Bush, Paulson take new approach to economic crisis

Bush, Paulson take new approach to economic crisis

WASHINGTON - The Bush administration's latest effort to resolve the financial crisis embraces an approach it had resisted just a few weeks ago.

But things move fast in the bailout world. And in deciding to inject fresh capital into U.S. banks in return for ownership stakes, the administration adopted a plan that many leading economists had been pushing for weeks.

"I — and many others — have been harping on (the banks') inadequate capital for months," said Anil Kashyap, an economist at the University of Chicago's Graduate School of Business.

The latest move follows a Herculean effort by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to win congressional approval last month of the $700 billion bailout package.

That legislation will fund the recapitalization. But the focus of Paulson's initial plan — buying distressed mortgage-related securities to improve banks' balance sheets and make it easier for them to lend again — is now taking a back seat.

The shift in approach suggests the administration had miscalculated the time it had to take corrective action before realizing the urgency of the crisis demanded the swiftest possible response.

Scott Talbott, a lobbyist for the Financial Services Roundtable, an industry group, said he thinks last week's "plunge in the Dow" — its worst ever — convinced the Treasury Department that it needed to move faster.

"Time is now of the essence," Ian Shepherdson, chief U.S. economist for the consulting firm High Frequency Economics, wrote this week in a note to clients. "The authorities do not have the luxury of mulling over the fine details; they need to act now."

Losses on mortgage-related securities have depleted bank capital. Those securities had collapsed in the face of falling home prices and rising defaults and foreclosures. Without sufficient capital, banks have been reluctant to lend, depressing economic activity.

Some economists say Paulson initially opposed the notion of recapitalizing the banks partly out of a bias against government intervention in a private industry.

The delay in taking that step "mostly seems to have been (due to) ideological blinders on Paulson's part," said Adam Posen, deputy director of the Peterson Institute for International Economics.

When asked during congressional hearings three weeks ago about providing new capital to banks, Paulson dismissed the idea, saying he preferred "market mechanisms" like his proposal to remove troubled mortgage-related assets from banks' balance sheets.

Government injection of capital "is about failure," he told members of the Senate Banking Committee. "This is about success."

That argument seemed to be at odds with Federal Reserve economists, who favored government recapitalization of banks, Posen said. Bernanke was careful to note during a House hearing last month that the bailout legislation was "flexible" enough to let the government provide an injection if necessary.

At the same time, Paulson faced a backlash from many Republicans in Congress who objected to the initial bailout plan and wanted a much smaller government role. Their rebellion contributed to the initial House rejection of the bailout on Sept. 29.

Many of these lawmakers were suspicious of Paulson, privately voicing concern that he was too willing to push solutions to the crisis that violated the conservative credo of limited government and frugality with taxpayer dollars.

Other Republicans, though, joined Democrats in prodding Paulson to consider taking equity stakes in financial institutions, on the theory that if government money was going to be used, taxpayers should at least get the chance eventually to profit from the investment.

Rep. Roy Blunt of Missouri, the No. 2 Republican, noted Tuesday that even though Paulson initially opposed the idea, he has come to view it as a vital way to get money into banks faster than asset purchases could.

"We're investing taxpayer money with an almost certain guarantee of return and profit," Blunt said.

The administration's plans also put the United States in the unfamiliar position of following the lead of Britain and other European nations, which have already announced similar steps.

That's another sharp reversal from several weeks ago, when many European officials opposed a systemic approach to the crisis and made clear they felt it was largely an American problem.

"The Europeans look good, the Americans look terrible and it is a surprise, because the stereotype is the European Union can't get it together," Posen said.

In part, the United States was forced to act after Britain said last week that it would recapitalize its banks, and 15 European governments followed suit over the weekend.

If the United States hadn't fallen in line, U.S. banks would have faced a significant competitive disadvantage against European banks, Posen said.

"The Brits did us a big favor," Kashyap said.

The U.S. and European governments are now taking a consistent, if not fully coordinated, approach. That is something many economists had hoped for late last week, just before the G-7 group of wealthy countries met Friday and the International Monetary Fund and World Bank held their annual meetings over the weekend.

_

Associated Press Writer Julie Hirschfeld Davis contributed to this report.

Social Security benefits going up by 5.8 percent

By MARTIN CRUTSINGER, AP Economics Writer 10/15/08

WASHINGTON - Social Security benefits for 50 million people will go up 5.8 percent next year, the largest increase in more than a quarter century.

The increase, which will start in January, was announced Thursday by the Social Security Administration. It will mean an additional $63 per month for the average retiree.

It's the largest increase since a 7.4 percent jump in 1982 and is more than double the 2.3 percent rise that retirees got in their monthly checks starting in January of this year.

The typical retiree's monthly check will go from $1,090 currently to $1,153.

But the fatter Social Security check may still seem puny to millions of retirees battered this year by huge increases in energy and food costs who have also watched helplessly as their retirement savings have been assaulted by the biggest upheavals on Wall Street in seven decades.

"Right now many senior citizens are feeling depressed because things seem out of control. They feel like they are in a boat being whipped around by rough seas," said Sung Won Sohn, an economics professor at the Smith School of Business at California State University. "Their purchasing power has been going down because of higher prices for food and energy and a lot of other things while their savings have taken a hit because of what is happening in the markets."

The market turbulence has continued this week with the Dow Jones industrial average plunging by 733 points on Wednesday, the second largest point drop on record. Earlier this month, the Congressional Budget Office estimated that Americans' retirement plans have last as much as $2 trillion over the last 15 months — more than 20 percent of their value — because of all the market upheaval.

With all the gloomy news, retirees may take little comfort in the new cost of living adjustment. The benefit change is based on the amount the Consumer Price Index increases from July through September from one year to the next.

The increase would have been even higher, but after racing ahead earlier in the year, energy costs fell in both August and September, helping to moderate the overall price gain.

The 5.8 percent rise in the cost of living adjustment is a sharp departure from recent years. The COLA increases have been below 3 percent for all but three of the past 15 years as the Federal Reserve waged a successful campaign to keep inflation under control.

Even with the big increase, the COLA is well below the gains of the late 1970s and early 1980s when the country was in the grips of a decade-long bout of high inflation. The biggest cost of living benefit on record was a 14.3 percent increase in 1980. Social Security benefits have been adjusted every year since 1975.

In one break for most retirees, the cost of living increase will not be eaten up by higher monthly premiums for the part of Medicare that pays for physician services. Because of gains in the Medicare Part B trust fund, that premium will hold steady at $96.40 a month, although higher-income people including couples making more than $170,000 annually will see their premiums increase.

Next year's cost of living increase will go to more than 55 million Americans. More than 50 million receive Social Security benefits while the rest get Supplemental Security Income payments for the poor.

The average couple, both getting Social Security benefits, will see their monthly check go up by $103 a month to $1,876.

The standard Supplemental Security Income payment for a couple will go from $956 per month to $1,011. The SSI payment for an individual will go from $637 per month to $674 per month.

The average monthly check for a disabled worker will go from $1,006 to $1,064.

Sens. Barack Obama and John McCain have sparred over Social Security during the presidential campaign, although neither has provided much insight into how they would fix the government's largest entitlement program, which is facing severe strains with the upcoming retirement of 78 million baby boomers.

If no changes are made, the Social Security trust fund is projected to deplete its reserves in 2041 and will begin paying out more than it collects in benefits even sooner, starting in 2017.

In addition to the cost of living adjustment, the government announced Thursday that the maximum amount of earnings subject to the Social Security tax will increase next year to $106,800, up from $102,000 this year.

Of the 164 million workers who will pay Social Security taxes in 2009, about 11 million will pay higher taxes as a result of this increase.

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