Taking the Economists' Pulse

By Dana Milbank
Friday, February 15, 2008

Secretary of the Treasury Hank Paulson could have been the secretary of ennui as he slouched in the witness chair before the Senate banking committee yesterday.

"Are we headed toward or in danger of being in a recession?" asked Sen. Bob Menendez (D-N.J.).

"I don't have a crystal ball," the secretary announced.

"Aren't you underestimating, not paying enough attention to, the severity of the problem in the credit markets?" inquired Sen. Chuck Schumer (D-N.Y.).

"It's one thing to identify a problem," Paulson returned. "It's another to know exactly what to do about it."

Sen. Bob Casey (D-Pa.) asked about home foreclosures and the "subprime crisis."

Replied Paulson: "I didn't create this problem."

No, but if Paulson and his fellow Bush economic advisers get any more laid back about the state of the American economy, they'll have to make their next appearance before Congress in a horizontal position.

That touch of "froth in the housing market," as then-Federal Reserve Chairman Alan Greenspan put it in 2005, has left his successor and former colleagues with a huge economic mess. Though economic officials have to avoid hysteria so they don't cause panic, Paulson and Fed Chairman Ben Bernanke, who joined Paulson at the witness table yesterday, went so far the other way that they seemed bored.

The senators were highly caffeinated -- Chris Dodd, Jack Reed, Evan Bayh and Richard Shelby all had venti Starbucks cups in front of them, and Chuck Hagel had a grande size -- but they proved unable to excite the witnesses.

One senator accused Paulson of having a tendency to "gloss over" problems, while another found a "sense of urgency" lacking. A third protested the "lapses that allow these situations to develop."

"When there is a storm brewing on the horizon, we count on those at the top, and certainly that's all of you, to sound the alarm, and to many of us, I think what we got was a snooze button," Menendez said. While saying he had no desire "to talk down the economy," the senator went on to ask how they would "stem the hemorrhaging."

Paulson provided a quick retort: "If you are trying to talk the economy up, I'd hate to see you try to talk it down."

"I'm just not trying to hide my head in the sand," Menendez said bitterly.

For much of the exchange, Paulson leaned back, draping his left arm over the back of his chair. Bernanke looked down, admired the chamber's marble walls and stroked his beard.

Even a couple of Republicans on the panel were troubled by the lethargy. "Chairman Bernanke, I just want to give you a heads-up: When you see something coming, don't put it off," suggested Jim Bunning (Ky.). "This housing market has been coming to us for a year, a year and a half, and we didn't react properly to it."

Sen. Bob Corker (R-Tenn.) tried a semantic question to draw out the witnesses. Is it a housing "crisis" or a "correction"?

"I don't use loaded words," came Paulson's inevitable reply, "so I've been using 'correction' because it is a correction."

By contrast, Dodd, the chairman, used the word "crisis" 12 times in his opening statement alone. "The current economic situation," he said, is no "mere recession." Job losses, weak retail sales, falling output, rising delinquencies and inflation, slumping stocks -- the senator hit them all. "This would be the first time since the Great Depression that national home prices will have dropped in two consecutive years."

Bernanke leaned back in his chair for Dodd's lengthy remarks. He allowed that there has been "considerable strain" in markets, a "softened" labor market and a "deteriorated" housing market -- but no recession. In fact, he forecast a "strong pace of growth" later this year.

Paulson went even further in buoyancy. Despite a "housing correction," he asserted that "the U.S. economy is fundamentally strong, diverse and resilient." The former Wall Street executive reassured the senators: "I have confidence in our markets."

Dodd didn't agree. "Pressure is mounting here," he pushed. "What are you going to do about it?"

"The markets are going to work," Paulson repeated. Bernanke offered something about "the complex causality that we're seeing promulgating."

Dodd asked whether previous economic forecasts had to be downgraded. They did. "But I do believe we're going to keep growing here," the secretary said.

Paulson must have known he sounded off key, because toward the end he seasoned his remarks with disclaimers such as "I don't mean to be overly complacent" and "I don't mean to sound heartless."

Heartless? No. But complacent was harder to avoid. Schumer pointed out that Wall Street bankers "seem much more worried than you guys."

"Some seem more worried than others," Paulson replied.

Clearly.