In some ways it was a throwaway line, the kind of praise a boss tosses out casually. But as the economy teetered Monday, President Bush’s words to Treasury Secretary Henry M. Paulson struck many as discordant and disengaged.
“I want to thank you, Mr. Secretary, for working over the weekend,” Bush said as he met with his economic advisors at the White House. “You’ve shown the country and the world that the United States is on top of the situation.”
Actually, many analysts and critics said, by focusing on Paulson’s working hours instead of on the fear gripping Main Street and Wall Street, the president seemed to show just the opposite -- that he has failed to grasp the gravity of the country’s economic crisis.
“He has no idea what’s going on. Even by his standards, he’s wrong,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, who said he had been trying to get the president to pay more attention to the economy for more than a year.
Bush’s “working over the weekend” line also suggested a comparison to another disaster in which he was accused of acting too slowly: Hurricane Katrina. After the storm, the president was ridiculed for praising FEMA Director Michael D. Brown for doing “a heck of a job” -- even as thousands remained stranded in floodwaters in New Orleans.
It is unclear whether Bush or his administration could have done more, sooner, to address the cascading financial crisis that started with sub-prime mortgage defaults and led to the collapse of Bear Stearns, one of Wall Street’s most venerable investment firms.
Economists point out that it is the Federal Reserve, which operates independently of the administration, that is in charge of regulating banks and the monetary system. And it was Fed Chairman Ben S. Bernanke who led the weekend effort to rescue Bear Stearns.
“Policymakers talk like they have an ability to affect these things, but their ability is very, very limited,” said Robert D. Reischauer, president of the Urban Institute and the former director of the nonpartisan Congressional Budget Office. “The Fed is emptying its gun right now. If the markets continue to falter, there is not a heck of a lot policymakers are able to do.”
Many of Bush’s Republican allies were pointedly silent Monday as the president and Paulson tried to avert a larger financial meltdown. Democrats, on the other hand, pressed their advantage, arguing that the administration is more responsive to a crisis that hits Wall Street than one that hits Main Street.
“The same focus and aggressiveness the administration directed toward rescuing Bear Stearns should be applied to the economic problems facing America’s homeowners,” Sen. Jack Reed (D-R.I.) said.
For his part, Paulson tried to make the case that the Fed’s action over the weekend did not qualify as a “bailout” of Bear Stearns because the investment house’s stockholders lost a lot of money.
“This was an easy decision. This is the right outcome,” Paulson said.
Still, some economists and lawmakers said that the administration had too strongly resisted efforts to regulate either the mortgage industry or Wall Street’s new mortgage-backed securities out of a misplaced faith in free markets.
“There are all kinds of things they could have done in the past,” said William A. Niskanen, a conservative economist at the Cato Institute. Bush is “not personally up to date on the problems in the credit market. He has good advisors in Treasury, but even they have been late in understanding the nature of the problem.”
Fifteen months ago, Niskanen said, administration officials were focused on concerns about the securities market. Six months ago, their main concern was people with adjustable rate mortgages. They failed to act on a report by the Boston Fed indicating that the rash of foreclosures was caused by the value of houses dropping below the mortgage.
“They should have been and still need to be more aggressive in response to the problems in the mortgage market because that is at the root of what’s going on,” said Mark Zandi, chief economist at Moody’s Economy.com. “I don’t think the Fed can solve this on its own.”
Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said he had been trying to get the administration to tighten the rules for mortgage lenders for more than a year -- to little avail.
“They could have done a lot of things over the last year, in my view, to make a difference and refused to do so,” Dodd said. “They are lagging in terms of their response to all of this. Had steps been taken over the last year, we could have avoided a lot of this.”
Frank said that when Congress returns from its spring recess, he will revive ideas the administration previously shunned -- including regulating investment firms more like banks, forcing them to reveal more of their liabilities to shareholders, and issuing new rules for the government-chartered mortgage holders Fannie Mae and Freddie Mac.
But ultimately, Frank said, the country must debate re-regulating the financial markets.
He noted that even during the Clinton administration, “we just accepted this notion that the market knows best.”
“All these years of deregulation by the Republicans and the absence of regulation as these new financial instruments have grown have allowed them to take a large chunk of the economy hostage,” Frank said. “And we have to pay ransom, like it or not.”