washington Congressional leaders and the Bush administration have reached a tentative deal on a bailout of imperiled financial markets that could cost taxpayers hundreds of billions of dollars.
The House could vote on it today and the Senate on Monday.
House Speaker Nancy Pelosi announced the accord just after midnight Saturday and said it still has to be put on paper. Treasury Secretary Henry Paulson talked of finalizing the deal but added: “I think we’re there.”
The plan would spend up to $700 billion, most of it on buying deeply devalued mortgages from the housing market’s collapse and other bad loans held by tottering banks and other investors. The aim is to prevent credit from drying up and causing a meltdown of the U.S. economy.
A key sticking point was how to include a government-sponsored insurance program demanded by House Republicans as an alternative to devoting the entire $700 billion buying up devalued mortgage-backed securities and other toxic debt from banks and investors.
The House was scheduled to convene at 1 p.m. EDT today, and members there were hoping they could vote on a bill by this evening and go home to campaign for re-election. The Senate isn’t scheduled to go back into session until Monday.
Bush expressed confidence earlier Saturday that lawmakers soon would approve a plan, but not even $700 billion could be enough to spare the U.S. from more economic anguish if the proposed bailout pans out like similar desperation moves during the past two decades. It usually takes years to recover from a financial crisis severe enough for politicians to ride to the rescue with truckloads of taxpayer money.
Take, for example, the U.S. government’s August 1989 bailout of the savings-and-loan industry. The stock market fell by 12 percent within the first 14 months of the rescue plan while the economy slipped into an eight-month recession that began in July 1990. Housing prices that had just begun to erode continued to fall for another three years.
“This is going to take years”
There’s little reason to believe it will be dramatically different this time around, particularly because this bailout involves harder-to-value assets and comes with the U.S. economy already on the edge of a recession, if one hasn’t begun already.
“This is going to take years to work out, and it will be incredibly complicated,” said banking consultant Bert Ely, who has extensively studied the U.S. government’s 1989 bailout.
Under the plan being considered, the Treasury Department would buy deeply distressed mortgage-backed securities. The money should help troubled lenders make new loans. The government would later try to sell the discounted loan packages at the best possible price.
House Republicans were insisting that some of the money be available to insure, rather than buy, distressed mortgage-backed securities. Banks and investment firms holding such packages would pay the government for insurance against losses if the mortgages default.
Proponents say their idea would require less taxpayer spending. But the Treasury Department has said it would not pump enough money into the financial sector to make credit sufficiently available.
Problems may stack up
Even as the government tries to clean up the mess left by reckless home lenders, borrowers and investors, more problems are likely to stack up.
The trouble could include longer unemployment lines as struggling companies faced with declining sales and limited access to credit trim their payrolls. That could lead to even more bank failures as cash-strapped borrowers don’t repay loans.
And most experts think there is a good chance the downturn in the housing and stock markets will deepen to further spook already frightened consumers.
The government is hoping its intervention will unclog the lending pipeline, but that isn’t a certainty either, said Sung Won Sohn, an economics professor at California State University-Channel Islands.
“If I am a medium-sized bank on Main Street, simply because the government is bringing a bailout package to Wall Street doesn’t mean I am suddenly going to change my mind and start lending money again,” Sohn said.
Many banks have curtailed lending because they are swimming in losses and don’t want to take chances on borrowers.
“The real tragedy is we will never know how many businesses would have been started or how many businesses might have expanded if all this hadn’t happened,” said Jonathan Macey, deputy dean of Yale Law School, who wrote a book about a government bailout in Sweden during the 1990s.
In a best-case scenario, Macey said the U.S. will bounce back in two years, like Sweden did after the government spent billions of dollars to salvage the troubled banks and prop up the housing market.
But the payoff from the U.S. bailout might take much longer. That’s what happened in Japan after its government intervened in a real estate and banking crisis that began in the early 1990s.
By the time the government acted in 1997, the economic hole was so deep, it took another seven or eight years to climb out.
