Friday was a memorable day in American history, yet probably passed unnoticed by many.
The House of Representatives finally agreed on provisions of the Emergency Economic Stabilization Act (otherwise known as the financial bailout plan) and President Bush signed it into law a mere two hours later.
The bill gives sweeping powers to Treasury Secretary Henry Paulson — something rarely done in peacetime. It authorizes Paulson to use $700 billion of taxpayers’ money to bail out faltering financial institutions. Some experts have even warned that the money may need to be used for firms other than banks, such as small businesses, universities, and even entire local governments, according to the Washington Post.
There has been some division as to why the situation occurred. Some have argued that the fallout happened because of the failed policies in the Community Reinvestment Act of 1977 during the Carter administration, which mandated banks to provide loans to their entire market area, including those who would not normally qualify. The law was intended to assist lower-income families get quality housing that was affordable.
Others have dismissed that explanation, pointing to abuse of the unregulated financial industry as the real culprit. Financial giants Freddie Mac and Fannie Mae took advantage of legislation during Clinton’s administration that allowed them to guarantee billions of dollars in shaky mortgages. When the mortgages fell into foreclosure and banks began collecting on the guarantees, Freddie and Fannie found themselves without the necessary funds and it all snowballed from there.
But whether it was due to a law or a lack of regulation, a $700 billion clean up is a lot in any currency.
While it is small potatoes compared to other sums like the national debt (coming in at approximately $50 trillion on September 30th, according to White House estimates), it is still a large amount to bail out private companies that essentially made poor business decisions.
But even more than the law’s price, the ideas contained within it are the real eye-openers. The law allows the Treasury Department to “purchase any assets from any firms at any price,” according to the Washington Post. This would give the Treasury Department the ability to choose which firms are helped and those that are left to go under.
Paulson has also discussed the use of reverse-auctions in which firms would offer assets in a competition for the lowest asking price.
How are these practices supposed to help? How does forcing companies to offer assets at the “lowest price” induce liquidity and increased cash-flow? I am no economist, but that seems like backwards logic.
The question of whether or not to pass a bailout plan is no longer the issue; the question of whether it will work is still legitimate. The issue at hand is restoring trust and faith to people — but it’s not just trust in the economy, it’s trust in our government.
Why did the government wait until the companies were going bankrupt to do anything? Frankly, it does not take a degree in economics to know that if a bank decides to extend credit to those who do not have the means or assets to pay back the money, the people will most likely default on the loan.
What about the families who no longer have homes because of their loans? Do they get any of the $700 billion?
Both presidential candidates were involved in the drafting of the bailout legislation. Both use the rhetoric of Wall Street and Main Street. So where is the help for Main Street?
I sure don’t see it in this plan. I begin to wonder if I ever will.
Janne is finding a suitable mattress under which to hide her State Press checks. If you know of a good one, let her know at janne.gaub@asu.edu.
