Thursday, September 18, 2008

U.S. Government Bailout Plan In The Works

Financial Times, U.S. Push for Crisis Breakthrough
New York Times, Fed and Treasury Offer to Work With Congress on Bailout Plan

As the stock market attempted to catch its breath from the roller coaster week after gaining 400 points at close of business on Thursday, U.S. policymakers met to create the structure for what could be the biggest financial bailout in history.

Details remain to be worked out, but the idea is that the U.S. government will have the power and capacity to buy distressed mortgages from banks and other institutions at deep discounts. The Thursday night meeting contemplated a “comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets.” The plan was the brainchild of Sen. Charles Schumer (D – NY) and Department of Treasury and Federal Reserve officials, who were concerned with keeping loan markets alive, even after the Federal Reserve committed almost $380 billion into the markets.

The plan will likely resemble the Resolution Trust Corporation that was set up during the Savings & Loan Crisis in the late 1980’s. U.S. officials had hoped for this plan over the past few days, but wanted to be sure it would pass Congress before they unveiled the plan to preserve what little remains of market confidence.

Several lawmakers have come out in support of the bailout plan, with everyone careful to note that the effort is bipartisan, though tense at times, and in the best interests of taxpayers. Lawmakers hope to have the plan hammered out by next week, when Congress adjourns and goes home to campaign in the homestretch before the November elections.

Questions for Discussion:

1) The Resolution Trust Corporation that helped to alleviate the S&L Crisis in the late 80's and 90's bought troubled assets, not entire institutions. Do you think the government bailout plan, the largest in history, will work in the same way? Will it solve the problem?

2) What do you think this means for taxpayers? What could this mean for the election?

2 comments:

movie buff said...

it's hard to object to the government's mass bailouts as similar debt-producing methods were put into action to bring the U.S. out of the Depression... our economy has been supported and driven by debt ever since

B said...

Big business should not be allowed to become too large to fail. A business with that much influence is too big for a free market. It has access to wholesale market manipulation. And it has the privilege of depending on a government safety net if it fails.

The recent economic crisis demonstrates that such businesses will now be rescued at taxpayer’s expense when they suddenly collapse. The CEO of AIG has even demonstrated on national TV that big business leaders expect tax funded rescues. And that diminishes a primary incentive for them to be efficient and prudent. It may even encourage their board members to strategically create a crisis requiring a government bailout rather than suffer losses over time on their own. These business leaders have developed an attitude of entitlement that should inspire corporate welfare reform.

If businesses that are too big to fail are allowed to exist, then they should pay for their own government entitlement programs. This has been the arrangement for the lower classes. That is why social security tax rates in the United States become less for those who become wealthier. Wage earners should not be expected to pay for business welfare too. The influence these businesses have over markets should help them pay for their government programs. And to discourage corporate welfare fraud, those in charge of businesses that either purposely or by neglect cause the government to pay for their rescue should be punished for a kind of embezzlement.

Bryant Arms