September 23, 2008
Over the weekend, Treasury Secretary Henry Paulson could be seen on TV screens everywhere, trying to sell the American public on the $700 billion bailout plan he’s given to Congress. So how does this bill affect people struggling to pay their mortgage, taxpayers, and everyone feeling the “credit crunch”?
What is the bailout plan?
As it stands, the bailout plan Treasury Secretary Paulson is pitching to Congress is a brief but far-reaching three page proposal. It asks for permission to spend $700 billion to buy up distressed mortgages from financial institutions (To put this into context, that’s more than this year’s spending on social security). It will then try to resell those mortgages to investors. It’s possible that the Treasury will not have to use all $700 billion, if the market rebounds. But it’s also possible that it will need to spend more than that, some say up to a trillion dollars. It also asks Congress to raise the ceiling on national debt to $11.3 trillion.
What is the significance?
Paulson’s plan would amount to the biggest government bailout in U.S. history. The Secretary believes that the future ability of Americans to borrow, and the ability of the U.S. to finance future economic expansion, depends on this intervention. His logic is that financial institutions will only be able to get a true sense of their assets and liabilities if the government buys up their bad mortgages. When they are more certain of where they stand, they will once again be willing to lend money for things like college, small businesses, etc.
What about Main Street?
Secretary Paulson and President Bush are both urging Congress to approve the proposal by week’s end. They argue that the more quickly the proposal is passed, the more quickly markets will stabilize. No one seems to be disagreeing that it is urgent that some sort of bailout be passed quickly. But there is less agreement over the details of the bill. Some points of contention include:
Oversight: as it stands, the proposal gives the Secretary of the Treasury virtually unlimited power, asking only that they report to Congress twice a year on their progress.
Executive Compensation: Some Democrats are demanding that executive pay be limited at companies whose bad debt is bought up by the government. They say it is unfair that taxpayers should be bailing out companies while their executives continue to profit.
Direct help for homeowners: There are proposals to add clauses to the bill that would directly help homeowners having trouble with their mortgages.
Giving judges the power to modify mortgages: Some members of Congress would like to allow bankruptcy court judges to modify the terms of loans on primary residences.
The bottom line?
Any plan that is passed will be intended to help address the mortgage crisis, but whether this is through more of a trickle-down effect from a looser credit market or through more direct assistance for homeowners will depend on whether Congress alters the current proposal.