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Debating the President’s Portsmouth pitch (part 16)

kbh — Fri, 14 Aug 2009 00:00:40 +0000

Here is part 16 of a 20(!) part series analyzing and debating the President’s comments on health care reform at a Portsmouth, New Hampshire town hall:

THE PRESIDENT: Now, I recognize, though, you make a legitimate — you raise a legitimate concern. People say, well, how can a private company compete against the government? And my answer is that if the private insurance companies are providing a good bargain, and if the public option has to be self-sustaining — meaning taxpayers aren’t subsidizing it, but it has to run on charging premiums and providing good services and a good network of doctors, just like any other private insurer would do — then I think private insurers should be able to compete. They do it all the time.

Follow-up question: Mr. President, are you confident that current and future policymakers won’t try to give the public option advantages over private plans? Look at all the cases where that has happened:

Fannie Mae and Freddie Mac crowded out private firms in the mortgage securitization business because they had government-provided advantages.
Only the government offers flood insurance, because private firms cannot compete.
Only the government offers terrorism reinsurance above a certain amount, because private firms cannot compete.
The Tennessee Valley Authority has no competitors, because the government has granted TVA market protections and advantages.
You are proposing cutting Medicare payments to private plans that compete with the Medicare “public option.”
Congressional Democrats argue that the government should save money by directly negotiating drug prices with pharmaceutical companies, a negotiation in which the government has most of the power.
The Federal Housing Authority is crowding out private forms that offer mortgage insurance.
The government is about to start crowding out private lenders who offer guaranteed student loans, in favor of direct student loans offered by the government.

Six month economic policy status update

kbh — Tue, 07 Jul 2009 13:32:00 +0000

We’re less than two weeks away from the six month mark of the Obama Administration. Here is a summary I would give to someone who had missed the past six months. I think the groupings are particularly important.

Good

The bank stress tests worked – regulators now have a common framework to evaluate the health of the 20 largest banks, and these banks are in the process of raising private capital.
Reports are that the Fed’s Term Asset-Backed Securities Loan Facility (TALF) is working, providing liquidity to certain markets that lacked it.
There has not been a sudden failure of a major financial institution since the President took office, in part due to significant new government efforts with AIG and Citigroup, and an ongoing flow of hundreds of billions of dollars to Fannie Mae and Freddie Mac.
As a result, the severe instability that plagued inter-bank lending markets and certain credit markets last fall and winter has largely receded.

Bad

As the Vice President said on Sunday, the Administration underestimated the severity of short-term macroeconomic decline.
The U.S. economy has lost 2.64 million jobs since the beginning of the Administration, and the unemployment rate is now 9.5%. Most private sector forecasters project economic growth will turn positive in the fourth quarter of this year, with job growth to resume sometime in 2010. The June job report was really bad. Watch the July report closely.
The stimulus was poorly designed by Congress, such that it is not now having any measurable economic effect, and the bulk of the GDP boost won’t come until 2010. When you combine this with the missed economic forecast, it means the next six months will be worse than they needed to be.
The President’s budget would result in massive increases in both deficits and taxes, driving by significant proposed spending increases, especially in health care. CBO projects deficits over the next decade equal to 5.2% of GDP, more than double the cumulative deficit projected under current law. Debt held by the public would rise from 57% of GDP in 2009 to 82% of GDP by 2019, while taxes would grow from 15.5% of GDP in 2009 to almost 20% by 2019.

Too soon to tell

Chrysler and General Motors are still operating. Chrysler has emerged from Chapter 11 bankruptcy, and GM is working through the bankruptcy process. It is good they have not failed, but it is unclear if they will survive in the long run. If either firm falters, will the Obama Administration give them even more cash? In addition, the Administration’s heavy-handed path to bankruptcy upended the traditional capital structure, increasing long-term political risk in the United States.
There is little apparent progress on the President’s foreclosure prevention plan. According to the Congressional Budget Office, as of [date], no funds had been spent on the program. (See footnote d on page 7 of this CBO report.) It takes time for mortgages to be restructured, so this may just be slow.

Non-existent

The much-hyped plan to buy troubled/bad/legacy/toxic assets from financial institutions, aka the Public-Private Investment Partnerships (PPIP), is reportedly being dramatically dialed back, almost to non-existence. This means that the Obama Administration’s much-hyped “new way” of doing TARP is basically the old way + the stress tests. After all the bashing of Secretary Paulson and the Bush Administration, TARP’s application to banks looks quite similar to how it looked in December and January.
The same CBO table shows no spending so far for the President’s small business lending program. I can’t tell if it’s in operation or not.
There has been almost complete radio silence on trade and open investment. The Free Trade Agreements with Colombia and South Korea are on life support due to Presidential and Congressional inaction. The Buy America provisions in the stimulus law are protectionist.
The President’s budget and Congressional proposals would significantly increase federal health care spending by creating a new entitlement to health insurance. The President and his advisors emphasize that their long-run budget plan is to “bend the health cost curve downward” by making systemic policy changes that would slow the growth of private and public health care spending. While the Administration has proposed policy changes that would increase the information available to consumers of health care, they remain silent on how to change the incentives to use more and more expensive health care. As a result, the President has no proposals that will slow the long-run unsustainable growth of private health care spending, and the Administration’s promises of long-run budget discipline are unsubstantiated.
Similarly, the Administration emphasizes the long-run budgetary effects of health care cost growth, but the Administration has no policies to address the more immediate budget pressures driven by an aging population.

Uncertain and unlikely

Climate change legislation passed the House June 26, but is unlikely to pass the Senate this year or next.

Uncertain

Health care reform legislation will pass the House, probably in July. Prospects in the Senate are highly uncertain. If legislation moves in the Senate, it will not be until fall.
The fate of the President’s financial regulatory reform package is unclear. House Financial Services Committee Chairman Barney Frank is talking positively about moving at least part of the package this Fall. Senate Banking Committee Chairman Chris Dodd is busy with health care reform and his re-election campaign. I think it is unlikely legislation will be enacted this year. If something is enacted, it will only be a piece of the whole.

Observations

Each of the good items is a joint Treasury-Fed operation.

In my judgment, four initiatives that the Administration hyped heavily appear dead or nearly dead: PPIP, foreclosure prevention, small business lending, and climate change. I respect that others may disagree with this judgment.

There is almost complete radio silence from the Administration on international economic policy, while incremental protectionist measures quietly move into place.

I think that over the next 3-6 months, the President’s economic stewardship will be judged almost entirely on (1) how he deals with the worsening macro picture, and (2) whether he signs into law a health care reform bill that meets his goals. Both are fraught with peril.

Six month economic policy status update

© 2010 Keith Hennessey - Your guide to American economic policy

The belt-and-suspenders of the Kennedy-Dodd health care bill

kbh — Thu, 11 Jun 2009 20:34:35 +0000

There is much debate about whether a health care reform bill should include a government-run health insurance plan, a so-called “public option.” Advocates argue that such a plan can compete fairly with private health insurance, and that this competition would “keep insurers honest.” They also argue that more choices are a good thing.

I fall in the other camp. I think that government cannot compete on a level playing field with the private sector. Government always has advantages because of its sovereign power. I also think that in most markets there is a range of private health insurance plans competing for business, and so the addition of one more plan is not worth the downsides of government involvement. (I believe that competition is flawed because for most people their employer shops for health plans. I prefer a system in which individuals are shopping for health plans.)

The government cannot compete on a level playing field with private firms:

Fannie Mae and Freddie Mac had competitive advantages relative to their purely private counterparts. They leveraged those advantages to the gain of their management and shareholders until they collapsed and jeopardized the entire financial system.
Ford Motor Company was not bailed out. It is now disadvantaged relative to GM and Chrysler, which benefited from government oversight, funding, and effective rewriting of bankruptcy rules.
Government-provided terrorism reinsurance is preventing private reinsurance from returning to the marketplace.
Most physician- and hospital-reimbursement structures are based on the methodologies of the largest payor in the market, Medicare.
Government-run direct student loans are now crowding out the guaranteed student loan program, in which private banks and financing firms offer loans. The government advantage comes from control over small details of the program that give direct loans a competitive advantage.

(I would appreciate further examples if commenters have any. Updates are in green.)

The ultimate fear of having a government-run “public” option is that it will crowd out private health insurance, and that ultimately most Americans will be getting their insurance from the government.

At the same time, I hope that opponents of Kennedy-Dodd and the developing House Democrats’ health care bills don’t miss a critical point. Even if the public option is successfully stricken from this legislation, the Kennedy-Dodd goals will be largely achieved by other parts of the bill.

Separate from the Kennedy-Dodd language that creates a new public option, other language in the bill:

Gives a government-appointed Medical Advisory Council the ability to determine a standardized package of minimum benefits;
Establishes three tiers of standardized copayments and deductibles, as well as the total dollar value of benefits included relative to an industry average;
Mandate relative premiums for people with different risk profiles;
Gives the Secretary of Health and Human Services authority to set a maximum percentage of administrative expenditures and profits for health plans;
Requires plans to provide incentives for certain models of delivery of medical care; and
Gives State “Gateways” authority to redistribute resources among health plans to account for the risk distribution of their beneficiaries.

If the government determines benefits, cost-sharing, relative premiums, expenses, and profits, and can take funds from one health plan and give them to another, then the insurance function is governmental.

The ultimate fear of a public option would be immediately implemented by other parts of the Kennedy-Dodd bill. Health plans would turn into a version of Fannie Mae and Freddie Mac: they would have (regulated) private profits but public purposes. (A friend points out that the Fannie/Freddie comparison doesn’t work well here. F/F are more about “private profit but public risk.”)

This is a smart tactical move by the authors of the bill. They have a belt (the public option) and suspenders (government control of private insurance). They achieve their policy goal even if they lose the public option.

Killing the public option is essential, but it isn’t enough to prevent government-run health care.

The belt-and-suspenders of the Kennedy-Dodd health care bill

© 2010 Keith Hennessey - Your guide to American economic policy

Intro to TARP: Banks have two problems

kbh — Tue, 28 Apr 2009 21:54:08 +0000

The big banks (and some large non-banks like AIG, Fannie Mae, and Freddie Mac) have two problems, not one:

They don’t have enough capital.
They have on their balance sheet downside risk that is creating uncertainty about how much the firm is worth and is scaring away investors.

I will use a simple example constructed by former Council of Economic Advisers member Donald Marron.

Imagine that you run Large Bank. You collect deposits and you borrow on the debt market, and you use both sources of funds to make loans. Here is what your balance sheet looked like three years ago when you made these loans.

Assets			Liabilities and Equity

Loans	1,000		Deposits	600

			Debt	300

			Equity	100

			Preferred	0

Total	1,000	. . . . . . .	Total	1,000

To keep it simple, let us assume that all 1,000 of loans were for home mortgages.

We measure the health of your bank in three ways:

You have 100 of capital — the equity from the shareholders who invested in your bank.
Your leverage ratio is 10 to 1 — you are supporting 1,000 of loans with 100 of capital.
Can you roll over your debt and issue new debt when you need/want to? Do creditors have enough confidence in your bank that they are willing to loan you money?

A healthy bank is one with a lot of capital, with a leverage ratio that is not too high, and that can borrow when it needs to at reasonable interest rates. Of course, the higher the leverage ratio, the more profit you make on each dollar of capital.

Now let us assume that you screwed up three years ago. 200 of the 1,000 of loans you made were “no documentation” loans. Some (many? most?) of those 200 of loans are going to default, or at least be late with some of their payments. They are clearly not worth the 200 of face value. First let’s separate out the good and bad loans.


Assets			Liabilities and Equity

Good loans	800		Deposits	600

Bad loans	200		Debt	300

			Equity	100

			Preferred	0

Total	1,000	. . . . . . .	Total	1,000

Now in present day, you estimate that 80% of those bad loans will default, with a 50% recovery rate, so they are worth only 120 (60% of 200). You write down the value of the bad loans to 120, losing 80 on the assets side. This means the value of your equity has dropped from 100 to 20.


Assets			Liabilities and Equity

Good loans	800		Deposits	600

Bad loans	120		Debt	300

			Equity	20

			Preferred	0

Total	920	. . . . . . .	Total	920

Writing down these loans has wiped out 80% of your capital. Problem #1 is that you only have 20 left of capital. This also leaves you with a very high leverage ratio of 46:1 (920 of loans divided by 20 of capital). Large Bank is clearly not in good shape. Creditors will start charging you higher interest rates for new debt (or to roll over existing debt), and any uninsured depositors may get nervous and pull their money out.

If you can raise more capital by selling more equity, you can give yourself more protection against insolvency and reduce your leverage ratio. Your existing shareholders will be upset, because before they owned 100% of the profits, and after raising more capital they will own a much smaller share. If you raise new private capital, you will be “diluting” your existing shareholders. This is one possible explanation why some banks have not raised capital so far.

You have a second problem, however. As you try to raise more capital and sell equity to new private investors, they are questioning the value of those bad loans. Sure they might be worth 120, but they might be worth only 100, or 80, or even 60. A private investor thinking of putting 60 of his own capital into Large Bank could see that get wiped out if the bad loans are only worth 40 rather than 120. The downside risk associated with those bad loans may deter private investors from putting in their own capital.

So Large Bank has two problems. You don’t have enough capital, either to satisfy your regulator or to reassure yourself that you won’t soon go insolvent if things get even worse.

You also have downside risk which makes the health of your bank even shakier than the above balance sheet suggests, and which scares away private investors.

Tomorrow we will look at three different ways to address your problems, aka TARP I, II, and III.

Intro to TARP: Banks have two problems

© 2010 Keith Hennessey - Your guide to American economic policy

Let’s not hide $1.4 trillion of IOU’s

kbh — Wed, 08 Apr 2009 14:02:14 +0000

Yesterday on his blog the President’s Budget Director, Peter Orszag, asks himself and then answers the question, “How much does the federal government owe?”

This sounds like a technical question of concern only to “those of us wearing the green eyeshades,” but the Director’s suggested answer has dangerous ramifications, and could mislead or at least confuse taxpayers and financial market participants.

The Director’s answer makes the federal debt appear $1.4 trillion smaller than the way it is traditionally measured. He argues that we should, in effect, ignore 1.4 million million dollars borrowed by the federal government. That is breathtaking.

Let’s look at the Director’s argument and why I think it’s dangerous.

Most budget experts focus on debt held by the public, which Director Orszag accurately describes as “the amount that the federal government owes to others.” I will expand on that a bit with some concrete numbers:

Take the total amount the Federal government will spend this year. Specifically, we’re looking at cash paid by the U.S. government to someone outside the government in 2009. A budget wonk would call these outlays. I’ll use the nonpartisan Congressional Budget Office’s numbers for current law, so I get $3.85 trillion of outlays for 2009. That is way (way) above historic norms, in part due to the financial stabilization efforts, and in part due to the new “stimulus” law.
Now take the amount the Federal government will collect in revenues this year. This is cash coming into the U.S. government from someone outside it. Almost all of this is taxes. CBO says this is $2.186 trillion of revenues for 2009.
If the U.S. government is paying out $3.85 trillion in cash (outlays) this year, but collecting “only” $2.186 trillion in cash, then we need to come up with the difference somewhere. That difference is $1.667 trillion for 2009. This is what CBO says is the federal budget deficit for 2009.
The U.S. government gets this cash by issuing IOU’s to people outside the government, aka Treasury bonds. The government gets cash from anyone who buys Treasury bonds – individuals, firms, and foreign governments.
The debt held by the public is simply the accumulation of these IOU’s. It is the sum of money owed by the U.S. government to others. (Update: See the caveat at the bottom.)

Nothing I have said so far is the slightest bit controversial, but this is where Director Orszag and I part ways. Tuesday he wrote:

As I said at the beginning of this post, I think the most meaningful measure of federal debt is debt held by the public net of financial assets. If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.

Suppose I tweak the Director’s metaphor to make it better fit the current situation and illustrate my point. If he takes a $100 loan from his bank and invests it in the business of his deadbeat neighbor Alan I. Gorp, he still owes the bank $100. The bank cannot loan that $100 to anyone else. His (the government’s) borrowing has “crowded out” borrowing by someone else. And who knows how much his $100 investment will be worth next month? We should care not just about his net position, but also about his total liabilities, and especially about how much he (the government) is borrowing from the bank (private sector).

In normal times this would not be a big difference, because the U.S. government in large part stays away from owning financial assets. Now, however, the federal government is buying equity stakes in banks and other large financial firms, and issuing loans to financial and non-financial firms. Director Orszag’s numbers show that the U.S. government owned $506 billion of financial assets last year, and will buy another $915 billion this year. (I’m subtracting “Debt net of financial assets” from “Debt held by the public” on Table S-1 of the President’s budget.) Those are huge numbers, and have a huge effect on what figure you cite for the federal debt.

If you look at the traditional measure of debt held by the public, which you’ll remember is the sum of all IOU’s (Treasury bonds) issued by the Federal government, then under the President’s budget and using OMB numbers, that’s equal to $8.36 trillion. Compared to one year of our entire national output (GDP), that’s almost 59% of GDP.

If, however, you net out OMB’s estimate of the value of the financial assets, then the debt held by the public net of financial assets, is “only” $6.94 trillion, equivalent to almost 49% of GDP. That’s still a big bad number, but it’s $1.4 trillion and 10% of GDP less bad than the debt held by the public numbers. That’s a convenient way to make the problem look much smaller. Director Orszag argues that it is also the “most meaningful measure of current federal debt.”

Here is his key paragraph:

As the federal government has acted to stabilize the financial sector amidst the worst financial crisis since the Great Depression, the federal government has purchased significant financial assets—such as preferred equity stakes in Fannie Mae and Freddie Mac. The federal government will likely take a loss on these purchases, but the assets have value. And just as what my bank owes me should be netted against what I owe the bank in determining the health of my personal finances, the value of these assets should be netted against publicly held debt in determining the health of the government’s finances. … Debt held by the public net of financial assets is the most meaningful measure of current federal debt … (emphasis added)

I disagree with this last statement, but I think I understand why he says it. From his perspective of the federal budget, he’s netting out some of his liabilities with a somewhat liquid asset that he now holds and hopes someday to sell. He concedes the point, however, that he is including some assets and liabilities with his new measure, but excluding others. This makes his new metric suspect.

From the perspective of the U.S. economy, the “netting” comes from different places. The U.S. Treasury has to issue $905 billion of Treasury bonds this year to raise the cash to buy those financial assets. This makes it harder for private firms and individuals to borrow, because they are competing with the government for cash, so they have to pay a higher interest rate. Those funds are then invested in other parts of the economy.

Another way to see why this is a poor metric is to imagine that the U.S. government were to borrow another trillion dollars by issuing even more Treasuries, and then immediately buy one trillion dollars of credit default swaps with the cash raised. According to Director Orszag’s preferred measure, nothing would have changed, because the two transactions would net out. But clearly we would have just had a major impact on the U.S. (and global) financial economies. U.S. government borrowing in these enormous amounts hurts financial markets, no matter what is done with the funds raised.

Director Orszag touches on another problem with his new metric when he writes “The federal government will likely take a loss on these purchases, but the assets have value.” He’s right, but the value of the particular assets being purchased by the government is highly uncertain. How much is he counting as the value of the $19.4 B loaned (so far) to General Motors? I sure hope he is not counting it at face value. What about the $70 B “invested” in AIG, or the $5.5 B in Chrysler? Any private firm valuing these assets would say their values need to be discounted.

The values of these financial assets are highly uncertain and depend heavily on what assumptions OMB uses about the likelihood of them being repaid. For people to trust this metric, they need to understand how it is calculated, which means that OMB should divulge the discounts they are applying to their financial assets. I will guess that he does not want to divulge those assumptions. I wouldn’t if I had his job.

I think the most meaningful measure of current federal debt is still debt held by the public. I think the public policy debate can be further informed by also disclosing the estimated value of the financial assets held by the U.S. government. But policymakers should not net out the two and use that measure instead of the one that most directly measures how much the U.S. government is borrowing from the private sector. This is particularly true when that new measure hides $1.4 trillion of debt borrowed by the U.S. government from the private sector.

Director Orszag, and those measuring his performance, should continue to use debt held by the public as the most meaningful measure of current federal debt. Budget projections will account for that measure to come down over time as the financial assets are sold and funds recouped.

Net measures can hide meaningful information. This is a theme I will return to often. Any time someone in economic policy gives you a net figure, see if you can learn something more by asking about the components that make up the net calculation.

The President’s Budget is titled “A New Era of Responsibility.” In his February 24th Address to the Congress, the President said,

The only way this century will be another American century is if we confront … the mountain of debt they stand to inherit. That is our responsibility.

A new era of responsibility does not begin with hiding $1.4 trillion of that mountain of debt. These IOU’s will not go away just because we ignore them.

Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. I don’t think this changes my logic above about whether to net out the purchase or sale of financial assets.

Let’s not hide $1.4 trillion of IOU’s

© 2010 Keith Hennessey - Your guide to American economic policy

Is $700 billion enough? Part 2: the Obama warning

kbh — Fri, 27 Mar 2009 10:32:24 +0000

In part one of this series, I explained why I think the Obama Administration will soon run out of TARP money and need to ask Congress for more.

Several weeks ago the Obama team began to lay the groundwork for such a request. Here are four signs.

1. In his February 24th Address to the Nation, the President said:

Third, we will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. … Still, this plan will require significant resources from the federal government – and yes, probably more than we’ve already set aside.

2. The President’s budget submission includes a $250 B “placeholder for potential additional financial stabilization effort.” See Table S-6, page 125, the Treasury section in the President’s budget submission. Importantly, the budget puts this $250 B placeholder in federal Fiscal Year 2009, which ends September 30 of this year. So they have a placeholder in the President’s budget for another $250 B request some time in the next six months.

3. In his written testimony before the Senate Budget Committee on March 12th, Secretary Geithner wrote:

It acknowledges that, as expensive as it already has been, our effort to stabilize the financial system might cost more. It establishes a placeholder to help ensure we can cover any additional financial stability costs.

I should note here that the existence of the $250 billion placeholder for financial stability in the President’s Budget does not represent a specific request. Rather, as events warrant, the President will work with Congress to determine the appropriate size and shape of such efforts, and as more information becomes available the Administration will estimate potential cost.

4. Budget Director Peter Orszag has similar language, both in his written testimony, and on his blog. Here’s a quote from page two of his written testimony:

Because of problems in financial markets, the costs of stabilization may amount to $650 billion or more – including the placeholder should additional efforts prove necessary to address the crisis we have inherited.

And here’s his blog:

Requiring $650 billion or more to stabilize financial markets (including placeholder):

$171 billion for stock purchases in Fannie Mae and Freddie Mac

$247 billion in federal costs for TARP

$250 billion placeholder in case additional actions are necessary

These are not small signals. This is a coordinated, Administration-wide message: “Hey, Congress, we may need to ask you for more TARP funds. Assume $250 B for now, and we’ll come back to you with a real number when we know it.” If they do make this request, it will dominate the legislative agenda.

Congress: you have been warned. Are you listening?

In part three of this series (coming soon), I will provide my views and recommendations.

Is $700 billion enough? Part 2: the Obama warning

© 2010 Keith Hennessey - Your guide to American economic policy

About

kbh — Sun, 22 Mar 2009 19:34:43 +0000

About Keith Hennessey
About this blog
About the National Economic Council
About my work in the White House
Photo credits
Technical credits

About Keith Hennessey

I served as the senior White House economic advisor to President George W. Bush. My job was to coordinate economic policy for the President, including macroeconomic issues, financial markets and institutions, tax policy, energy and climate change, health care, pensions, Social Security and Medicare reform, housing, transportation, technology and telecommunications, and agriculture. I also worked on budget and international trade and financial issues.

From August 2002 through the end of 2007, I served as Deputy Assistant to the President for Economic Policy and Deputy Director of the National Economic Council at the White House. In 2008 and the first three weeks of 2009, I was Assistant to the President for Economic Policy and Director of the National Economic Council, a position now held by Dr. Larry Summers for President Obama. I spent most of my waking hours for almost six and half years of my life here, based in #19 and then #18.

I’m now taking some time off to recover from 6+ years in the White House. For fun I’m doing a little bit of TV commentary and this blog.

Before working in the White House, I spent eight years working on Capitol Hill. I spent the bulk of that time as a policy advisor to Senate Majority Leader Trent Lott (R-MS). I also worked for two years on the Senate Budget Committee staff for the Chairman, Senator Pete Domenici (R-NM), and for six months on the staff of the Bipartisan Commission on Entitlement and Tax Reform, which was co-chaired by Senator Bob Kerrey (D-NE) and Senator Jack Danforth (R-MO). Many years ago, I designed and tested software for Symantec Corporation.

I earned a B.A.S. in math and political science from Stanford, and a Master in Public Policy degree from the Kennedy School at Harvard.

I like to bike and wish I had a dog.

About this blog

This blog is an experiment. During my time in the White House, I wrote and edited hundreds of memos and presentations for President Bush. I’d like to do the same now directly for the taxpayer who finances the U.S. government, as well as for students of American economic policy wherever they might be.

While working for President Bush I had a semi-public mailing list titled White House Economics. All the posts you see on this blog dated before January 20, 2009 are from that mailing list, with only slight clean-up tweaks. So where it says “Posted [date],” where [date] is before 01/20/09, it actually means “Emailed to my White House Economics mailing list on [date].”

I am new to blogging, and I welcome suggestions about how to improve this blog.

About the National Economic Council

The National Economic Council (NEC) is one of four policy councils in the White House. The others were the National Security Council, Domestic Policy Council, and Homeland Security Council. (President Obama has since folded the HSC into the NSC.) Every policy issue that comes to the attention of the President “belongs” to one of those councils.

The NEC is a coordinating body that helps the President manage economic issues. My staff and I were responsible for:

analyzing economic policy problems and coordinating design of the President’s economic policies;
framing strategic decisions and policy options for the President, integrating economic and other policy analysis with legal, legislative, and political constraints;
acting as an honest broker among the various Cabinet secretaries and senior White House advisors, resolving conflicting views where possible, and structuring and chairing Oval Office meetings at which issues and options were presented to the President;
after a Presidential policy decision, working as part of the core White House team that wrote the speech, communicated the policy to the public, worked with Congress to enact a new law, and oversaw the implementation of that policy.

About my work in the White House

I worked for the President for 6+ years. The last thirteen months were by far the most important, helping advise President Bush on his Administration’s response to the financial crisis. In addition to that work, here are some of the major Presidential policies that I helped design, enact, and implement:

the 2003 law that cut taxes on income, capital gains, dividends, marriage, children, small businesses and estates;
the 2008 economic stimulus, as well as tax cuts in 2004, 2005, and 2006;
successfully opposing repeated Congressional efforts to raise taxes in 2007 and 2008;
reforming the regulation of Fannie Mae and Freddie Mac;
two energy laws that support nuclear power and other alternative energy technologies, and will reduce U.S. gasoline consumption 20 percent by 2017;
eliminating the ban on offshore drilling for oil and natural gas;
the “Major Economies” process that is restructuring global climate change negotiations to ensure participation by all large economies;
creating Health Savings Accounts and implementing health policies to improve price and quality transparency;
bringing private sector competition and market forces to Medicare and adding a prescription drug benefit;
providing loans to U.S. auto manufacturers in 2008;
coordinating the response to the 2002 West Coast Port Strike;
coordinating the response to the 2002 Mad Cow disease outbreak;
creating Terrorism Reinsurance after the 9/11 attacks; and
the most popular policy change of President Bush’s tenure: the Do-Not-Call list.

I was heavily involved in budget and international economic issues, including all of the President’s budget submissions from 2003-2008, his line item veto proposal and earmark reforms, the G-20 summit of 2008, several Free Trade Agreements and the Doha global trade negotiations, and the President’s open investment policies.

There are several policies which, while not enacted into law during the Bush Administration, I hope will serve as models for future reforms, including President Bush’s:

Social Security, Medicare, and Medicaid reform proposals, with the goal of making these entitlement programs sustainable over the long run;
proposal for a standard tax deduction for health insurance and health insurance market reforms, to move toward market-based health care and make health insurance more affordable for tens of millions of Americans;
proposal to make our farm programs less trade-distorting and more fiscally responsible; and
proposals to make permanent the tax relief enacted in 2001 and 2003 and prevent future tax increases.

In my final days on the President’s staff, I answered some questions on the Freakonomics blog about working at the White House and on the NEC staff.

What caused this financial mess?

kbh — Fri, 17 Oct 2008 21:55:00 +0000

President Bush spoke today about the financial crisis to the U.S. Chamber of Commerce.

I’m going to use the President’s speech as an opportunity to explain to a non-financial audience what the Federal government did this week and why. I will oversimplify in many cases, and will gloss over many details. I don’t claim that the description below is comprehensive. But it is, we think, a good starting point for discussion.

This is a story that evolves over time as we learn more, and will be debated by economists and historians long after we’re gone.

We begin with a global credit boom. A dramatic increase in worldwide saving outside the United States, and especially in Asia and the Middle East, meant there was a lot of money to lend. Fed Chairman Ben Bernanke referred to this as a “global savings glut.” The U.S. has a productive economy and a strong legal framework that protects investors, so a lot of this capital was attracted to the U.S. This lowered interest rates here, creating abundant and inexpensive credit. This was particularly true for riskier borrowers – as the supply of loanable funds increased, the interest rates charged to these borrowers came down a lot, making it easier for them to get loans. In many cases this was a good thing – many low-income people who had previously been unable to buy a home were able to do so. At the same time, an economist would say that “credit spreads narrowed dramatically”, and many would say this led to an underpricing of risk. Lots of lenders seeking higher yields made increasingly risky investments.While most of the focus has been on housing, and I’ll use housing to explain the rest of the story, the underpricing of risk existed in other markets as well (e.g., commercial real estate). Also note that the credit boom was not confined to the U.S. – Australia, the U.K., France, and Spain also experienced housing or credit booms.

We then look at a domestic housing boom. Cheap credit and low interest rates contributed to a building boom, soaring housing prices, and ultimately an excess supply of housing. Normally you’d expect about 1.6 million homes to be built each year. At the peak of this boom, about 2¼ million houses were being built each year. At a normal time, there’s about a 5½ month supply of unsold inventory of homes; now there’s about a 10 month supply. When there’s excess supply, prices drop and construction of new homes plummets. This last factor meant that the “residential construction” component of GDP was shrinking, and caused an overall drag to economic growth beginning in early 2006.

Risky mortgages proliferated. Low interest rates combined with relaxed lending standards, a new model of mortgage origination, and innovations in mortgage products to dramatically expand the number of Americans who could get mortgages and buy homes. At the same time, these factors also expanded the universe of people who purchased mortgages and homes they could not afford.In an imperfect lending system, you’re always trading off between helping too few deserving people, and too many really bad risks who will never be able to pay off their loans. The expansion of credit and innovation in mortgage markets moved the pendulum toward a lot more people being able to borrow and buy homes than had previously occurred. Many of these people who previously would not have been offered credit are now living in their homes, paying their mortgage every month. This is a good thing. At the same time, these changes allowed others to purchase mortgages and homes that they could not afford.

You can try to minimize this tradeoff by doing things like fixing the lending disclosure rules, and changing requirements on lenders to make sure that a borrower will be able to afford the highest interest rate of the mortgage, and not just the teaser rate. But even after you’ve made these kinds of fixes (which the Fed did late in 2007), there will still always be a tradeoff and a value choice to make: do you want to help more higher-risk low income people own homes, at the cost of having more defaults and more bad lenders and borrowers abusing the system? Or do you want fewer abuses of the system, at the cost of fewer responsible low-income and high-risk people owning homes?
We then move to the secondary market for mortgages. Mortgages were bundled, guaranteed, securitized, and sold to financial institutions (especially banks).DETOUR: What is a mortgage-backed security?You get a mortgage from Bob’s Bank. You will make monthly mortgage payments to Bob’s Bank for the next 30 years. 99 of your neighbors get similar mortgages from Bob. Bob then sells the 100 mortgages to the company Fannie Mae (or Freddie Mac, or a fully private securitization firm). Fannie collects a fee from Bob and slaps a guarantee onto each mortgage – if you default, Fannie will pay the rest of the mortgage due to Bob’s Bank, or whoever owns it.
Now imagine that each of your monthly mortgage payments is a pancake, and so your mortgage is a big vertical stack of 360 payments/pancakes (30 year mortgage X 12 monthly payments per year). Fannie Mae lines up the 100 stacks of pancakes/payments side-by-side, and then takes a slice of the pancake/payments stacks (e.g., the bottom pancake/payment from each stack, or in the usual case with Fannie Mae, a vertical slice of each stack). That slice is a mortgage-backed security (MBS) that consists of a portion of the payments from all 100 mortgages. Fannie Mae then sells the MBS slices back to Bob, after charging him a fee for the service. Bob then sells those mortgage-backed securities to investors for cash, which he can turn around and use to offer new mortgages to other homebuyers.

Fannie Mae and Freddie Mac did the bulk of this guarantee and securitization business, while other firms securitized lower quality subprime and Alt-A loans. A deeper analysis could explain how this securitization contributed to problems in these secondary markets. Creative financial engineers further sliced and diced these mortgage-backed securities, breaking risk apart into little pieces and combining them in interesting, creative, and almost completely incomprehensible ways. (Imagine flipping and swapping some pancakes around before slicing them and you’ll have a feel for it).
Many banks and other large financial institutions, including some insurance companies, and Fannie Mae and Freddie Mac themselves, bought and held these mortgage-backed and other complex securities. These investors all made the same incorrect assumption: they assumed that anything mortgage-related would be safe and yield a good return. While most mortgages are safe investments, investors did not correctly understand that some of these assets were quite risky. They didn’t really know what they were buying for two reasons: (1) the underlying information about some of the mortgages was bad, because some of the loans were based on poor information (e.g. “no documentation loans”) or were made to people who were higher credit risks; and (2) many buyers of complex securities did not understand how the sophisticated financial engineering affected the risks built into these securities. In some cases, investors relied on the Fannie/Freddie brand name and didn’t do their own homework. Others relied solely on credit rating agencies that later turned out to be wrong in their risk assessments.

Banks and other financial institutions that bought mortgage-backed securities (and other mortgage-related investments) lost a lot of money when these securities later declined in value. Because many of these institutions (especially large investment banks) were highly leveraged, they faced a greater risk of failure from a bad bet, and the consequences of that failure were much greater. Many of those banks that did not fail still lost a lot of their capital. Some of these large financial institutions were so big and so interconnected with other institutions, that their failure would create a domino effect. This is what we call “too big to fail”, which should more precisely be called “too big and interconnected to fail suddenly”.

Example of low leverage

If an investment bank has $10 of capital and makes $50 of loans, it is leveraged 5 to 1. (The other $40 to lend comes from deposits or borrowing.) If that $50 of loans loses 10% of its value and pays back only $45, then the bank has lost $5, which is half of its $10 of capital.

Example of high leverage

The same bank with $10 of capital makes $200 of loans, and is leveraged 20 to 1. If that $200 of loans loses 10% of its value and pays only $180, then the bank has lost $20. All of its capital is gone (the bank is bankrupt), and the bank is $10 in the hole. Because this bank was highly leveraged, it took on greater risk of failure.

The major investment banks were levered 25 to 1. That’s like buying a house with only 4% down – if your home price declines by 5%, you’re “underwater”. And since many of these large financial firms relied on short-term financing to run their operations, when lenders started to get nervous and pull back from their short-term loans to these large firms, things rapidly spiraled downward.

That story gets us up to the point of a large bank (we’ll call it Big Bank) ending up in a bad position in two ways:

Big Bank lost a lot of capital because the mortgage-backed securities (MBS) it bought have declined tremendously in value.
Big Bank is still holding the MBS on their balance sheet. Nobody wants to buy these MBS. And if housing prices or market conditions get even worse than expected, those MBS will decline in value even more. So Big Bank has a security that is illiquid and contains the downside risk of further losses.

Big Bank’s problems show up in any combination of three different ways:

Capital – Because Big Bank has too little capital, they can’t lend as much. This hurts everyone in the economy who needs to borrow – students who want student loans, drivers who want car loans, small business owners who need credit to operate and to expand, farmers who borrow for seed and fertilizer, …
Liquidity – Banks normally loan money to each other for short periods of time. But now Large Bank doesn’t want to lend to Big Bank, because Large Bank fears Big Bank might be insolvent and not be around to pay them back. So Large Bank charges Big Bank more (a higher interest rate) for this short-term borrowing. We have seen this in dramatic fashion as the interest rate that banks charge either, called the London Interbank Offerer Rate (LIBOR) has spiked up. Large Bank may shorten the term of their lending – being willing to loan to Big Bank overnight, but not for 30 days. In an extreme case, Large Bank may not lend at all to Big Bank. To oversimplify, banks don’t trust each other enough to lend. This breakdown in trust/confidence among large financial institutions is a core problem in our financial system.
Solvency – At the extreme, a bank could lose so much capital that it is clearly insolvent. In less severe cases, either depositors or lenders to that bank might lose confidence that the bank was viable. Depositors might withdraw their funds from the bank, or lenders to that bank might stop lending. Either one of these could cause a “run on the bank” that could ultimately force the bank to shut down.

Conclusion

Many banks and other financial institutions, and especially big ones, lost a lot of money on bad mortgage-related investments. This caused them to lose a lot of their capital, and in many cases some of their assets are illiquid and pose additional downside risk to their balance sheets. This hurts those banks’ ability to lend, it hurts their ability to remain liquid and borrow short-term cash from other banks, and in extreme cases it can lead to a run on the bank (of depositors, lenders, or both) and insolvency.

I am indebted to Eddie Lazear and Donald Marron of our Council of Economic Advisers for their help with this note. All mistakes are my own.

Address by President Bush on financial markets

kbh — Wed, 24 Sep 2008 13:40:00 +0000

President Bush gave a major policy address on the State Floor of the White House this evening.

THE WHITE HOUSE

State Floor

9:01 P.M. EDT

THE PRESIDENT: Good evening. This is an extraordinary period for America’s economy. Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration. We’ve seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money.

We’re in the midst of a serious financial crisis, and the federal government is responding with decisive action. We’ve boosted confidence in money market mutual funds, and acted to prevent major investors from intentionally driving down stocks for their own personal gain.

Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets. Financial assets related to home mortgages have lost value during the housing decline. And the banks holding these assets have restricted credit. As a result, our entire economy is in danger. So I’ve proposed that the federal government reduce the risk posed by these troubled assets, and supply urgently-needed money so banks and other financial institutions can avoid collapse and resume lending.

This rescue effort is not aimed at preserving any individual company or industry — it is aimed at preserving America’s overall economy. It will help American consumers and businesses get credit to meet their daily needs and create jobs. And it will help send a signal to markets around the world that America’s financial system is back on track.

I know many Americans have questions tonight: How did we reach this point in our economy? How will the solution I’ve proposed work? And what does this mean for your financial future? These are good questions, and they deserve clear answers.

First, how did our economy reach this point?

Well, most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions — along with low interest rates — made it easier for Americans to get credit. These developments allowed more families to borrow money for cars and homes and college tuition — some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit — combined with the faulty assumption that home values would continue to rise — led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected — along with mortgage payments they could not afford. As a result, many mortgage holders began to default.

These widespread defaults had effects far beyond the housing market. See, in today’s mortgage industry, home loans are often packaged together, and converted into financial products called “mortgage-backed securities.” These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all.

I’m a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There’s been a widespread loss of confidence. And major sectors of America’s financial system are at risk of shutting down.

The government’s top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

Fellow citizens: We must not let this happen. I appreciate the work of leaders from both parties in both houses of Congress to address this problem — and to make improvements to the proposal my administration sent to them. There is a spirit of cooperation between Democrats and Republicans, and between Congress and this administration. In that spirit, I’ve invited Senators McCain and Obama to join congressional leaders of both parties at the White House tomorrow to help speed our discussions toward a bipartisan bill.

I know that an economic rescue package will present a tough vote for many members of Congress. It is difficult to pass a bill that commits so much of the taxpayers’ hard-earned money. I also understand the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15th, and are reluctant to pay the cost of excesses on Wall Street. But given the situation we are facing, not passing a bill now would cost these Americans much more later.

Many Americans are asking: How would a rescue plan work?

After much discussion, there is now widespread agreement on the principles such a plan would include. It would remove the risk posed by the troubled assets — including mortgage-backed securities — now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses. Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan’s implementation. And it should be enacted as soon as possible.

In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday. First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system. In the short term, this will free up banks to resume the flow of credit to American families and businesses. And this will help our economy grow.

Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

A final question is: What does this mean for your economic future?

The primary steps — purpose of the steps I have outlined tonight is to safeguard the financial security of American workers and families and small businesses. The federal government also continues to enforce laws and regulations protecting your money. The Treasury Department recently offered government insurance for money market mutual funds. And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000. The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit — and this will not change.

Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we’ve seen how one company can grow so large that its failure jeopardizes the entire financial system.

Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability. There are other good ideas, and members of Congress should consider them. As they do, they must ensure that efforts to regulate Wall Street do not end up hampering our economy’s ability to grow.

In the long run, Americans have good reason to be confident in our economic strength. Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised. It has unleashed the talents and the productivity, and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back.

Our economy is facing a moment of great challenge. But we’ve overcome tough challenges before — and we will overcome this one. I know that Americans sometimes get discouraged by the tone in Washington, and the seemingly endless partisan struggles. Yet history has shown that in times of real trial, elected officials rise to the occasion. And together, we will show the world once again what kind of country America is — a nation that tackles problems head on, where leaders come together to meet great tests, and where people of every background can work hard, develop their talents, and realize their dreams.

Thank you for listening. May God bless you.

Rose Garden Statement by President Bush on the Economy

kbh — Fri, 19 Sep 2008 15:15:00 +0000

Here’s what President Bush said at 10:45 AM today in the Rose Garden.

This is really important.

Good morning. I thank Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox for joining me today.

This is a pivotal moment for America’s economy. Problems that originated in the credit markets — and first showed up in the area of subprime mortgages — have spread throughout our financial system. This has led to an erosion of confidence that has frozen many financial transactions, including loans to consumers and to businesses seeking to expand and create jobs. As a result, we must act now to protect our nation’s economic health from serious risk.

There will be ample opportunity to debate the origins of this problem. Now is the time to solve it. In our nation’s history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment. Last night, Secretary Paulson and Chairman Bernanke and Chairman Cox met with congressional leaders of both parties — and they had a very good meeting. I appreciate the willingness of congressional leaders to confront this situation head on.

Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary. Given the precarious state of today’s financial markets — and their vital importance to the daily lives of the American people — government intervention is not only warranted, it is essential.

In recent weeks, the federal government has taken a series of measures to help promote stability in the overall economy. To avoid severe disruptions in the financial markets and to support home financing, we took action to address the situation at Fannie Mae and Freddie Mac. The Federal Reserve also acted to prevent the disorderly liquidation of the insurance company AIG. And in coordination with central banks around the world, the Fed has injected much-needed liquidity into our financial system.

These were targeted measures designed primarily to stop the problems of individual firms from spreading even more broadly. But more action is needed. We must address the root cause behind much of the instability in our markets — the mortgage assets that have lost value during the housing decline and are now restricting the flow of credit. America’s economy is facing unprecedented challenges, and we are responding with unprecedented action.

Secretary Paulson, Chairman Bernanke, and Chairman Cox have briefed leaders on Capitol Hill on the urgent need for Congress to pass legislation approving the federal government’s purchase of illiquid assets, such as troubled mortgages, from banks and other financial institutions. This is a decisive step that will address underlying problems in our financial system. It will help take pressure off the balance sheets of banks and other financial institutions. It will allow them to resume lending and get our financial system moving again.

Additionally, the federal government is taking several other steps to address the trouble of our financial markets.

The Department of the Treasury is acting to restore confidence in a key element of America’s financial system — money market mutual funds. In the past, government insurance was not available for these funds, and the recent stresses on the markets have caused some to question whether these investments are safe and accessible. The Treasury Department’s actions address that concern by offering government insurance for money market mutual funds. For every dollar invested in an insured fund, you will be able to take a dollar out.

The Federal Reserve is also taking steps to provide additional liquidity to money market mutual funds, which will help ease pressure on our financial markets. These measures will act as grease for the gears of our financial system, which were at risk of grinding to a halt. They will support the flow of credit to households and businesses.

The Securities and Exchange Commission has issued new rules temporarily suspending the practice of short selling on the stocks of financial institutions. This is intended to prevent investors from intentionally driving down particular stocks for their own personal gain. The SEC is also requiring certain investors to disclose their short selling, and has launched rigorous enforcement actions to detect fraud and manipulation in the market. Anyone engaging in illegal financial transactions will be caught and persecuted [sic].

Finally, when we get past the immediate challenges, my administration looks forward to working with Congress on measures to bring greater long-term transparency and reliability to the financial system — including those in the regulatory blueprint submitted by Secretary Paulson earlier this year. Many of the regulations governing the functioning of America’s markets were written in a different era. It is vital that we update them to meet the realities of today’s global financial system.

The actions I just outlined reflect the considered judgment of Secretary Paulson, Chairman Bernanke, and Chairman Cox. We believe that this decisive government action is needed to preserve America’s financial system and sustain America’s overall economy. These measures will require us to put a significant amount of taxpayer dollars on the line. This action does entail risk. But we expect that this money will eventually be paid back. The vast majority of assets the government is planning to purchase have good value over time, because the vast majority of homeowners continue to pay their mortgages. And the risk of not acting would be far higher. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, and further erode housing values, as well as dry up loans for new homes and cars and college tuitions. These are risks that America cannot afford to take.

In this difficult time, I know many Americans are wondering about the security of their finances. Every American should know that the federal government continues to enforce laws and regulations protecting your money. Through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000. The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit — and this will not change.

America’s financial system is intricate and complex. But behind all the technical terminology and statistics is a critical human factor — confidence. Confidence in our financial system and in its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken. Investors should know that the United States government is taking action to restore confidence in America’s financial markets so they can thrive again.

In the long run, Americans have good reason to be confident in our economic strength. America has the most talented, productive, and entrepreneurial workers in the world. This country is the best place in the world to invest and do business. Consumers around the world continue to seek out American products, as evidenced by record-high exports. We have a flexible and resilient system that absorbs challenges and makes corrections and bounces back.

We’ve seen that resilience over the past eight years. Since 2001, our economy has faced a recession, the bursting of the dot-com bubble, major corporate scandals, an unprecedented attack on our homeland, a global war on terror, a series of devastating natural disasters. Our economy has weathered every one of these challenges, and still managed to grow.

We will weather this challenge too, and we must do so together. This is no time for partisanship. We must join to move urgently needed legislation as quickly as possible, without adding controversial provisions that could delay action. I will work with Democrats and Republicans alike to steer our economy through these difficult times and get back to the path of long-term growth. Thank you very much.