$700B Bailout Alternative: Another Great Depression, Officials Say

Legislation & Lobbying

$700B Bailout Alternative: Another Great Depression, Officials Say

Posted Sep 24, 2008, 02:39 pm CST
By Martha Neil

Updated: Despite warnings that the alternative is an economic tailspin, as well as an agreement today by U.S. Treasury Secretary Henry Paulson to limit top executive pay as a condition of providing aid to struggling U.S. financial institutions, it isn't clear that Congress is ready to approve extraordinary emergency bailout legislation expected to cost taxpayers some $700 billion.

Predicting dire consequences if the rescue legislation isn't passed, Paulson and Federal Reserve Chairman Ben Bernanke testified again today on Capitol Hill about the troubled asset relief program they are proposing, according to Reuters. Meanwhile, President George W. Bush is scheduled to join in the lobbying tonight with a televised address to the nation at 9 p.m. ET.

"Bush administration officials warned of a looming economic disaster akin to the Great Depression of the 1930s if an angry and rancorous Congress failed to act swiftly to fund a bailout that would be larger than the total cost of the Iraq war," the news agency writes.

However, legislators are troubled by the cost of the plan, as well as the fact that there's no guarantee that it will work, writes the Christian Science Monitor.

"Mr. Paulson's plan aims to restore confidence by moving the most troubled assets off the balance sheets of banks and into a TARP—troubled asset relief program," the newspaper explains. But experts are divided about whether it is better to intervene now, or wait until more Wall Street financial institutions are pushed to the verge of bankruptcy or over the brink by the current economic crisis, for which years of irresponsible lending now appears to be largely to blame.

The treasury secretary says his plan creates what amounts to a line of credit that his department could use to purchase mortgage-related debt, reports the Los Angeles Times.

"This is not an expenditure. This is an investment," Paulson said yesterday. "And as the economy grows, as housing corrects, these assets should appreciate in value. The cost to the taxpayer will be far below what is invested in the assets."

(Since this post was written, a number of legislators have agreed in principle to a revised bailout plan that could be enacted within a few days. See the subsequent ABAJournal.com post for details about developments on Sept. 25.)

As discussed in earlier ABAJournal.com posts, risky mortgages have led to a huge amount of foreclosures. The foreclosures have depressed housing values and made it difficult or impossible for many struggling homeowners to solve their financial problems by selling or refinancing their real estate. The increasing amount of bad debt—much of which has been "securitized" and sold in packages to investors worldwide has also shrunk the pool of available capital to lend, sparking an international credit crisis.

Besides the cost of the bailout, many reportedly are angry about the perception that sophisticated Wall Street institutions are being saved from their own bad judgment at a significant cost to taxpayers, while individuals who made bad decisions about real estate are losing their homes.

"In addition to limits on executive pay, some lawmakers have demanded that a bailout package include help for beleaguered homeowners to avert foreclosures because of mortgages they can no longer pay. Legislators also insisted that the government receive equity in firms that benefit from bailouts," writes the Washington Post.

Additional coverage:

Bloomberg: "Bernanke Sees `Grave Threats' to Financial Stability"

Bloomberg: "Paulson Agrees to Address Executive Pay After Outcry"

Bloomberg: "Paulson, Bernanke Put Shoring Up Banks Ahead of Cutting Best Taxpayer Deal"

ABAJournal.com: "$700B Bank Bailout Uncertain, Despite Bernanke-Paulson Push"

ABAJournal.com: "Bush Bailout Plan Would Protect Treasury Secretary from Lawsuits"

ABAJournal.com: "More Regulation Likely Will Mean More Legal Work"

Updated at 5:15 p.m., central time, to include links to Bloomberg articles and updated at 5:30 p.m. to include information from Los Angeles Times coverage, and updated at 2:25 p.m. on Sept. 25, 2008 to include link to subsequent ABAJournal.com post describing new developments.

Comments

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Posted by associate - 2 months, 1 week, 19 hours, 50 minutes ago

Sorry, but I’m kind of a why guy. They’re going to have to tell me WHY we’d go into The Depression again. Just telling me it’ll happen isn’t quite getting me there.

If this is just a liquidity issue and we’re on the hook anyway, why not just loan these banks the boatlad of money we’re talking about? I doubt the govn’t can do anything better than any private entity other than increase its own size and waste.
Posted by OnPurposeWholeThing - 2 months, 1 week, 18 hours, 12 minutes ago

Cheaper to seize all assets of bush administration and some congress.
Posted by Tom Tilson - 2 months, 1 week, 12 hours, 19 minutes ago

This seems to be the final pillage of the public purse by the most destructive, greedy and truly evil people ever put into power by our “democratic” system. For eight years, they screwed the economy with their unnecessary wars, heads up the bum of Big Oil and Cheney’s cronies, focussing on scamming everything they could in pure self-interest and greed. The whole point of government is to protect the general interest, but the Republican seem to think that entering into public office is merely a license to steal.
Posted by Ellen Barshevsky - 2 months, 1 week, 7 hours, 49 minutes ago

This is not good. There needs to be something done that is going to fix this. I recommend that the President assemble a blue-ribbon panel of 10 highly qualified men and women who can come up with a soulution. I recomend these 10 people—representing all constutencies:
1) Condolezza Rice
2) Henry Paulson
3) Henry Kissinger
4) Alan Greenspan
5) Carliy Fiorena
6) Sally Krawchuck (Citibank)
7) Sarah Palin
8) Mr. Biden (VP Candidate)
9) The Head of the Federal Reserve (don’t know his name)
10) Maria Bartiromo

These 10 people have vast experience and if they put their heads together, and are asked to come up with a solution within 1 week, they can do it.

Afterwards, we can then move on to other things.
Posted by associate - 2 months, 1 week, 2 hours, 1 minute ago

3, that’s a pretty good rant. You just left out “Bush is the devil.“ You should write speeches for Ahmanutjob.

The loan buying standards for fannie and freddie were changed 10 years ago (which would be by Clinton, not Bush), which is the whole basis of the problem. McCain co-sponsored a bill back in 2005 to fix the standards, but it was killed in Congress. But hey, don’t let facts get in the way of a good rant, right?
Posted by associate - 2 months, 1 week, 1 hour, 58 minutes ago

Even if we do bail out these guys, how can we be sure that they’re going to go back to actually making loans. I mean, that’s what we’re trying to do, right; get them back to doing their jobs properly. Where’s the guarantee that they’re going to immediately make some home equity loans and such to people worthy of the loans?
Posted by Alan Derkow - 2 months, 2 days, 6 hours, 10 minutes ago

I think Barshevsky has a good idea. I would not have Palin on the blue ribbon panel, though. Perhaps Ben Bernanke instead.

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