In a recent column, I discussed the economic emergency facing the nation and expressed the urgency of the response required by the federal government. This week I’d like to discuss the legislation Congress approved to address the crisis.
Many have been led by the media to believe that the bill was a “bailout” of Wall Street. While it is true that the Treasury Department and Federal Reserve engineered bailouts of Bear Stearns, insurer AIG, and Fannie Mae and Freddie Mac several weeks ago, the economic stabilization bill addresses a different problem in a different way and is not a “bailout.”
The problem the bill seeks to address is the decreasing availability of credit which was brought on by overinvestment and speculation in home buying. Like it or not, most of our economy runs on credit, and if it’s not available, economic activity can grind to a halt. Most families cannot afford to buy a new car or a refrigerator – let alone a house – with cash. The credit crunch that is affecting our economy started several months ago, but has accelerated in recent weeks.
The Arizona Republic recently wrote that “Arizona business leaders report they are seeing entire lines of credit evaporate.” A USA Today poll in August found that 67 percent of businesses felt a credit crunch, up from 55 percent in February.
The Republic also reported that automobile sales are down sharply: down 34 percent for Ford, 32 percent for Toyota, and 16 percent for GM. Taxable vehicle sales in Arizona are down 23 percent compared to a year ago.
What all of this indicates is that the credit crunch is spreading to Main Street and threatens severe economic disruption. Even the state’s resources are at risk. The State Treasurer in Arizona reports the potential loss of millions of dollars from state-backed investment pools. Unless the credit problem is addressed, economic turbulence will continue to erode our economic well-being.
To restore the orderly functioning of credit markets in the most effective way, Treasury Secretary Hank Paulson and many other experts believe that the federal government should buy mortgage-backed and other distressed securities that are clogging the balance sheets of financial institutions.
Accordingly, the financial stabilization bill Congress approved would allow the Treasury Department to purchase up to $700 billion of these securities, hold those assets until the market recovers, and then resell them at a later date with the goal of recovering the taxpayer investment. Only the federal government has the ability to buy and hold these assets for the amount of time required for the markets to recover and return sufficient value to the taxpayers.
The stabilization bill would also create a “Financial Stability Oversight Board” to provide better oversight and ensure that assets are acquired at the best price for taxpayers; require firms selling troubled assets to the government to provide it with stock options (this will allow taxpayers to share in a firm’s future profits – when the economy recovers – in exchange for the risk taken by the government now); ensure that executives of troubled institutions do not profit from the government’s asset acquisition plan; and increase the federal deposit insurance limit from $100,000 to $250,000 to help maintain confidence that Americans’ personal savings are safe and secure.
Also added to the bill was legislation previously passed by the Senate by a 93 to 2 vote, but not yet passed by the House, that extended certain tax credits and deductions and a one year repeal of the Alternative Minimum Tax (AMT) in order to prevent a large tax increase on 25 million Americans.
For those of us who fervently believe in the virtues of a free-market economy – where businesses succeed and fail based on their appeal to consumers, the soundness of their business practices and accountability to their shareholders – the idea of government intervention to try to fix the credit crisis is not an appealing one. But the larger economy is facing a serious emergency, and I believe some kind of bold government action was both necessary and urgent. The stakes were simply too great not to support the economic stabilization bill.
