Wall Street Turns to Government for Help: $700 Billion Bailout Bill Passed

![The credit crisis has led to despair on Wall Street. (Richard Drew/The Associated Press)](/content/uploads/1.jpg)
The credit crisis has led to despair on Wall Street. (Richard Drew/The Associated Press)
On Monday, September 29th, the United States House of Representatives voted against a bailout bill by a measure of 228-205 that would have allowed the Department of the Treasury to purchase failing assets at an above-market price for up to 700 billion dollars. Hoping that the plan would have saved troubled financial companies from bankruptcy, the Treasury would have eventually attempted to re-sell the assets in order to gain some of the money back.

This vote was particularly noteworthy as the Republicans in Congress defeated the bill against the wishes of the Bush Administration. The Democrats supported the bill by a vote of 140-95, while the Republicans rejected the Bush-supported plan with 65 voting “yes” and 133 voting “no.” While many blame the bill’s failure on Nancy Pelosi’s divisive remarks about the Bush Administration before the final vote, there seems to be a schism between “Wall Street Republicans” and “Main Street Republicans.”

Nevertheless, the Senate overwhelmingly passed a bailout bill on Wednesday that was filled with added “sweeteners” in order to gain extra votes. The sweeteners, which are mainly various tax reliefs, add 150 billion dollars to the 700 billion granted to the Treasury. The House passed the same bill on Friday, and President Bush then signed the “Emergency Economic Stabilization Act” into law. While 25 Republicans in the House of Representatives did switch votes, a majority of the GOP still opposed the bill on Friday.

While financial and real estate companies lobbied hard for the bill’s passage, the measure was largely unpopular with the American public, and many saw the plan as a blank check to failed institutions and a payment to CEOs for their mistakes. Furthermore, the public was correct in assuming the costs will be towering; out of the 140 million working Americans, each taxpayer will now be responsible for approximately six thousand dollars of the plan if the full 700 billion dollars is spent along with the 150 billion dollars from sweeteners. With a government that is already running a record budget deficit, it should not be surprising that Representatives were at first hesitant to force their constituents to owe even more money with a bill that many felt had been rushed in production. Moreover, the passage could further weaken the dollar as questions arise as to the credibility of the United States with respect to paying off its debts.

A bailout of this scale inevitably raises the question as to the degree to which the United States and its taxpayers should respect the fundamental integrity of capitalism. Failure of companies that do not perform well is an essential feature of a truly capitalist system. Financial companies are supposed to be able to manage risk–in this case, the companies failed to anticipate the true risks associated with the housing crisis. Too many weak or zero-down- payment loans, which had low interest rates in the first couple of years of the mortgage, were sold to people who were unlikely to be able to afford them. Still, under the 1990s real estate boom mindset that housing was destined to increase in value, these transactions were made without sufficient attention to potential problems. A recession, in addition to inflationary pressures such as rising oil prices, left millions of Americans struggling and unable to pay. Meanwhile, financial companies that had bought the receivables from the mortgage companies and had them packaged into securities were surprised to find that they were losing money. The problem is further complicated by the fact that many companies are in trouble not because of their direct dependence on mortgages, but because they depend on other companies that are in turn dependent on these payments. The demonstrated effects of interdependence have caused many to fear the risk of overall financial collapse.

Whether and to what extent the United States should have rescued the financials remains uncertain. What seems more certain, however, is the clear reluctance of the American people to turn toward government to socialize industry. Still, the costs are obvious to any American who has invested in the stock market: the Dow Jones Industrial Average (DOW) closed with a record fall of 778 points on Monday. While not the largest crash in percentage terms ever, it was the largest gross numerical drop. The collapse, in terms of percentage, was even worse in the NASDAQ, which showed a 9% drop as opposed to the DOW’s monumental 7%. In addition, the markets were down on Friday in spite of the record bill’s passage.

Unfortunately, there does not seem to be a winning answer to these problems. Strict adherence to free market principles risks market collapse. Meanwhile, the purchase of risky assets shifts the burden to the United States taxpayer while putting the nation further in debt and weakening the dollar– in addition to making us more dependent on the government. In the future, Americans should be aware that their banks and financial institutions are fallible. On an individual level, the acquisition of safe risk-free (FDIC-insured) savings and Certificates of Deposits may not be the trendiest investment tactics, but they keep the money from disappearing. This shift towards risk aversion in investment strategy has already been exhibited by Treasury Bills’ fall to zero-yield. Investors are choosing safer options rather than risking further collapse on the stock market. In the near future, then, it is unlikely that optimism will return to either Wall Street or Main Street, regardless of what the government does to the financial system.

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