"The same focus and aggressiveness the administration directed toward rescuing Bear Stearns should be applied to the economic problems facing America's homeowners," Sen. Jack Reed (D-R.I.) said.
For his part, Paulson tried to make the case that the Fed's action over the weekend did not qualify as a "bailout" of Bear Stearns because the investment house's stockholders lost a lot of money.
"This was an easy decision. This is the right outcome," Paulson said.
Still, some economists and lawmakers said that the administration had too strongly resisted efforts to regulate either the mortgage industry or Wall Street's new mortgage-backed securities out of a misplaced faith in free markets.
"There are all kinds of things they could have done in the past," said William A. Niskanen, a conservative economist at the Cato Institute. Bush is "not personally up to date on the problems in the credit market. He has good advisors in Treasury, but even they have been late in understanding the nature of the problem."
Fifteen months ago, Niskanen said, administration officials were focused on concerns about the securities market. Six months ago, their main concern was people with adjustable rate mortgages. They failed to act on a report by the Boston Fed indicating that the rash of foreclosures was caused by the value of houses dropping below the mortgage.
"They should have been and still need to be more aggressive in response to the problems in the mortgage market because that is at the root of what's going on," said Mark Zandi, chief economist at Moody's Economy.com. "I don't think the Fed can solve this on its own."
Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said he had been trying to get the administration to tighten the rules for mortgage lenders for more than a year -- to little avail.
"They could have done a lot of things over the last year, in my view, to make a difference and refused to do so," Dodd said. "They are lagging in terms of their response to all of this. Had steps been taken over the last year, we could have avoided a lot of this."
Frank said that when Congress returns from its spring recess, he will revive ideas the administration previously shunned -- including regulating investment firms more like banks, forcing them to reveal more of their liabilities to shareholders, and issuing new rules for the government-chartered mortgage holders Fannie Mae and Freddie Mac.
But ultimately, Frank said, the country must debate re-regulating the financial markets.
He noted that even during the Clinton administration, "we just accepted this notion that the market knows best."
"All these years of deregulation by the Republicans and the absence of regulation as these new financial instruments have grown have allowed them to take a large chunk of the economy hostage," Frank said. "And we have to pay ransom, like it or not."
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maura.reynolds@latimes.com
janet.hook@latimes.com
