Banking Crisis and the Treasury's
Financial Bailout Proposal
Update:
October 3, 2008
Congress passed the Wall Street bailout bill today, and President Bush signed it into law. This controversy is now settled, and I just hope that the legislation will provide the promised relief to all Americans.
Update:
October 1, 2008
After the House's rejection of the bailout proposal on Monday, I'm afraid there is a new effort to railroad essentially the same bad bill through the Senate and then the House. The bill's sponsors have added some sweeteners and renamed it a "rescue" package, but none of its $700 billion flows to homeowners. If you agree with this analysis, tell your Senators and Congressman that you oppose the Wall Street bailout (sorry, the "rescue").
Update:
September 28, 2008
The newly negotiated bailout package takes the pressure off of Wall Street without doing anything concrete to solve the home foreclosure crisis. I propose a better rescue package that will help homeowners.
Original posting:
September 20, 2008, last revised September 21, 2008
I oppose the U.S. Treasury's Financial Bailout Proposal in its present form. My reasoning is stated below. Instead of a wholesale bailout, I favor loans to, or equity investments in, those domestic institutions that have had longstanding status as commercial banks, on a case-by-case, as needed, basis.
The proposed $700 billion bailout is massive, being greater than the cost of the entire Iraq war to date (which is estimated by the National Priorities Project at $555.7 billion). The bailout proposal authorizes the U.S. government to purchase mortgage-related assets from "any financial institution having its headquarters in the United States" (U.S. Treasury's Financial Bailout Proposal to Congress, September 20, 2008).
The Proposal Favors Creditors Over Homeowners
The proposal's $700 billion in aid to mortgage creditors dwarfs any federal assistance to homeowners. The mortgage rescue signed into law on July 30 is expected to provide only about $68 billion in mortgage guarantees for homeowners. That is the CBO estimate of the amount of mortgages that will qualify for refinancing under the new program, despite the nominal $300 billion authorization provided. (CBO Cost Estimate, Federal Housing Finance Regulatory Reform Act of 2008, June 9, 2008, p. 7)
The Proposal Provides Aid Indiscriminately
The wholesale nature of the proposed bailout is wasteful of taxpayer money. It would channel public funds into heretofore wealthy investment banks as well as depository institutions. Until recently, the principals of the investment banks profited handsomely from their risky mortgage-backed security transactions, while the bailout would use taxpayer money to cover their current losses. The failure of these investment banks would not have the serious repercussions that failure of major, longstanding, commercial banks would have.
The Proposal is a Poor Investment
The proposed bailout is neither a loan nor an equity investment in troubled financial institutions: it is a purchase of dubious assets. The U.S. government must look to the purchased assets for any return, as it will have no stake in the rescued firms. This distinguishes the proposed bailout from the rescue of Fannie Mae and Freddie Mac, where the government receives an equity interest in the two institutions.
The Proposal Has Undesirable Consequences
Under the new proposal, the U.S. government would become, in effect, a collection agency for the bad mortgage loans. This would be administratively burdensome and politically undesirable. Although its status as holder of the mortgages could permit the government to provide homeowner relief through loan workouts, the proposal apparently does not contemplate this.