On Sept. 20, the U.S. Treasury Department proposed legislation to Congress requesting authority to purchase troubled assets from failing financial institutions to increase market stability. The rejection of two subsequent proposals prevented what would have been the biggest government intervention since the Great Depression.
Nine days after the initial pitch, Treasury Secretary Henry Paulson vowed not to give up as the stock market experienced a considerable sell-off.
In the meantime, Federal Housing Finance Agency (FHFA) director James Lockhart put Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.), government sponsored enterprises (GSE’s), into conservatorship. GSE’s are privately owned businesses intended to make a profit but with government backing to instill consumer confidence.
These lending companies showed signs of instability when foreclosure rates started rising.
When Americans are unable to make their mortgage payments, it prevents lending companies from paying their own bills and offering future loans at reasonable rates. It also prevents them from making investments, a key element in a private profit making businesses.
The bailout is being proposed to prevent a larger calamity. The treasury is advising Congress that if the situation is left unchecked, homeowners’ default rates will increase dramatically and interest rates will skyrocket.
According to CNN, Paulson and Federal Reserve Chairman Ben Bernanke want Congress to move quickly to protect the U.S. economy and prevent the housing crisis from spreading further.
“It seems like either the government spends a lot of money now or spends a lot in a couple of years when we are stuck in a depression and can’t figure our way out of it,” said Maria Rosales, assistant professor of political science.
Initially taxpayers would be footing the $700 billion tab, but it’s the terms of the bailout loan that are at the center of a heated debate.
One of the plan modifications includes giving the government equity in the companies it helps. Changes in bankruptcy laws are also part of the proposed plan, adjusting mortgages to make them affordable to homeowners.
“It’s in the best interest of the banks, they need to be paid back,” said Rosales. “It will just take a little longer.”
However, there are strong arguments against the bailout in that it rewards flawed business dealings relative to the housing market.
“The Fed is the guardian of the currency, its job is not to subsidize people who make credit mistakes,” said William Silber, professor of finance and economics at NYU, to Time magazine.
Distrust that the federal government will be able to handle the responsibility of managing the bailout is another element of debate.
Former Republican House Speaker Newt Gingrich told Time magazine that he thought it was inconceivable that the treasury thinks they could manage Wall Street.
“I think that is an undertaking of such gigantic delusion that it will be a nightmare,” Gingrich said.
Troubled that the government will be spending too much money on an unprecedented program, junior Andy Young predicted “it might get crazy in the next couple of years.”
“I feel doomed,” Young said.
Meanwhile, President Bush, in an effort meant to speed up the negotiations between the House Republicans and the Treasury Department warned, “If money isn’t loosened up, this sucker could go down.