Wednesday, April 8, 2009

Bailout and Stimulus: Brief History and Explanation by Ron Powell

Bailout and Stimulus: Brief History and Explanation
by Ron Powell

The Troubled Assets Relief Program (TARP) is the government program created for the establishment and management of the Treasury fund made available to try to curb the ongoing financial crisis of 2007-2008. The TARP gave the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to improve access to cash and loosen up the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury was given $250 billion immediately. As required by the legislation, President Bush certified that additional funds were needed. Accordingly, an additional $100 billion was released and distributed. $350 billion remains.
Under the current legislation Congress has the right to not approve release of the remaining TARP funds. At the urging of then President-Elect Obama, who threatened to veto any attempt to block release of the remaining funds when he took office, the Senate voted to release the remaining 350 billion on the 16th of January. At the same time in the House of Representatives, Democrats unveiled an $825 billion fiscal recovery plan aimed at putting millions of unemployed Americans back to work.
In September 2008,Global credit markets came to a near stand still, as several major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group, went under. In a few surprising moves, two big investment firms, Goldman Sachs and Morgan Stanley, changed their charters to become commercial banks, in an attempt to enhance and stabilize their dwindling cash reserves. The bailout is supposed to increase the availability of cash in the secondary mortgage markets by purchasing the bad or ‘toxic’ mortgage backed securities in order to reduce the potential losses that could be felt by the institutions who currently own them.
The passage into U.S. law on October 3, 2008, of the $700 billion financial-sector rescue plan (or bailout) is the latest in the long history of U.S. government bailouts that go back to the Panic of 1792, when the federal government bailed out the original 13 United States, which were over-burdened by their debt from the Revolutionary War. It also marked the fourth time in 2008 that the government interceded to prevent the ruin of private enterprises or the entire financial sector. There have been five financial crunches in the past century that resulted government intervention: The Great Depression; the savings and loan bailout of 1989; and in 2008, the collapse of Bear Stearns, an investment bank and brokerage firm; American International Group (AIG), a giant international insurance company; Freddie Mac and Fannie Mae, government-backed mortgage lenders.
In October of 2008, shortly after the legislation was passed and signed into law, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $350 billion to be used to bail out nine major U.S. banks, and many smaller banks by buying some of their stock. This stock purchase program demands that companies involved lose some tax benefits, and in many cases incur limits on pay for executives. The unilateral revision of TARP by Bush and Paulson has caused confusion in accounting and accountability for the first half of the 700 billion that is to be provided under the legislation. President Obama is committed to using the remaining half as a stimulus to the economy by giving tax relief and financial assistance to those hurt by the crisis, making personal and business credit more readily obtainable, and by creating jobs.

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