With Washington Paralyzed, Wall Street Gets the Shakes

TARP Politics

Supporters and critics say Paulson’s lame-duck status may be more worrisome and unsettling than President Bush’s, because the bailout legislation gives vast and unprecedented authority to the Treasury Secretary.

At one point Paulson seemed “almost presidential,” says Bon Bixby, executive director of the Concord Coalition, which preaches fiscal responsibility. “If you start changing your mind about what the $700 billion is for, it detracts from your credibility.”

“There was an atmosphere here in Congress, ‘Oh my god, we need somebody smarter than ourselves, give him the money,” says Rep Brad Sherman (D. Calif.), who voted against the legislation.

Paulson’s missteps and step-back have both emboldened members of Congress, some of whom clearly regret voting for the TARP, say observers, and is now rethinking its use.

“Congress wants influence over it,” says the Cato Institute’s Dan Mitchell, who served as an economist to Sen. Bob Packwood.

“They don't have much incentive to compromise with Paulson at this point,” says Baker.

Congress Adrift

That, too, has had negative repercussions for the markets.

“The kind of spread-it-around mentality shows a lack of understanding of the issue that's out there,” says Brian Bethune, chief US economist at Global Insight.

That was aptly illustrated by the desire of some Democrats to use the TARP to bail out the auto industry. Former ten-term Republican congressman Bill Frenzel, now with the Brookings Institution, calls it “a new-use mandate.”

What’s worse, ideological differences and partisan politics boiled over during the auto bailout debate.

“It’s very hard for the Congress to do itself,” says Riegle, who represented Michigan and spearheaded the Chrysler bailout three decades ago. “You have a vacuum. “If the president had a plan to direct some of that money, then you could get the votes in the Congress.”

Gerald Herbert / AP

Instead, the Congress spent about as much time on a $25 billion package as it did on the $700 billion TARP, failing to produce any legislation but creating more uncertainty.

“Congress is going back to a business-as-usual approach,” says Frenzel.

In doing so, the lame-duck Congress probably gave up any chance of creating a second stimulus package, whose broad support includes Fed Chairman Ben Bernanke, business leaders, supply-side economic maestros such as Martin Feldstein of Stanford University and, of course, President-elect Obama.

Obama's Role

Obama, who quickly convened a group of economic advisors for a one-day summit the same week he was elected, certainly did what he could in naming his Treasury nominee, who by virtue of already being in government should be able to achieve a faster transition than others.

AP Barack Obama

Until that decision Friday, observers like Resler worried the President-elect would soon "squander his honeymoon period.”

For former senator Riegle, who was among those applauding the choice of Geithner, much of the responsibility still rests on the sitting president, George W. Bush.

“The President should assemble a task force and working group, meeting seven days a week to come up with a plan to get us thru November, December and January,” says Riegle.

© 2012 CNBC.com

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