Doubts grow over rescue

Collapsing confidence and buckling financial markets sparked talk Monday that Congress may need to resume work soon on emergency measures to shore up the economy.

On the first weekday of recess, with the Dow Jones Industrial Average plunging more than 700 points in intra-day trading, economists and market experts questioned the benefit of the $700 billion rescue package enacted just last Friday.

{mosads}Some economic experts read the House’s failure to pass the bill on its first attempt as evidence that Washington lacked the leadership to restore confidence.

Congress is due to return for a brief lame-duck session on Nov. 17, but market turmoil and economic gloom could change the agenda of that brief post-election workweek, some say.

The House was adjourned “subject to a call from the chair” and so could technically be reconvened at short notice.

Speaker Nancy Pelosi’s (D-Calif.) spokesman, Nadeam Elshami, said: “We are closely monitoring [the crisis] and will act accordingly … We will review what further action needs to be taken by Congress as the economic rescue plan is implemented.”

Stacey Bernards, spokeswoman for House Majority Leader Steny Hoyer (D-Md.), said: “Leader Hoyer plans on staying in close touch with both the bipartisan congressional leadership, as well as the White House, to ensure that we respond appropriately to economic events.”

Bernards deflected to Pelosi’s office all questions about further action by Congress this year.

European finance ministers met Monday to discuss how to handle a financial panic that has spread across the Atlantic and forced the German and Belgian governments to intervene to save two major banks: Hypo Real Estate Holding, a German mortgage lender, and Fortis, a Belgian insurance and banking giant. The London and Frankfurt stock markets lost 7 percent, and Paris 9 percent.

The spreading crisis, congressional recess and dwindling effectiveness of President Bush in the final weeks of his presidency will focus attention on Washington again this weekend when the World Bank and International Monetary Fund (IMF) hold their annual meetings.

As the financial storm gathered, House lawmakers traded partisan accusations at an Oversight and Government Reform Committee hearing Monday over the reasons for the financial meltdown. Democrats blamed Wall Street greed and Republicans pointed to lax lending by Fannie Mae and Freddie Mac.

The Dow closed down nearly 370 points, and the Standard & Poor’s 500-stock index fell almost 4 percent.

Some economists suggested Democratic leaders might have to call the Senate and House back into session for emergency action to prevent a severe recession. Market confidence and the credit crunch have worsened sharply in the two weeks since Treasury Secretary Henry Paulson handed Congress his three-page outline for a bailout.

“Now people are getting much more concerned about the financial markets feeding back adversely on the regular economy,” said Morris Goldstein, a former senior official at the IMF and a fellow at the Peterson Institute for International Economics. “In the last week or two that’s gotten a lot worse. We’re really not seeing the credit availability now. That’s making people more pessimistic.”

Goldstein said the $700 billion bailout has failed to revive market confidence. Anxiety has worsened as investors realize that toxic mortgage-based assets threaten banks in Europe as well as those in the United States.

Goldstein said that Congress might have to return to Washington in the next several weeks to pass an emergency economic stimulus package, increase the federal insurance limit on bank deposits or enlarge the financial authority of Paulson to buy distressed assets.

{mospagebreak}Joseph Brusuelas, chief economist for Merk Investments of California, said investors have been watching three metrics to gauge the success of the congressional bailout: the strength of the Japanese yen against the dollar; the spread on two-year U.S. interest rate swaps; and the difference between the rate charged for dollar loans in London compared to the overnight index swap rate.

“All of those different metrics worsened today,” said Brusuelas, who explained that investors are fleeing from the U.S. stock market to Japanese banks, which are believed to have less exposure to toxic mortgage-backed assets.

Bush has urged investors to remain patient, cautioning them that it would “take a while” for Treasury to set up the rescue program.

{mosads}His administration is expected to name Neel Kashkari, a former Goldman Sachs executive, to run the program, which has yet to be sketched out in detail.

Several economists told The Hill that Americans should not expect to see any substantial benefit from the program before Election Day.

“There’s a lot of uncertainty about whether this will work,” said Thomas Pugel, a professor of economics and global business at New York University. “I don’t expect a huge turnaround in the next month.

“Not good news for people running for reelection,” he added.

Doug Roberts, chief of investment strategy at ChannelCapitalResearch.com, said, “Everyone thought the bailout would be the silver bullet that would solve all of our problem. Now they realize the problem is global in nature and will take a lot longer to solve it.”

Market analysts said the rocky passage of the bailout through the Senate and House undermined the boost it was expected to give the markets.

Roberts said lawmakers should set aside partisan differences and press the Federal Reserve to act quickly to address the spread of instability to Europe.

Lawmakers could press for the Fed and other central banks to coordinate interest rate cuts, something hoped for by investors in the U.S. and abroad.

“Congress needs to get its act together and get into coordination with central bank and act in a coordinated manner to solve the problem,” said Roberts.

Conservative economists, however, said Congress would do the most good by staying on the sidelines, especially after many analysts blamed it for frightening the markets rather than calming them.

“If they want to really spook the markets, they should come back,” said J.D. Foster, a senior fellow specializing in fiscal policy at the Heritage Foundation. “There’s nothing the Congress can do to improve the functions of market.”

Barry Bosworth, a senior economist at the Brookings Institution, said the House defeat of the bailout last Monday may have contributed to panic in Europe.
 
Jared Allen contributed to this article.