Government loans help bail out faltering company and banks in times of economic woes
Bailout plan proposed by Paulson and Bernanke
Because of the recent financial crisis, economic officials and members of Congress are meeting on Capitol Hill this week to discuss a $700 billion bank rescue plan.
Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson said Congress must work the plan out quickly before the financial situation worsens.
After a significant drop, stocks rose last week with the news of the plan.
The proposal would allow the Treasury to buy assets from troubled financial firms at a discount.
These assets would be sold later for a profit. The goal is to allow banks to lend to each other again, taking one burden off of the struggling economy.
Bernanke and Paulson said it is necessary for Congress to approve the bailouts this week, or the economy could grow weaker.
The proposal is under debate, because some members of Congress are worried about how much government intervention the plan requires.
-Information gathered from www.cnn.com.
The U.S. economy has seen its share of troubles with the stock market crash and the Great Depression. Could America be headed down that road again?
According to the Federal Reserve Web site, an $85 billion loan for AIG was authorized Sept. 16, by the federal government with the full support of the Treasury Department.
According to the site, if AIG failed now it could add major problems to the already falling economy.
In addition to large government loans, several companies have had to file bankruptcy and discontinue operations.
Airlines such as Skybus and ATA, who both closed down in April, have had to succumb to the rising costs in fuel and a slowing economy.
“Financial markets themselves and financial institutions are in the most trouble,” said Lon Simpson, branch manager and financial advisor at Raymond James financial institution.
Simpson had his own ideas as to why institutions are in trouble and who is to blame.
“It’s more greed than anything and deregulation by the government,” Simpson said. “The overseers weren’t overseeing, and the institutions themselves continued to exploit the non regulations by continuing to borrow more and more money than what they should’ve.”
Robert Garrison, professor of economics, said while subprime mortgages are the biggest problem right now, the real issue is that it’s an old financial sector.
He went on to say that while people are always hearing that it’s a market failure, a strong case could be made that it’s a government failure.
“It stems from some legislation back in the mid ’90s,” Garrison said. “The federal government urged the banks to reduce the standards for credit worthiness. It’s a strange site because everybody’s blaming it on speculation, and they’re blaming it on reckless activity by the commercial banks, but it really traces to poorly thought out legislation that weakens the standards for credit worthiness.”
Garrison said one of the poorly thought out acts he speaks of is the Community Reinvestment Act of 1977, intended to make more lending for mortgages in low income areas.
To do this, the banks had to reduce the standards of credit worthiness.
He also said the intent of the legislation was to get more mortgage money from low income neighborhoods.
Malcolm Cooper, trading officer at Primerica Financial Services, said the key is to educate borrowers on affordability and how to manage money and plan for the future.
“We’re helping people,” Cooper said. “We try to help people save money. We’re going to show them where to put their money. With some of those other companies, it’s all about the money.”
The pressure is now on for the government to make a move toward getting America back to a stabilized economy. While the financial sector is struggling, steps are being taken to bring some relief to Americans.
According to a press release on the U.S. Treasury Web site, the treasury has the authority to issue $700 billion to take care of assets that are in trouble.
It says removing those assets will help the U.S. financial system regain its strength and maintain financial stability.
“It’s a very dangerous method,” Garrison said. “It’s a huge amount of money, and the plan is to put the treasury secretary in charge of that with very little, if any, oversight.”
Garrison said he has never been a fan of putting that much money in the hands of one person.
The most important question is, will the economy eventually stabilize?
“The economy is going to bounce back,” Cooper said. “Look at how things were in the Great Depression, and they bounced back from that.”
Garrison said he agreed it would bounce back, but it will take a lot of time to do so.
“America is known for getting itself out of tight situations,” Simpson said.
