I was right about what Bush was going to say, but I was wrong about how he said it. This was one of the best speeches of his presidency, if not the best. I was watching in a noisy bar, and got the gist — but more importantly I got the body language. He wasn’t panicked, and he wasn’t angry, and he wasn’t telling us that we really had to Act Now Or Else. He was calm, and surprisingly coherent, and he took first-person responsibility for the bailout, and he explained the urgency without sounding like he was reacting in a knee-jerk manner.
Put it this way: if Chris Dodd has been a surprise to me over the past week, Bush tonight was a revelation. It was like he was a completely different politician from the one I’ve gotten used to for the past eight years.
Whoever wrote this speech deserves some kind of medal. It explained complex matters clearly, without oversimplifying, and without talking down. You want the history of the credit crisis in 355 words? I don’t think you could do much better than this:
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.
Of course, one can quibble. Was the credit boom because America "is an attractive and secure place to do business" or was it because Alan Greenspan cut interest rates too much? But as potted economic history, addressed at an audience of millions who have no idea what a bond is, this is first-rate stuff. And the rest of the speech is just as good. In fact, it’s exactly the kind of thing that Hank Paulson has signally failed to deliver: he might be good at talking to Wall Street, but he’s dreadful at talking to Main Street.
Bush also said quite explicitly that the bailout plan calls for the government to buy distressed assets "at their current low prices and hold them until markets return to normal" — not to buy them at some notional "fair value" price. Is this exactly what Paulson will do if and when he gets his druthers? I have no idea, and Floyd Norris, for one, doubts it. But with the President breathing his shoulder impressing on him the need to buy low, the government might not, in the end lose as much money as I feared on this venture.