The Bailouts Worked: Like the Concept or Not - Term Paper Example

?A subhead has been added. We cannot possibly know your level or style of writing. You will have to adjust it according to your particular needs. Student name Instructor name Course name Date The Bailouts Worked: Like the Concept or Not A second Great Depression averted by government intervention It was late summer 2008. The nation was losing hundreds of thousands of jobs each month; the stock market was plunging, major banking institutions were failing by the day and the country was dragging the global economy toward a second Great Depression. Treasury Secretary Hank Paulson reportedly marched into President Bush’s office and told him if the financial markets were not stabilized and soon, the President’s legacy would not be the military debacle in Iraq but as the overseer of a global economic depression that would dwarf the one of the 1930’s. Though counter to his conservative ideology, Bush relented and worked with Congress to pass TARP, the Troubled Asset Relief Program, a move applauded by then presidential candidate Barack Obama. TARP and the auto bailout were and remain controversial topics. These were big gambles that, with all the associated drawbacks, paid big dividends. The bailouts saved a major American industry, the world from the Great Depression, the sequel and millions of people from living in “Bushvilles.” TARP, otherwise known as the “bank bailout,” was hurriedly implemented in 2008 as the world appeared on the threshold of a catastrophic financial meltdown. To stabilize financial markets, Congress authorized the Treasury Department to spend $700 billion, a move that caused widespread public outcry against the program. Most economists, however, understood that the move played a central role in rescuing the global economy. The Treasury didn’t use the entire amount though. It spent $470 billion on hundreds of banks, the auto industry and trying to help prevent home foreclosures. Treasury calculated that the total lifetime cost for taxpayers to be $17 billion in losses from the investments in the auto industry and auto finance companies plus a $46 billion loss from mortgage modification programs. “By any measure, TARP’s final tally will be far less than expected amid the crisis. But the program remains a big loser politically.” (“Credit,” 2010). According to a Treasury Department official Timothy Massad, Read Mthe federal government successfully stopped the 2008 financial crisis by “acting with overwhelming force and speed.” “The actions we took to stabilize the crisis worked. We really did arrest the panic,” said Massad. In addition, the financial regulatory reforms implemented the past three years have afforded economic policymakers enhanced tools to scrutinize systemic risk and better manage future crises. The U.S. government’s rapid and robust actions are in contrast with how European Union countries handled their banking crisis. “We’ve seen Europe struggle with its problems for two years. They haven’t been able to act as forcefully with their problems.” (Mowbray, 2011) To gain a little perspective, TARP and other government actions taken due to the financial crisis will cost taxpayers less than the savings and loan debacle during the 1980s, as a percentage of GDP (gross domestic product). Following the initial payout, President Obama continued the attempt to revive the financial system by implementing a scheme to help banks raise private money so that they can pay the government back. The Obama administration forced the 19 biggest banks to submit to a “stress test” to give potential investors confidence that those banks were solvent and reporting accurate financial records. Consequently, “banks have been able to raise enough private capital that today banks totaling only about 8 percent of bank holding companies by assets still have TARP money, down from 75 percent at the dawn of the crisis.” (Mowbray, 2011) Another element of the Obama administration’s reaction to the financial crisis was to pass the stimulus plan, or more formally, the American Recovery and Investment act of 2009. TARP was necessary because some financial institutions, banks and insurance companies, are “too big to fail,” a phrase commonly spoken during the crisis. The federal government took steps to rectify the “too big” problem by passing legislation that gives the government the authority to split up non-banking companies such as AIG, whose financial fitness, or lack of, could disrupt the financial system. Congress passed the Consumer Protection Law and Dodd-Frank Wall Street Reform to reinstall financial regulations that were stripped away during the 1980’s and 1990’s. However, these measures still fall short of the Glass-Steagall Act, a financial oversight law which been in place from 1933 to 1999. In addition to these legislative measures, the Financial Stability Oversight Council was formed to allow the government to scrutinize how different components of the financial system interconnect so as to identify potential problems. A remarkable feature of the government’s reaction to the financial crisis of 2008 was that it was nonpartisan. It began under a Republican president and was continued by a Democratic president. Both parties worked together and took the necessary action in a way we have seen little of since. (Mowbray, 2011) While the bailout did keep the country and world economies from plunging into an economic depression, the program failed in several keys areas. It allowed the largest banks to grow even larger, did nothing to return lending to Main Street businesses and did not achieve much as far as helping homeowners stay in their homes. An important facet of TARP, as was originally proposed, was to preserve homeownership, an element of the legislation that was vital to its passage. Congress was led to believe that TARP money would be used to buy up to $700 billion of home mortgages and, to gain the needed votes for passage, the Treasury Department said that it would modify the mortgages of homeowners who were struggling to make their monthly payments. Undeniably, the act specifically directs Treasury to do just that. But, according to Treasury Department’s special inspector general Neil M. Barofsky assigned to oversee TARP, the program has “done little to abide by this legislative bargain.” (Barofsky, 2011) Treasury Secretary Timothy Geithner admitted that TARP “won’t come close” to realizing its initial expectations, that its financial inducements were not “powerful enough” and that “the mortgage servicers are still doing a terribly inadequate job.” (Barofsky, 2011) However, Treasury bureaucrats refuse to tackle these issues. Instead they obstinately insist that TARP is successful and does not need to be significantly modified which effectively guarantees that the government’s most explicit promise to ordinary citizens will not be honored. Financial regulatory reforms that would keep the country from succumbing to another economic crisis due to the reckless behaviors of large banks are another governmental promise that remains unfulfilled. The largest banks have grown by 20 percent since the economic meltdown occurred and influence a larger piece of our economy than they did previously. The Treasury Department has apparently chosen to disregard instead of encourage real efforts at financial reform, such as consumer protection measures advocated by Sheila Bair, the former FDIC chairwoman. Treasury could also have simplified the banking system and reduced the size of the most complex monetary institutions but to date has not and does not appear to be heading that direction. “Whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.” (Barofsky, 2011) TARP could not rescue all homeowners and the mortgage industry was not prepared to process and absorb massive defaults. Because it uses taxpayer capital, the government cannot bail out every homeowner. It makes financial sense to only modify those mortgages where the homeowner can maintain payments at a new rate and remain in their home. The Obama administration has acted on behalf of “Main Street” by requiring mortgage servicers to establish a single contact point for troubled homeowners and has set forth stricter foreclosure rules while mortgage companies work with the homeowner to modify their contract. Treasury official Timothy Massad acknowledged that “the Obama administration has not been able to help as many homeowners as it originally hoped and is working on new efforts to stabilize neighborhoods and exploring the possibility of turning property owned by Fannie Mae and Freddie Mac into rental units.” (Mowbray, 2011) The auto industry, much the same as the housing market, is a major energizing force of the economy. The industry affects nearly every aspect of the economy. It would not be sound economic policy to allow the auto industry to fail. The massive loss of jobs would mean a great loss of tax revenue for a government having to, simultaneously; provide unemployment assistance for hundreds of thousands suddenly out of work. The housing industry would suffer and many more mortgage failures would occur, a sobering prospect. In addition, retail and grocery stores, charities, youth sports, restaurants and many other peripheral businesses and activities would suffer without economic support of the auto industry. The Center for Automotive Research performed a study to determine the impact on the economy if the three American automakers were allowed to fail. “Overall, the U.S. economy would lose close to 3 million direct and indirect jobs in the first year. Added to that, the U.S. government would lose at least $156.4 billion in taxes over the first three years.” (Fortson, 2008) The auto bailout saved two of the three automakers which, given the option of failure, was worth the $50 billion investment. General Motors scaled-back its production transforming into a much smaller company after declaring bankruptcy. It discontinued once very popular brands such as Saturn, Pontiac and Hummer. GM’s market share plummeted to 20 percent, down from 50 percent at the peak of its dominance due to competitors profiting from its financial problems. Its domestic sales now matched its anemic foreign sales figures. The federal government owns about 60 percent of the revamped company. Fiat, an Italian car company took over the management, 46 percent and soon to be 52 percent therefore controlling interest in Chrysler. The federal government and the United Auto Workers also retain minority shares of the company. (“Automotive” 2011). GM has repaid the majority of the bail-out money and ahead of schedule. Both GM and Chrysler likely would not exist today had the government not intervened and oversaw restructuring of the companies. The bail-out also saved many other American companies that sell parts, machinery and factory needs along with other associated services to the auto companies. Instead of now being a defunct auto giant, GM is celebrating 100 year of existence, is expected to create about 6,000 new jobs in the near future and is investing billions of dollars in factory upgrades. “The jobs were saved, the economy was helped, and the government gets repaid ahead of schedule. GM too is earning healthy profits again, allowing the government to divest itself of its GM stock. So: everybody wins.” (“New GM,” 2011) The bailout was very unpopular in when implemented in 2009 and interestingly, two years later the benefits of the highly successful program are known but the overall feeling is still very mixed. TARP prevented a collapse of the financial system, a bold move that saved many people from the misery and hopelessness of an economic depression. The government also took steps to prevent another set of circumstances that preceded the 2008 crisis. The auto bailout, a move still criticized by many, saved two-thirds of an American cultural icon and major employer. Whether a person’s political ideology allows them to accept it or not, and for all its flaws, the bailout of Wall Street and auto industry worked and worked well. It’s hard to imagine anyone choosing the alternative, a cataclysmic economic disaster for America and the world. Works Cited “Automotive Industry Crisis” New York Times May 25, 2011 Web. November 22, 2011 < http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/auto_industry/index.html> Barofsky, Neil M. “Where the Bailout Went Wrong.” New York Times. March 29, 2011. Web. November 22, 2011. “Credit Crisis - Bailout Plan (TARP)” NY Times December 7, 2010. Web. November 22, 2011 < http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/bailout_plan/index.html?offset=0&s=newest> Fortson, Jeff. The Automotive Bailout Plan: A Real Insider’s Perspective. Black America Web. November 8, 2008. Web. November, 22, 2011 < http://www.blackamericaweb.com/?q=articles/news/moving_america_news/3093/2> Mowbray, Rebecca. “Banking bailout was a success, TARP executive says” New Orleans Times-Picayune. September 18, 2011. Web. November 22, 2011 “New GM Jobs Result of Auto Bail-Out” KPLR11 St. Louis November 3, 2011 Web. November 22, 2011 < http://www.kplr11.com/news/kplr-jaco-bail-out-gm-110311,0,409104.story> The Times-Picayune Read More