Comment & Debate
US Secretary of the Treasury Hank Paulson in testimony before Congress – The events leading us here began many years ago, starting with bad lending practices by banks and financial institutions, and by borrowers taking out mortgages they couldn’t afford. We’ve seen the results on homeowners – higher foreclosure rates affecting individuals and neighborhoods. And now we are seeing the impact on financial institutions. These bad loans have created a chain reaction and last week our credit markets froze – even some Main Street non-financial companies had trouble financing their normal business operations. If that situation were to persist, it would threaten all parts of our economy.[1]
Federal Reserve Chairman Ben Bernanke warned in testimony to Congress on September 23rd, 2008 – “if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.”
United States President George Bush – Without the $700 billion bailout, “our country could experience a long and painful recession.”[7]
Barack Obama. “Obama’s Remarks on the Economic Crisis”. Reno, Nevada. 30 Sept. 2008 – This morning – like so many others over the last few months – we woke up to some very sobering news about our economy. Over the course of a few hours, the failure to pass the economic rescue plan in Washington led to the single largest decline of the stock market in two decades.
Over one trillion dollars of wealth was lost by the time the markets closed on Monday. And it wasn’t just the wealth of a few CEOs or Wall Street executives. The 401Ks and retirement accounts that millions count on for their family’s future are now smaller. The state pension funds of teachers and government employees lost billions upon billions of dollars. Hardworking Americans who invested their nest egg to watch it grow are now watching it disappear.
But while the decline of the stock market is devastating, the consequences of the credit crisis that caused it will be even worse if we do not act and act immediately.
Because of the housing crisis, we are now in a very dangerous situation where financial institutions across this country are afraid to lend money. If all that meant was the failure of a few big banks on Wall Street, it would be one thing.
But that’s not what it means. What it means is that if we do not act, it will be harder for you to get a mortgage for your home or the loans you need to buy a car or send your children to college. What it means is that businesses won’t be able to get the loans they need to open new factories, or hire more workers, or make payroll for the workers they have. What it means is that thousands of businesses could close. Millions of jobs could be lost. A long and painful recession could follow.
Senator Charles E. Schumer, “the arteries [of the economy] are clogged,” and that without action “the patient will surely suffer a heart attack.”[8]
According to CNBC commentator Jim Cramer, large corporations and institutions are pulling their money out of bank money market funds, in favor of government backed Treasury bills. This move is slowly robbing banks of the capital reserves they so desperately need. Cramer called it “an invisible run on the banks,”[citation needed]one that has no lines in the lobby but pushes banks to the breaking point nonetheless. Bank runs are taking place under the radar, he said. Chief financial officers, lawyers, the wealthy – they’re all pulling their money from savings accounts and asking for T-bills. As a bank’s deposits evaporate, so too does its ability to lend and correspondingly make money. This will continue until Congress agrees on a bailout deal. “The lack of confidence inspired by Lehman’s demise, the general poor health of many banks, this is going to turn this into an intractable moment,” Cramer said, “if someone in the government doesn’t start pushing for more deposit insurance.”[9]
National Association of Home Builders – We agree with Fed Chairman Bernanke and Treasury Secretary Paulson that immediate steps need to be taken to stem the financial crisis. The financial markets are in turmoil and the flow of credit has been severely curtailed for housing and other sectors of the economy. There’s no time to waste. Congress must pass legislation as soon as possible.[10]
National Association Manufacturers – Business and manufacturers depend on the effective functioning of our capital markets. Without access to credit, manufacturers will be limited in their ability to expand their business, make investments, and even carry out day-to-day operations. If the financial crisis means America stops making things, then our country and our economy are in serious trouble. As employers and community members, manufacturers are also concerned about the financial crisis’ impact on our employees and their families, as well as individual investors and pension plans. All of these rely on a secure and stable financial system.[11]
U.S. Chamber of Commerce – Whatever the cost of action, the cost of inaction will be significantly higher. “Main Street” and Wall Street are inextricably connected. The funds that flow through Wall Street drive the activity on Main Street that creates jobs and generates income. Americans have witnessed what has happened to equity markets over the past week, and failure to act will only contribute to even greater declines in the markets, which will erode taxpayers’ retirement savings and pension fund assets. However, that may very well be only the tip of the iceberg because a lockup in credit markets will cripple Main Street’s ability to operate and threaten taxpayer jobs and income.[12]
AARP – The nation faces a historic economic crisis, and failure to act will risk Americans’ jobs, homes, and retirements. AARP is urging bipartisan action on a plan that is in the best interests of our members and future generations. [J]oin AARP in telling Congress to come together now on an appropriate economic rescue package.[13]
Sen. Christopher Dodd, D-Conn. – “When the chairman of the Federal Reserve described the situation to us … there was a pause for about 10 or 15 seconds when nothing was said. The air came out of the room.”[14]
Warren Buffet, Billionaire Investor – We were very, very close to a system that was totally dysfunctional, and would have not only gummed up the financial markets but gummed up the economy in a way that would take us years and years to repair.
It’s not like Pearl Harbour where you could look at what happened with your own eyes and decide you had to do something that day. This is sort of an economic Pearl Harbour we’re going through.[15]
Minnesota Kline, of the 2nd Congressional District. – As we can see from the precipitous decline in the markets, this crisis has not dissipated. I urge my colleagues not to allow discussions to devolve into partisan bickering. We must not act in a way that exacerbates the problem. As we now resume negotiations, I am hopeful that we can put aside our differences and work together to shield Americans from further harm caused by Wall Street and Washington.[16]
Minnesota McCollum, of the 4th Congressional District. – I wish it wasn’t needed, but this legislation is about saving our nation’s economy and starting a new era of responsible government regulation in the marketplace to protect working families from greed, corruption, and abuses.[17]
Martin Wolf. “Congress decides it is worth risking depression”. Financial Times. 30 Sept. 2008 – It is just over three score years and ten since the Great Depression. Judged by its rejection of the plan put forward by Hank Paulson, US Treasury secretary, Congress believes it is time to risk another one. That slump was, arguably, the greatest catastrophe of the 20th century: it was, among other things, responsible for the events that led to the second world war – not least Hitler’s rise. One can only imagine what horrors a depression might bring now?
Every week, 50 of the world’s most influential economists discuss Martin Wolf’s articles on FT.com
Such forebodings must seem exaggerated. So, I expect, they will be. But that dire outcome is no longer impossible, not because a slump is inevitable, far from it, but because action is needed to prevent one.
We are watching the disintegration of the financial system. Finance is the web of intermediation binding economic agents to one another, across both space and time. Without it, no modern economy can survive. Yet that is now threatened, with the ongoing collapse in trust and flight to safety. We can indeed run this experiment. But why should we?
“Economists: Federal Debt Bailout Best Option”. CBS5.com. 25 Sept. 2008 ― “The economy could suffer a massive hangover from the government’s efforts to rescue the financial system in the form of a soaring debt burden. But the alternatives look infinitely worse…economists said the government has to take decisive action because the alternative of letting the financial system slide into even deeper problems which could jeopardize the routine loans that businesses and consumers need was simply not an option.
“It was critical to arrest the downward slide in financial markets,” said Sung Won Sohn, an economist at California State University, Channel Islands.
“Financial fix better than ugly alternative”. Dallas News Editorial. 25 Sept. 2008 – “But a government-assisted rescue is unavoidable. Years of moral excess, Wall Street Ponzi schemes and regulatory blindness threaten the futures of every American. As bad as things are now, inaction would make them worse: For starters, think of devastating job losses, a deep recession, shuttered businesses up and down Main Street and depleted retirement savings.”
John Mauldin. “Who’s Afraid of a Big, Bad Bailout?”. Thoughts from the Frontline. 26 Sept. 2008 – I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don’t understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world…If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous. Unemployment will jump to rates approaching 10%, at a minimum. How did all this come to pass? Why is it so dire? Let’s rewind the tape a bit.
Bruce Bartlett. “Why the bailout? The Case Bush Hasn’t Made”. New York Post. 27 Sept. 2008 – Bottom line: We’re closer to the precipice than Congress or most of the public understands. Our entire economic system really is at stake – and those treating the bailout plan as just another government spending program are seriously wrong.
Failure of this plan risks another Great Depression. Really.
You can see the fear in Treasury Secretary Henry Paulson’s eyes and in those of Federal Reserve Chairman Ben Bernanke. But they dare not say how critical the situation is – lest it shake confidence and make matters worse.
Robert Kuttner. “Learning from 1929”. The American Prospect. 30 Sept. 2008 – One thing that people often forget is that the stock market crash of 1929 did not turn into the Great Depression overnight. The unemployment rate was still only 8.7 percent in 1930. GDP lost 6.4 percent in 1931, but the bottom fell out only in 1932, when GDP plunged by 13 percent. So it took three years for the damage to the stock market to ravage the banking sector, and eventually for the air to come out of the real economy. In the meantime, government did far too little.
The basic cause of the great crash of ’29 was very similar to what we are experiencing today: too much speculation with too many exotic financial creations, using too much borrowed money.
Supposedly, 1929 could not happen again because of “what we learned.” We learned that in a financial panic, the Federal Reserve needs to pour in heaps of “liquidity” — money — as the Fed failed to do after October 1929. One of the world’s reigning experts on the Fed’s failures of the early 1930s is one Ben Bernanke, and he certainly hasn’t been stingy with the Fed’s billions.