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Wall Street Crisis: Political game over the scope of bailout

(Chinadaily.com.cn)
Updated: 2008-11-28 11:42

To avoid the American financial collapse, the 3-page bailout scheme was expanded to 110 pages. Yet the Emergency Economic Stabilization Act of 2008 (EESA) was still killed by the House. A revised version of 400 pages finally made its way through both the House and the Senate.

The new version also stressed US$700 billion of government spending to purchase distressed assets. But it included pension schemes, assets held by local governments and community banks for mid-and-low income families for bailout. Other add-ons were higher ceilings on deposit insurance and an Alternative Minimum Tax (ATM).

Thanks to the democratic magic of America, this polished bill finally got the go-ahead by Congress. However, the market dropped even further during the protracted debate in the Capitol. The ever changing market situation was well ahead of the belated consensus.

On September 29th, the US$700-billion recipe proposed by Treasury Secretary Paulson and Fed Chairman Bernanke was rejected by the House. The world was shocked and the US economy plunged even deeper.

The Dow Jones industrial average tumbled 778 points, a 7% drop. The stock market lost US$1.2 trillion in a single day. Meanwhile, the liquidity strain worsened. All sent out a strong signal: the financial crisis was spilling over from the capital market to the credit and money markets with the real economy and the public's livelihood at stake.

An implosion was brewing for the American economy. President Bush urged Congress to adopt the bill without delay. He warned that America would otherwise suffer a "painful and lasting" recession.

Why was the seemingly well-targeted bailout package killed by the Congress? Some legislators complained that Troubled Assets Relief Program (Tarp), the core of statute, gave preference to the interests of the Wall Street rather than those of taxpayers.

They didn't think it justifiable for taxpayers to cover the fat cats on the Wall Street.

One week before the Congress' vote on the bill, e-mails, letters, telephones and faxes objecting to the bill bombarded the Capitol Hill.

According to Wall Street Journal, a voter said openly "We're going to phone or fax every congressman who votes against this to show our appreciation. ... Anyone who votes for this bill will be ousted by us." As the representatives and one third of the senators would seek re-election on Nov. 11th, they were desperate to curry favor with their constituency.

In this round, voters overpowered Congress leaders and the White House. The bill was floored and the debate over the bailout was more intense than ever.

In order to push through a bailout package for the American economy, a new game unfolded among the administration, the Congress and the voters, involving the Wall Street, politicians, realtors, investors, home owners and renowned scholars.

Alerted by the impact of the failed bill on the financial market and the American economy, public opinion began to change. More and more people came to understand the magnitude and viciousness of the crisis and looked forward to an alternative recipe.

The collapsing economy pressed the government and Congress for an agreement. Democratic presidential candidate Obama said in a debate, "we urgently need to pass that plan to prevent an economic catastrophe." His Republican counterpart McCain agreed. President Bush called on members of the Congress to "get serious on the bailout plan".

Some 50 trade groups -- including the International Dairy Foods Association and the National Association of Plumbing, Heating and Cooling Contractors -- signed a letter voicing disappointment with the House's rejection of the bailout package. Signatory list included big names of the real-estate and banking industries, such as NAR, AGCA, and ABA.

The Democratic Governors Association and The Republican Governors Association issued a joint statement, pleading with Congress to "leave partisanship at the door and pass an economic recovery package."

As the initiator and executor of the bailout plan, the US administration made necessary compromises after weighing the pros and cons. According to the Financial Times, White House spokesman Tony Fratto said that the government was considering expanding the bailout.

No matter how the rescue plan turned out, the US$700-billion bailout proposed by Paulson would be its core. The government was open to all suggestions that might help ride through the financial crisis, consolidate the American financial market and ensure the enactment of the bailout scheme.

All parties were pulling hard on their strings. Add-ons were proposed to appease voters and interest groups. In order to safeguard taxpayers and secure their constituency, the Congress proposed tax reductions and a higher ceiling of deposit insurance. But the government insisted that the US$700 billion provision be left intact, without which the whole package would be nothing more than a placebo.

When the dust settled, the government managed to keep the US$700 billion prescription and provide recapitalization, options, guarantees, and other pro-taxpayer instruments to stabilize the market.

Tax breaks, a higher ceiling of deposit insurance, and other initiatives by the Congress were also included in the final version, paving the way for the passing of the bill. The adopted bill was a 400-page volume, with the scope extended to the whole national economy. And the spending was raised to US$ 850 billion, about 17% of America's GDP last year.

However, when the bill was finally pushed through, it fell short of the new market demand. In the following week, the US stock market nosedived again, and the credit market was virtually frozen, dealing a heavy blow to the real economy.

Capital replenishment and debt guarantees turned out to be the last resort. These measures would exert much more intervention than previously expected by politicians and the general public of America.