| Business | October 17, 2008 11:39 AM EST |
| Setting the bailout in motion |
| By Luisana Suegart from Markets.com |
Last Friday, the U.S. House of Representatives signed a $700 billion bailout bill to provide relief to the nation’s troubled financial systems; one week later, the stock market has seen its worst weekly decline, posting a 20-percent loss.
On Friday, Bush addressed the crisis by recapping the Federal Reserve and Treasury Department’s efforts to deal with the worsening financial crisis, saying that the government’s $700 billion bailout is “big enough to work”, so why hasn’t it?
The U.S. government is still weighing the possibilities of what to do with the $700 billion check; the legislation behind it grants the Treasury Department authority to obtain common or preferred shares from the banks it capitalizes. Behind the plan, the federally insured deposit limit was raised from $100,000 to $250,000.
As reported by Reuters, the U.S. Treasury plans to direct capital into U.S. banks in exchange for passive investment stakes at the end of October. It is a measure already being implemented by the U.K., which unveiled a plan to inject $87.4 billion into its banks on Wednesday.
Treasury Secretary Henry Paulson is evaluating the effects of guaranteeing billions of dollars in bank debts and temporarily insuring all U.S. bank deposits, a move intended to unfreeze bank lending, The Wall Street Journal reported on Friday.
Experts suggest that the bailout bill will not work if other factors are not addressed, case and point: the housing market.
Because a turnaround in housing is essential to boost investor confidence, Experts believe that banks will be more open to lending once home prices start falling. For now, the bailout intends to buy up bad mortgage debt and assets to provide relief for banks and widen the possibilities for consumers to obtain loans.
Meanwhile, others suggest that the rescue package is not a cure-all remedy for the financial crisis.
“The bank bailout will provide banks with much needed liquidity but it does not address the compensation and management practices on Wall Street that drove irresponsible decisions and gave rise to the crises,” said Peter Morici, former chief economist at the U.S. International Trade Commission. “It does not assess the void of sound leadership at the top of major financial institutions like Citigroup and Merrill Lynch.”
Still, the Treasury Department is in a hurry to set the rescue plan into motion to soothe fears of the crash that was seen coming.
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