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

Posted Sep 24, 2008 3:39 PM CDT
By Martha Neil

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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.

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