State-Federal Relations



Below are responses to several questions submitted to the White House following the conference calls on the economic recovery plan.  These are for information only and are not to be quoted as official White House correspondence.

Q: The President has said taxpayers will recover much, if not all, of the $700B - what are the projections for the time frame for that recovery?

A: The timeframe is uncertain, but we would hope to sell any assets purchased by the government back to the market as soon as practical while ensuring the investment made by taxpayers is protected to the greatest extent possible by receiving a fair price in the sale.  The timeframe will depend on how long it takes for the housing market to stabilize and market demand to return for the illiquid assets Treasury would potentially purchase under the program. 


Q: What regulatory oversight does the White House believe is appropriate to assure a similar situation does not recur?  Specifically, what agency would provide that oversight, what would it cost, and who would pay?"

A: The existing regulatory structure has proven outdated, and financial regulatory reforms are needed.  Secretary Paulson outlined a Blueprint for a Modernized Financial Regulatory Infrastructure in March of this year which includes several recommendations to improve oversight while ensuring the U.S. capital markets remain competitive.  This is an important issue that will require lengthy and substantive debate in Congress, however, it is not an issue that can be thoughtfully addressed by Congress in the short amount of time remaining before Congress intends to adjourn. 


Q: Can you describe the ways in which the current financial crisis is affecting small businesses and how would the proposal address that?

A: Access to capital is critical for starting up new businesses and continuing operations, both large and small.  Many businesses rely on access to short-term financing to meet their payrolls or keep their operations going - especially cyclical industries like farming where there is heavy activity in planting and harvesting seasons.  We have already heard of instances where small businesses have been unable to obtain loans to get through the next several months of operations and have been forced to shut their doors.  Any business that wishes to invest in new equipment or expand their operations will find themselves unable to obtain a loan or find the cost of borrowing much more expensive.  We've already seen this occur for Fortune 500 companies with excellent credit and collateral.  Small businesses without the history and balance sheets of brand name companies will likely encounter the same situation.  Many small businesses are suppliers to larger businesses - as these companies are forced to raise prices to cover higher borrowing costs, demand for their products will fall and the orders they place with their suppliers will follow.  By purchasing or insuring currently illiquid assets, the Administration's proposal would provide greater confidence in the value of assets on the balance sheets of financial institutions, allowing banks to resume trading with one another and lending to businesses and consumers.


Q: Will the government's acquisition of mortgages create an artificial market?  For example, if the government buys mortgages with the intent to sell them later when things settle won't that create a floor for prices?

A: One goal of the government's purchase of mortgages and mortgage-related assets is precisely to establish a price for currently illiquid assets that the market is unable to price.  There currently is no market for these loans and securities, although we know these assets have value over the long-term, especially since the vast majority of borrowers continue to pay their mortgages on time each and every month.  The current uncertainty over the value of these assets has led to a freeze in their trading, and uncertainty over the solvency of the financial institutions that hold them.  By establishing a price for these assets, we expect that the market will be able to more accurately assess their value and demand for these securities will return, especially once the housing market recovers.  The Administration is exploring several ways to price these assets that will ensure taxpayer dollars are protected.


Q: What new rules (eg, reserve requirements, lending disclosures, etc) will be put in place to ensure that only qualified borrowers can access the credit markets?

A: While the Administration has pushed for new rules on lending and housing policy for many years, including FHA Modernization, simplified real estate settlement procedures, and GSE reform, these issues must be addressed in a comprehensive manner through legislation that modernizes our financial regulations.  The current crisis has resulted in qualified borrowers being unable to access the credit markets, and that is our immediate concern. 


Q: How should state and local governments be responding to the crisis?  There is a wait and see approach since the issues are national but is there something a state policy maker can do?

A:  State and local governments have a vested interest in not taking a wait and see approach as some state and local governments have already been directly impacted by this crisis.  When credit dries up, the cost of funds go up for state and local projects as well.  When borrowing rates go up, bridges, roads, and schools become more expensive to fund.  The most important thing elected officials can do is to educate the public and Members of Congress on what needs to be done to alleviate the credit crisis and the consequences of inaction.


Q: Is there any indication of foreign central banks slowing purchases of treasuries and what are the ramifications to the economy if that happens?

 A: To date, we have not seen evidence that foreign central banks have slowed their purchases of treasuries in the data we have available.  Should central banks decide to reduce their purchases of treasuries, the cost of financing the national debt would likely rise and there could be effects on the value of the dollar.

Q:  Given that the Secretary Paulsen will be authorized to purchase assets of failing institutions, what parameters will be placed on those financial institutions to assure that they will extend credit to main street?   Several commentators have opined that, rather than extending credit to main street, the financial institutions will instead speculate in commodities futures, e.g. oil and food, resulting in increased costs for these essentials for the general public.

A:  We believe that such protections are unnecessary and could potentially harm the effectiveness of this proposal.  Placing additional restrictions on what banks can do with their funds will make them less likely to participate in the program.  The Federal government already aggressively enforces laws against manipulation in energy and other commodity markets through the Commodity Futures Trading Commission. The Secretary’s authority is not directed to failing institutions, rather it is for any institution with illiquid assets on their balance sheet.  Our proposal will help reduce the risk posed by these illiquid assets and will restore the confidence in and functioning of our financial markets.  The restoration of confidence will allow banks to begin lending to each other again and will allow them to lend money to Main Street. These banks want to lend to Main Street: it is part of their business.  The reality is that until confidence is restored, funds will remain unavailable for lending at reasonable rates.