Bailout plan sparks wide debate in Congress

John W. Schoen Senior producer • Profile • E-mail

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

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.

Wall Street turmoil Bernanke, Paulson: Congress must act now First fear, then loathing, toward Wall Street Bush, Democrats differ on bailout’s passage Last U.S. investment banks to change status How Wall Street met its downfall U.S. offers 4 measures to restore order Vote: Is the government doing enough? Consumers, retailers cautious amid crisis Paulson: Rescue to cost ‘hundreds of billions’ Judge allows Barclays to buy Lehman units U.S. begins backing money-market funds Q&A: What does the crisis mean to you?

“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.”

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