The economic maelstrom is rapidly whirling, and the world is ready to see this global financial turmoil come to a halt. Markets around the world are in distress, as this is a financial crisis that does not only affect Wall Street, but also Main Street and both our country and nations around the world.
The governments historic proposal of a $700 billion dollar bailout is the last tool in Secretary of the Treasury Henry Paulsons toolkit to rescue the economy. As I write this on the evening of Monday, Sept. 29, the House has refused to pass the rescue bill and the equity markets are in a historic downward tailspin. The bankruptcy of Lehman Brothers, Merrill Lynchs rapid sale to Bank of America, the government rescue of American International Group (AIG), the nationalization of Fannie Mae and Freddie Mac and the demise of Washington Mutual (Americas biggest bank failure) these are just a few examples in a series of problems that have unfolded. It has never been more apparent that such a bailout plan is in need of implementation. Government intervention is necessary, as Americas capitalist system is facing one of its greatest challenges capitalism is driven by credit and credit is driven by confidence, and with no confidence, the global economy is in grave danger.
What exactly are the details of the government rescue bill? It is $700 billion to be spent in installments: $250 billion immediately, with another $100 billion if the president says the country needs it. The president could ask for another $350 billion more, but Congress has the ability to stop it. This line of credit would enable the Treasury to buy toxic mortgages and other securities that are currently undermining market confidence. However, House Republicans are concerned with this package, as many are uneasy with the high degree of the governments role in the economy and the bills tremendous cost. Republican defiance neither bodes well for the global economy nor John McCain, as the presidential nominee supports the bill.
The gravity and urgency of this economic crisis demands the swift passage of the bill. Indeed, Cornellprofessor Isaac Kramnick recently mentioned Alexander Hamilton in a lecture that touched on the current economic situation. Hamilton, once a prominent statist, argued that the central government must play an important role in Americas economy. This view contrasted Thomas Jeffersons laissez-faire approach. During the first years of our country, business titans supported Hamiltons view, while the agrarian community supported Jeffersons outlook. Recently, such support reversed, with Wall Street and many businesses supporting free markets and the invisible hand. Yet given the historic nature of todays economic problems, the invisible hand is failing and many, including those in the business world, agree that the government must use its visible hand in order to fix a problem that it helped foster.
A major takeaway from the current situation revolves around lax market regulations and lending processes that permeated our system. Mortgage lending, among other types, skyrocketed. In particular, sub-prime mortgages (loans made to people with weak or troubled credit history) abounded practically anyone could get a mortgage during the sub-prime lending frenzy, and the housing bubble flourished. Indeed, most economic policies since the Great Depression have been designed to help people acquire homes. Government agencies and related institutions, such as the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac were created to ensure that people who want a home can buy one. Owning a home is a basic tenet in nearly every Americans conception of achieving the American dream.
Naturally, Wall Street engineers devised a way to get involved in this; they bundled the mortgaes together and sold them as securities. Securitization made average families around the country, writing their monthly mortgage checks, a part of sophisticated financial instruments. Global investors, including various central banks, bought a large number of these securities, as they were considered safe (only slightly riskier than a U.S. Treasury bond). Credit rating agencies, like Moodys and S&P, made exotic mortgage securities seem much safer than they actually were; agencies were not required to do due diligence regarding the originators or servicers of the mortgage loans. The agencies faced various challenges in developing models that were sophisticated enough to even evaluate such loans. When U.S. homeowners began defaulting on their mortgages in record numbers, a financial crisis started to unravel that few could have imagined.
This crisis is no joke; with rising CDS prices on U.S. Treasury Securities, one can only confirm that we are a hobbled hegemon. With people facing foreclosures and increasingly limited access to credit, our economy is attempting to withstand challenges reminiscent of the Great Depression. The Treasurys bailout plan is not rescuing Wall Street titans, but is a way to ensure the continued functioning of our economy. I am no Marxist, but I believe it is time for taxpayers and the government to work together in a bipartisan way, intervening in the economy and rescuing our country from further demise.