US Economy: $700 Billion Bill Passed but More Measures Needed

New York, 6 Oct. Friday’s $700 billion bailout plan is designed to create credit liquidity in the market, but is it enough to restore confidence?

New York, 6 Oct. Friday’s $700 billion bailout plan is designed to create credit liquidity in the market, but is it enough to restore confidence?

A fundamental lack of trust in the credit market has meant that no institutional lending has happened recently. Lenders have been hoarding cash to a degree that common businesses have started to suffer. They can’t get bank loans to buy things like inventory, expand into new markets, or even at times pay wages. Naturally the effect on the economy as a whole could be severe if this were to continue for much longer.

The bailout should get the cash flowing once again, but first the Treasury has to purchase the assets. The bailout means that over time, the government will buy the estimated $700 billion in assets linked to subprime mortgages. Ohio Representative Dennis Kucinich (D) dubbed it “Cash for trash”.

The government will most likely sell bonds or treasury bills to raise the funds. Treasury Secretary Henry Paulson has 45 days to develop a plan to acquire the toxic assets. Then, the government will have to make arrangements to make the purchases. How will it decide the price? The banks know how much money the government is spending and naturally will do their best to make as much money as possible in these transactions.

Still, this doesn’t solve the problem right away. Investors will not be likely to jump back into the market until things are finalized and a stable future is apparent. Even the passing of the bill made the Dow drop a whole percent-and-a-half.

The President reminded Americans it would be a while. “Americans should also expect that it will take some time for this legislation to have its full impact on the economy,” he warned. “With a smoother flow of credit, more businesses will be able to stock their shelves and meet their payrolls. More families will be able to get loans for cars and homes and college education. More state and local governments will be able to fund basic services.”

While this could be a step to ameliorate the US (and global) financial situation, it still doesn’t solve the inherent flaws in the system which caused the problems in the first place. There must be measures to treat the cause of the problem instead of just the symptoms.

After all, the root of the problem is in the US housing market. Congress told lenders to loosen their standards and regulations so that more Americans could own homes. Lenders gave mortgages to nearly anybody who wanted them, confident that with the appreciating hosing market any inabilities to pay would mean they could just sell their homes for profit.

Without tightened credit and underwriting conditions, we could be back in the same mess once again. Of course, the mortgage industry doesn’t want this – they make their money by giving mortgages in the first place. In fact, the more people default on their loans, they more they can make.

Yet the president of Wells Fargo & Co’s lending division, Carla Heiden, testified in favor of federal lending standards and nation-wide regulation of mortgage brokers. But that’s not surprising since Wells Fargo already has a ban on risky lending.

Only time will tell whether or not this new bill restores credit liquidity in an orderly manner within the US and around the world.

Ron Portobello, EconomyWatch.com