By Amber Pope
A bill called TARP (Troubled Asset Relief Program), also called the “Bailout”, was proposed in Congress earlier this week and shot down with much ceremony. The bill called for an unprecedented government intervention in the finances of private corporations, as well as in housing and mortgage issues. TARP was the federal response to recent economic decline and speculation that Wall Street could experience historic losses this week. The Bailout, however, is not the answer to all of America’s economic woes, even according to those who propose it. Politicians are faced with evaluating where our economy is and where it is headed, and whether the situation warrants such federal action. A new revision of the bill has been drafted and is set for a vote on Wed, October 1.
It is key to understand where the US stands economically and how we got to this point in order to fully comprehend why lawmakers are backing a bill that could cost taxpayers something to the tune of $700 billion. The current standing of the US economy is shaky. We are in danger of a failing stock market and credit freezing. We have already seen the decline of some major US corporations. Lehman Brothers filed bankruptcy and was not spared by the government. Wachovia was bought by Citibank. AIG was bailed out by the feds. Merrill Lynch will soon be acquired by Bank of America. Fannie Mae and Freddie Mac were both nationalized. The list goes on and on. Part of the reason for rampant corporate failure is the practice of credit default swaps, which were created in the 1990s.
When two corporations make such an agreement, one party may default on a mortgage or loan and pick up a sort of “insurance” from another company. One company can pay another to pick up the slack when there is not enough revenue to cover payments. This has allowed corporations to make risky moves in the stock market with little repercussion. To put it simply, promises were made that could not be carried out.
Individual companies that engage in risky business dealings could be allowed to go under, but our economy is so integrated that individual failures could become a ripple in the market, ending with a vast economic tsunami. This is what the federal government is working to prevent.
To complicate all this, the housing market is experiencing its own issues. The US has a cumulative debt of about a trillion dollars, most of which is mortgage debt.
Beginning with the Clinton administration, policies on lending requirements were made more lax. The Bush administration perpetuated this practice. People who could not previously afford to buy homes began taking out loans to foot the bill. These loans were bought out by corporations like Fannie Mae and Freddie Mac. Problems occur when people cannot make the payments. The homeowner’s money passes through so many hands, that a chain of default occurs. Most present mortgages are 5 to 10 times the homeowner’s yearly income, which is well above the standards of the previous decade, when a “safe” mortgage was no more than triple the buyer’s income. Much like the stock failures, this is a case of people signing on the line for something that cannot be afforded. Additionally, the decline in home value has made an estimated 10 million homes worth less than what homeowners are paying for them. This has also put real estate sales in a stalemate. The practice of buying properties, building or renovating and selling (often known as flipping houses) is a thing of the past.
Realtors and others who made a living in this type of business are stuck with properties that they can no longer sell and must continue to make payments on. The so-called “housing bubble” only works when a property is sold at a higher price than is paid for it. And as the current situation shows, there is no way to ensure stability in that market. Henry Paulson, US Treasury Secretary, even called the housing market “the most significant risk to our economy” in 2007.
The end result is people who are stuck with properties that they cannot sell and others who are defaulting on mortgages and losing their homes.
As a result of stock and housing failures, banks are becoming much more strict in lending practices. This is the predicted credit freeze. The cornerstone of our dynamic economy is the speed at which money changes hands. Money has to circulate for growth to occur. With no new loans occurring, companies at risk of going under cannot be picked back up. Any sort of progress becomes impossible, both for individuals seeking loans and corporations. The economy reaches stagnation and then decline.
This is where the government comes in to the picture. TARP, for reasons of connotation is no longer being called a “bailout” but a “rescue”, proposes that billions of taxpayer dollars be used to buy distressed assets (such as defaulted mortgages) from corporations in order to free up the market.
$250 billion would be available to the Treasury immediately, with another $100 billion added at the approval of the president. Congress would vote on the release of the last $350 billion. A committee will be designating to oversee the delegation of funds. The newly revised bill also includes a raise in deposit insurance from $100,000 to $250,000. This means that bank losses on accounts of up to $250,000 per account holder, per bank are insured by the government. This addition to the bill is meant to increase the general public’s confidence in banks, and to encourage banks to begin lending again without fear of mass losses. New tax legislation geared toward business breaks and infrastructure projects aimed at creating new jobs have also been added to the bill.
Despite the turmoil in Washington surrounding the bill as it passes through Congress (the last proposal was turned down by the House on Monday, ten votes shy of passing, and was later passed), there is heated public debate over TARP.
Some of the debate may be attributed to controversy over who would hold the reigns of this economic machine. The bill gives authority to Treasury Secretary Henry Paulson. It is not a secret that Paulson has a vested interest in passing the bill- it is worthwhile to note his involvement in Goldman Sachs, another corporation feeling the sting of decline.
The authority to delegate such an unheard of sum has the potential to make Paulson more powerful than any other Treasury Secretary in the history of the United States.
Many people also feel that the bill would benefit those companies receiving aid, while placing the cost on taxpayers. Benefit is privatized, while loss is socialized.
There is also speculation as to whether the extensive influx of capital into the economy could cause inflation, or even hyperinflation.
Whether the bill passes or not, there will be consequences to the public. The question remains as to whether the bill can significantly increase economic mobility. If the economy does not shift toward growth quickly enough, TARP may not be successful or justified. The US would have only built a temporary wall between itself and recession. The irony is that if the bill is successful, we will never see the crisis that it averted.
If TARP is successful, we will never know the bullet that we dodged, and we will never be able to truly validate its passage.