Paulson, a lame-duck secretary who will leave in January when Pres.-elect Obama appoints a new secretary, said he knows how he is going to spend the remaining funds, and foreclosure assistance and an auto industry bailout is not part of his plan.
Congress has been apprised of Paulson's spending, has vast authority over it, and could have directed him to intervene on behalf of homeowners.
Congress handed the $700 billion to Paulson on Oct. 3, after Paulson said the emergency money was urgently needed to prevent a wholesale collapse of the U.S. banking system and economy. The U.S. public was highly critical of the plan, and called Congress by the thousands, but legislators, led by Frank and other Democrat leaders, authorized the money.
Without help, five million U.S. homes will be lost to foreclosure in the next two years, according to the Federal Deposit Insurance Corporation. Two million have already been foreclosed on.
Committee member Maxine Waters expressed anger that she helped win votes for the $700 billion, which she said she thought would be spent on foreclosure assistance.
"I worked very hard to pass this [bailout] legislation. I was looked at with suspicion when I sold this to the Congressional Black Caucus. I am disappointed you have just divorced yourself from dealing with foreclosures," Waters told Paulson.
Paulson, formerly of Goldman Sachs, has spent the funds directly on financial firms, and spent hundreds of millions to hire financial firms to disperse the money, and track it.
"We are turning the corner. We have stabilized the system and prevented a collapse. We have a lot of work ahead. It's a lot of work to get the markets going again," Paulson said.
Paulson has given $125 billion in cash to nine of Wall Street's largest firms, in exchange for limited stock, and $148 billion so far to other smaller banks.
"You, Secretary Paulson, took it upon yourself to ignore the authority and direction that Congress gave you. I couldn't believe it when I heard that you abandoned the foreclosure effort," Waters said.
Paulson expects to spend up to $350 billion before he leaves office, and said the remainder will be directed to credit card companies, and businesses that make auto and education loans.
None will go toward foreclosure assistance or the auto industry, he said.
"I feel a great responsibility to stick with the purpose of the [fund], to stabilise and strengthen the financial system. Auto companies fall outside that purpose," Paulson said.
"Why are foreclosures still increasing, in light of the $700 billion spent at taxpayers' expense?" Rep. Nydia Velazquez asked Paulson.
"It's hard to imagine we're not going to have a large number of foreclosures when you look at what we've gone through, and the shoddy lending practices," Paulson said.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, has a plan in hand to help homeowners, and told Frank and Paulson she needs $24 billion to get it started. It appears homeowners may have to wait until January for Congress or the Treasury to consider funding it.
None of the powerful congressional leaders nor Paulson has stepped forward to propose funding for it.
Frank told Paulson that he should address the foreclosure problem.
"The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction," Frank said.
Waters expressed frustration that Paulson has refused so far to fund Bair's plan, and said it is badly needed. Mortgage holders are not voluntarily trying to re-negotiate their unfair loans, she said.
Waters' office is trying to help 26 homeowners to re-negotiate lower interest rates on unfair loans.
"It is absolutely ridiculous. One of the banks is Wells Fargo. I've had to go all the way to the chairman. I stay on the line for one hour just trying to get to a servicer. Then when you talk to the servicer, they don't even know enough to evaluate the incomes of the owners," she said.
The foreclosures are at the center of the financial meltdown, and unless stemmed, will continue to drag down the U.S. and global economy, economists told the panel.
"Stopping the financial crisis and getting credit flowing again requires ending the spiral of mortgage foreclosures and the expectation of very deep further house price declines," said Martin Feldstein, of Harvard University.
Alan Blinder, an economist at Princeton University, painted a bleak picture of the next year.
"The hope that we might avoid a serious recession is now gone," he said.
Blinder said that if the U.S. takes aggressive action by spending billions on infrastructure and other projects, the country may be able to hold unemployment at 8 percent. It currently stands at 6.5 percent.
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Albion Monitor November
19, 2008 (http://www.albionmonitor.com)
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