government bailouts for individuals and corporate America alike," said Sen. Richard Shelby, R-Ala., the top Republican  member of the Banking Committee. "We have been given no credible assurances that this plan will work. We could very well spend $700 billion, or a trillion, and not resolve the crisis."

Other members see the issue in more stark, philosophical terms.

Sen. Jim Bunning, R-Ky., said the bailout plan is “financial socialism and it's un-American.”

Paulson and Bernanke stressed to the committee that, given the scope of the threat to the financial system and the potential harm to the economy if it’s not promptly shored up, the cost of not acting would be much greater than the $700 billion spent cleaning up.

Shouldn’t the financial institutions getting bailed out have to help pay for all this?

Some in Congress think government should get stock in any financial institution that gets a bailout so that taxpayers can participate in any profit that comes from turning around ailing company. That model was used in the bailout of Fannie Mae, Freddie Mac and AIG. In response to a question from Sen. Charles Schumer, D-N.Y., proposing a “broad, industrywide tax” to help pay for the bailout, both Paulson and Bernanke gave general support to the idea.

Other companies are also getting hit hard by the economic downturn. Why bail out financial services companies and not others?

Some of those who oppose the government bailout of Wall Street complain that the proposed intervention applies a double standard: Wall Street keeps the profits when things go well and the government picks up the pieces when they make mistakes. Paulson and Bernanke defended the plan by saying the pain inflicted by a collapse of the credit markets would be felt much more widely than the companies at the center of the storm.

“These institutions provide credit for homeowners, and they provide credit for businesses that create jobs,” Bernanke told the panel. “It's about the people who need those services and that credit. It's about people retiring who need to have assurances about the value of their investments and their assets. If this is not done that it will be a significant adverse consequence for the average person in the United States.”

What about homeowners who are stuck in these bad loans? Shouldn't they get help too?

This part of the debate has been under way for over a year, amid widespread opposition to bailing out homeowners who borrowed more than they can afford. Opponents argue that people who made bad choices should suffer the consequences. Further, people who were more prudent and didn’t get into trouble shouldn't have to pick up the tab.

So far, efforts to help homeowners have largely relied on voluntary efforts by lenders to work out new loans terms. But these solutions haven’t worked very well. Defaults and foreclosures are rising, and millions more homeowners face foreclosure over the next few years. Until the rate of foreclosures can be slowed, holders of the mortgage-backed paper at the heart of the problem will face continued losses.

"Why does this proposal have what I would consider a gaping hole to deal with foreclosure prevention?" asked Sen. Robert Casey, D-Pa.

Paulson said the plan could help speed the process of working out bad loans as the government buys up the debt backed by those mortgages.

Why not change bankruptcy law to let judges approve changes to more affordable loans?

Proponents of this idea say it would be the most effective way of clearing the system of bad loans, speeding up the process of getting the financial system back on a sound footing. Currently, mortgages are the one form of debt excluded from personal bankruptcy filings.

Opponents fear that allowing judges to rewrite loans could make matters worse by making it even harder for future home buyers to get a loan. If lenders have to factor in the risk that a judge may change terms after the loan is written — a so-called "cramdown" — mortgages will be harder to get and cost more.

“It’s the one thing the Republicans and the president are going to lie across the railroad tracks for,” said John Taylor, president of the National Community Reinvestment Coalition.

How is this going to work? Who’s going to be in charge of spending all this money?

The initial proposal from the Treasury — a $700 billion program to buy up bad mortgage-backed debts that are clogging the financial system — was exceptional in both its brevity and scope. The three-page proposal would give the Secretary of the Treasury unprecedented power to spend an equally unprecedented pile of taxpayers’ dollars.

Some have proposed the creation of a new entity like the Resolution Trust Corp. that was established to clean up in the savings & loan mess in the late 1980s. Others say the financial crisis is too immediate, and that setting up a new agency would take too long. House Financial Services Committee Chairman Barney Frank, D-Mass., has suggested the New York Federal Reserve Bank — which already buys and sells billions of dollars worth of securities every day — might be tapped to do the job.

In his testimony, Paulson made clear the document was a starting point.

“(Oversight) is something we’re going to work on together,” he told the Senate panel.

How will the government come up with a price to buy these bad debts?

These mortgage-backed securities are so complex, no one knows what they’re worth — which means no one wants to buy them. But since the majority of mortgages will be paid back over the long term, these pieces of paper almost certainly will be worth more over the long term.

If the government buys these debts at the “fire sale price,” banks will have to take an even bigger hit as they write them off their books. If the government pays more than the debt is worth over the long-term, taxpayers will take the hit.

One proposal is a “reverse auction” in which banks offer up their lowest priced-debt and the government buys that first.

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