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Bernanke, Paulson Pressed to Seek Big-Government Bank Bailout

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Rich Miller
Monday, July 21, 2008

Ben S. Bernanke and Henry Paulson are under pressure to embrace the big-government policies of America in the 1930s, or Sweden in the 1990s, to contain the conflagration engulfing the U.S. housing and financial markets.

Among the ideas: Using taxpayer money to shore up the capital of loss-ridden Fannie Mae and Freddie Mac, setting up new agencies to buy and refinance mortgages in default, even taking over failing financial institutions.

The government’s current “fire-brigade approach to dealing with the fallout from the extremely weak domestic economy is eroding general confidence in the U.S. financial system,” says Brian Bethune, chief U.S. financial economist at Lexington, Massachusetts-based Global Insight. “Bold, creative, aggressive policy action is needed.”

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Trying to envision what steps Washington might have to take, economists hearken back to the last time the country faced a nationwide decline in house prices, during the Great Depression. In response to those travails — which were far worse than today’s — President Franklin D. Roosevelt adopted a radical, multipronged approach with a much bigger government role than anyone is proposing now.

“You need a change in mindset,” says Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co.

“So far, the hope has been the private sector would provide” the money, says El-Erian, whose Newport Beach, California-based firm manages about $800 billion for investors. “Now the focus is on Washington.”

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This article was posted: Monday, July 21, 2008 at 4:00 am

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