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Obama Officials Delay Bank Bailout Announcement

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By Kevin G. Hall

congress-webRISMEDIA, February 10, 2009- (MCT)-The Obama administration on Sunday postponed the announcement of its new bank rescue plan so it could concentrate on pushing passage of economic stimulus legislation in Congress.

Treasury Secretary Timothy Geithner had been scheduled to deliver a speech at noon Monday to spell out what the administration plans to do with the second half of the $700 billion bailout that was approved last year in an effort to thaw credit markets and get the ailing banking sector on its feet again.

But administration officials pushed that presentation today as they stressed the need for passage of the stimulus bill.

“The Senate votes on Monday, and economic officials administration-wide will be working and consulting with senators throughout the day,” Isaac Baker, a Treasury spokesman, said in a statement. “Secretary Geithner will postpone the release of the administration’s Financial Stability and Recovery Plan until Tuesday to allow for that to happen.”

Meanwhile, two key Obama advisers warned a failure to pass the stimulus bill could plunge the nation into a deflationary spiral from which it would be difficult to emerge. In deflation, prices drop, and consumers stop buying in anticipation that prices will be lower in the future. The resulting decline in spending drags down other economic activity with it.

Both Christina Romer, the head of the White House Council of Economic Advisers, and Lawrence J. Summers, Obama’s chief economic adviser, raised the specter of deflation in Sunday talk show appearances.

“The numbers are … quite frankly truly frightening,” Romer said of job losses and deflationary spiral that would follow if a stimulus package fails to win congressional passage. “That’s the thing that’s in the back of my mind.”

Geithner’s announcement on the next step in the bank bailout had been widely anticipated as lawmakers and others waited to see how the new administration’s approach to the crisis would differ from that of the Bush administration.

That Bush plan, signed into law in early October, foresaw using $700 billion in taxpayer money to buy up distressed mortgage securities and other complex financial instruments that have become a drag on bank balance sheets. But instead, then Treasury Secretary Henry Paulson decided to inject $300 billion directly into struggling banks, with few requirements for how the money was to be spent or accounted for.

Congress howled when it learned that few banks used the money for loans and instead spent it on acquiring rivals and paying hefty bonuses.

The Obama administration has promised tighter controls and limits on executive compensation. But the details of Geithner’s plans for using the remaining $350 billion from the Wall Street rescue plan remain largely unknown.

Romer said on CBS’s “Face the Nation” that the recovery plan will include at least $50 billion for mortgage modifications and other steps to halt and reverse the soaring number of foreclosures nationwide.

Summers told ABC’s “This Week with George Stephanopoulos” the new plan would be aimed at increasing bank lending.

“The focus is going to be on increasing the flow of credit and increasing transparency,” he said.

The Treasury’s plan is also expected to include some form of a so-called bad bank, where some bad assets would be transferred from bank balance sheets. The government and private sector would share both the risks involved in taking over these assets and the potential rewards down the road as markets recover.

“We, the federal government, will take some paper back so that if this works and you become more profitable, we will get compensated. But we will have to share some of the risk if we’re going to get private capital back in,” Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said on “Meet the Press” on Sunday.

Adding urgency to both the stimulus and bank rescue efforts are new economic data that point to an economy in freefall.

The Labor Department on Friday said 598,000 were jobs lost in January, bringing the figure to 3.6 million since the recession began in December 2007. A day earlier, the department released data showing more than 600,000 new unemployment claims during the first week of February.

Obama warned last week of “catastrophe” if a stimulus bill does not get passed soon and have the government step in and create artificial demand for goods and services while the private sector is reeling.

David Lightman contributed to this story.

© 2009, McClatchy-Tribune Information Services.

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