When will the bailouts stop? A summary of 2008 stimulus packages and bailouts in the United States

by Xin Lu on 20 October 2008 14 comments

2008 will probably go down in history as the year of bailouts, crashes, and meltdowns. Here is a quick run down of all the laws and bills congress pushed through with lightning speed in this election year. With two months left in the year, we may see some more bailouts and stimulus packages to come.

02/13/2008 - $168 billion stimulus package is passed into law . This included tax rebate checks for individuals making less than $75000, and married couples making less than $150000. The most overlooked part of this package was that the jumbo loan limit was raised for mortgages that are purchased by Fannie Mae and Freddie Mac. This means that just eight months ago the government was still a cheerleader behind more debt and more spending.

03/26/2008
- The Federal Reserve extends a $29 billion "loan" to J.P. Morgan Chase to purchase the failed Bear Stearns through a shell company. BusinessWeek has a good article on how this deal worked. Essentially, the Fed purchased $29 billion in mortgage backed securites that could lose value.

07/26/2008 - $300 billion "housing rescue" bill was passed. This is the bill that established the Hope for Homeowners program, and also gave Treasury Secretary Paulson the ability to give Fannie Mae and Freddie Mac a limitless line of credit. The Hope for Homeowners program has now started and offers those who cannot afford their mortgages a chance to refinance into smaller mortgages insured by the Federal Housing Administration. This made Paul wonder if we should all just stop paying our mortgages .

9/7/2008 - Fannie Mae and Freddie Mac were taken over by the Federal Housing Finance Agency and the Treasury promised up to $100 billion in future support and capital investments per company . The actual total costs are yet to be determined.

9/17/2008 - AIG mostly purchased by the United States government for $85 billion dollars. The United States now owns 79.9% of the insurer through a loan deal.

10/03/2008 - $700 billion pork ladened package gets signed into law. The Treasury has been given the right to buy troubled assets and hold them. Also, $250 billion are used to purchase stocks in thousands of banks. Additionally, a variety of random provisions such as exemption of taxes on toy wooden arrows were included.

ARTICLE CONTINUES BELOW

Now - The White House and Congress is now mulling over a second stimulus package of the year. This package is planned to be anywhere from $150 billion to $300 billion. Noone knows the details, yet. Additionally, there is a $25 billion auto industry bailout that is waiting to be signed into law. I guess $25 billion is really peanuts compared to what has already been passed.

Where will all of this money come from? Some say that not all of these deals will be expenditures because the equity stakes the government is taking in the largest banks and AIG will eventually give a return to the taxpayers. However, noone seems to be quite sure if that would really happen. Meanwhile, the reach of United States government has certainly grown with all of these acquisitions. When you add it all up, the quick financial maneuvers taken by the United States Government is costing more than the war in Iraq.

Another comment on the whole fiasco is that the National Debt Clock has run out of digits and each family's share is $86,023. No matter who the next president is, he must work on reducing the ever rising national debt . In fiscal year 2008 the United States spent over $450 billion in debt interest payments , and if the government does not chip away at its debt principal then more and more of this nation's production will be going towards debt service. Something has to be done, but one government bailout or stimulus after another is not the answer.

Finally, the scariest thing about these bailouts is not just the amount of money they will cost American taxpayers for generations to come, but that these bills were passed with haste and little concern for the voice of the people. In this video, Senator Diane Feinstein states that she received 91,000 phonecalls of which 85,000 were against the $700 billion bailout, but that she believes that these angry citizens do not understand the good the bailout will do. Is a democratic government really democratic if most of the elected officials do not serve the people that voted for them?

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Guest's picture
Diana

It sickens me to think that the US can continue to just print money to make things better. Have no one seen what is happening over in Zimbabwe with over 300% inflation?

For as much rhetoric that is spread about national security and preventing terrorism from coming over here, it becomes clear that terrorists don't have to do anything: we're killing ourselves.

Guest's picture
Jonathan

Zimbabwe was at 11.2 million percent in August. We have a long way to go before we are even in the same ballpark.

I think the point lawmakers are missing, is that there is a definite portion of the population is not happy with our culture of spending. I personally think that the majority of this country could use a good recession to force them back into responsible spending.

Guest's picture
jared

It depends on how you define "serving the people." If your definition is solely "do whatever the majority says," then you're absolutely right -- the government is not doing that. If your definition is to do what's best for the people, regardless of public opinion, then the government could well be serving the people. As a wisebread writer, you should know full well what would happen if a lot of these institutions were allowed to fail -- you know about credit default swaps, you know about the domino system of debt we've set up in america. America has a long history of serving it's people by NOT following the whims of the majority, and it's because (and why) we are not a democracy but a constitutional republic. I would say that the past decade or so of bad regulation (not just de-regulation, also regulation that forced lenders to make loans available to the otherwise unqualified as well) is where the government failed to serve the people -- even when that WAS what the masses wanted. Remember, nobody forces people to live outside their means -- the masses wanted it.

Xin Lu's picture
Xin Lu

Actually..I think a lot of the fear mongering that lead up to all of these bailouts aren't really based in fact.  So what if some companies fail?   Right now, the government is buying stakes in a lot of solvent banks and guaranteeing bad loans that should just be written off as a loss in any other year.  There was also a lot of propaganda leading up to the mess about the wonders of homeownership.  So maybe the masses finally woke up to what's right, but it doesn't matter all that much because the government will just do whatever it wants anyway. I think a lot of it has to do with the fact it is an election year, and the congress wants to look busy.

Guest's picture
Guest

Brings to mind one of my all time favorite quotes....by Frank Borman

"CAPITALISM WITHOUT BANKRUPTCY IS LIKE CHRISTIANITY WITHOUT HELL!!"

Geo

Guest's picture

The bailouts will continue because it is too many people in corporate America that are trying to be greedy by making quick money. They try to loan people money that have no business even being able to apply for a loan and expect these people to be able to pay them back. Then the government will keep the bailouts coming to show the economy that they are taking action.

Guest's picture
wildgift

As conservatives liked to always scold us liberals: "this is not a democracy, it's a republic." These bailouts are the republic in action -- things are being done for our own good, they say.

Ignore the fact that their rich friends are getting bailed out too.

Guest's picture
wildgift

@Donny Gamble - they were lent this money because almost everyone believed that housing prices would always rise. These mortgages seemed to be low-risk, even if the borrower was high-risk, because the underlying asset seemed to be "no risk."

Real estate was perceived to be a safe, fast growing asset, investors wanted to profit from real estate. So they bought mortgage backed securities, creating an oversupply of money to be lent out. (They also invested in REITs, which aggregated capital and pushed through big development and gentrification in cities.)

It's not like the relaxed lending standards were entirely political. The market conditions were demanding that standards be lowered. Almost nobody in Washington was saying to look out for the crash, even after prices went flat in 2006.

All that's in the past now. The crisis today is one of confidence in the banks.

Unfortunately, some banks seem to think they need to hoard this tax money they're getting. They don't seem to realize that will erode our confidence in capitalism even further.

lghbob's picture
lghbob

Hard to sum up the criminality in a few sentences... but...

 

There's no question that  through ignorance or collusion, Wall Street and the Government of if the US has brought the citizenship to the all time "LOW".

 

Bernanke and Paulson are incompetent to deal with the problem that they still don't understand.  

 

Derivative Swaps,( AKA Derivative Insurance) come to  $534 Trillion totalmarket  Notional Value, $53 to $60 Trillion  unresolved notional value... and...

 

Get this... $2.7 to $3.5 Trillion real value.  Real money.  Real dollar bets that simply can't  be resolved, because there's just not enough money in the world to pay off the unconcionable risk that the Bankers and Brokers took.  

 

Remember the beginning of the Paulson "solution"?  To buy up the questionable mortgages and make the banks whole.   That's before the army of CPA's tried to unravel the "swaps".  That's before Paulson and Bernancke found out that Buffet was right when he tried to do the same thing with Gen Re the company he had bought, but couldn't sell because no one could undo the twisted derivatives that were in the asset pool. Economic Disaster.  It's impossible to unwind the mess that has been created.

 

We'll never know what Congress knew or didn't know about the sewage in our major banks.  No matter... The failure of government to protect the people is almost as bad as the cover-up where absolutely no one has ever been brought to task for the fall of the United States.

 

The money is gone.  Unrecoverable.  What is happening now, is a vast cloud that is being created to cover  the tracks of those who are responsible.

 

The irony of this failure is that the Perps... Congress and the Bankers... are using the aftermath to gain even more wealth.  Passing money to the banks with no restrictions, insures that they (the Banks) will hold on to the "gift" and continue to protect their assets, pay off their employees, and reward the stockholders... not to mention the "pork" that has been thrown into the mix.

 

IMHO, there isn't any way out of this.  The only possible solution was "falling domino bankruptcy" which would have cleaned the system and allowed a fast rebound of the economy (and incidentally, punished the crooks)... That is no longer an option.  The government has made a commitment to many years of depression.  Even Russia was much smarter... when they decided to bite the bullet by revaluing the ruble.

 

Derivatives are no more mysterious than what bookies do... "lay off bets".  The only difference is that there is honor among the bookies, that keeps their business intact. 

 

my opinion only

Guest's picture
andys2i

I am a supporter of fiscal stimulus to drive growth, but the government has got so many initiatives on hand with a seemingly myopic view that I question how many of these programs will actually work. For example an earlier direct to consumer $50 billion stimulus package, provided a lift to consumer spending of 0.4 percent in May, but dried up after that. Similarly the 2008 housing relief bill did not save the housing market or GSE's - Freddie and Fannie. Despite being politically popular, both examples of fiscal action failed miserably. With the floodgates of government spending opened, it is likely that our financial chiefs and lawmakers will keep on coming back for more. We are essentially spending away our futures to save the political and financial backsides of those people who got us into this mess in the first place.

Guest's picture

It makes me sad to hear of all this money being shunted to the richest 5% of the population.

What else could you do with $700B?

For $30B a year, we could avert all future threats of conflicts over food. According to the head of the UN’s food and agriculture organization, Jacques Diouf, this would cover 862 million hungry people.

For $45B a year, we could protect most of the world’s forests, mountains, rivers and seas. Our inaction costs $2-5T (yes, trillion) annually due to the services lost from those ecosystems (eg, providing clean water and absorbing carbon dioxide).

The international WaterAid charity estimates that providing safe water and sanitation to the 2.5 billion people in the world without such basics would cost $75B. That’s about how much it cost for the UK to bail out RBS, HBOS and Lloyds.

I hope karmic retribution is swift, but unfortunately that is not usually the case.

http://renaissancetrophywife.wordpress.com/2008/10/21/bailout-alternativ...

Guest's picture
wildgift

Why are people still suspicious of the government, when, it's patently obvious that some parts of the market can inflate values exponentially, allowing some people to accumulate so much real money and power, that they can squeeze a bailout from the government?

I recall that derivatives were supposed to be totally awesome. They would smooth out the fluctuations, and thus, free up more capital for investment, and if managed properly, could create increased wealth with less risk. That was the market doing its magic.

How about we give government a chance? The government, when it's told to do so, can focus on the basics: land, labor, goods, and social security.

Guest's picture
Cheaplee

If you believe we are selling our future, consider going offshore. I am not talking about moving. Maybe you should look at increasing your international holdings. When the volatility in the global markets start to subside, you may want to consider some international, broad based ETFs.

Guest's picture
Kristen

I think one thing to remember, re: the Feinstein video, is that the US is not a true democracy. We live in a representative government. We elect officials (ideally) based on whether we think their values and goals are inline with ours. The US government does not expect its citizens to read through hundreds of pages of legislation and be expert in complicated economic theories in order to make an informed decision about whether or not a $700 Billion bailout is good or bad. I have read, watched, listened to so many descriptions and views of what is happening and what caused, and I am decidedly undecided on how I feel about it. I would rather leave this decision up to the "experts".

My feeling about housing prices dropping is that I think people need to stop panicking, and stop complaining that folks in foreclosure or who are getting their mortgages reset are better off for it. Their not. And as for your house value, if you stay in your house for the next 10 years, stop thinking of it as an ATM and start thinking of it as shelter, the value will eventually go back up. That's the real problem... we Americans need to stop wanting instant gratification, and stop coveting everything our neighbors get, be it an HD television or a mortgage bailout.