Treasury and the Fed Knocking on Congress’ Door

Henry Paulson and Federal Reserve Chairman Benjamin Bernanke understood the crisis early on, and in September of 2008 they approached Capitol Hill with their plan to restore the credit markets and infuse capitol into the economy. Unfortunately there was already too much distrust and finger-pointing occurring to make the solution simple, and Mr. Paulson found himself at the center of some of the accusations.

Part of this distrust was based on his Wall Street background (he was CEO of Goldman Sachs until 2006), but mainly his approach in dealing with Congress during the crises suffered criticism. His original document presented for consideration was only three pages: he proposed that the Treasury would purchase bad assets, reduce uncertainty in the value of the remaining assets, and restore confidence in the credit markets.

Simple and direct enough for an economist or investment banker, the Paulson plan met with unending scrutiny on the floor of Congress. The final plan that was put to the vote by the Senate was 451 pages, with additional provisions totaling $100 billion. The point of this fact is to illustrate how poorly Secretary Paulson managed to exert his influence on Congress initially (despite his ultimate successes in gaining the necessary funds for the TARP).

This level of influence helped create speed bumps for the passage of the bill, and the relationship between Congress and the Executive branch eventually suffered. In point of fact the Treasury appeared almost as an interest group lobbying Congress throughout the crisis. This is partly because the proposal gave such broad-reaching powers to the Secretary to apply funds where he saw fit, and intrinsically asked for little or no oversight in an effort to streamline the process of jumpstarting the credit markets.

This request was made formally, but behind closed doors and in the halls of Congress the Treasury was quietly drumming support for the proposal with legislators; explaining the solution as the only way to affect the crisis in the time necessary to preserve American financial markets. This lobbying created tension between the branches during the bill’s deliberation, and hence the basic tenets of the bill became contentious. In short, the bill smacked of a lack of oversight, which contributed to the original problem, and Congress did not want to make the same mistake twice.