UPDATE: Bailout bill fails; candidates play blame game
National lawmakers came to a tense agreement early yesterday on a $700 billion plan to buy failing loans from U.S. financial companies, a move that Treasury Secretary Henry M. Paulson, Jr., hopes will stem a downturn that some say could be as devastating as the decline that triggered the Great Depression.
The House of Representatives is scheduled to vote today on the bill, which now contains a deal-sealing provision squeezed in by Democrats that would force the rescued companies to pay if the bailout ends up leading to long-term losses for taxpayers.
The 110-page Emergency Ec- onomic Stabilization Act of 2008 seeks to assist ailing firms while assuaging irritated taxpayers. "It's very clear that Americans have some reason to be concerned, even angry about where we find ourselves. We know there has been greed on Wall Street," Senate Majority Leader Harry Reid (D-Nev.) said.
Paulson called the deal fair. "I am confident this legislation gives us the flexibility to unclog our financial markets [and] increase the ability of our financial institutions to deliver the credit that will help create jobs," Paulson said in a statement.
Paulson's Sept. 19 proposal for a massive bailout was initially met with criticism for lacking oversight on businesses and stipulations to protect taxpayers' money.
But several national figures suggested that inaction could lead to a depression that could rival that of the 1930s.
The marathon negotiation sessions of the last few days have incorporated Paulson, Federal Reserve Chairman Ben Bernanke, President George W. Bush, congressional leaders and businessmen such as Warren Buffett.
Tufts Economics Lecturer Christopher McHugh said the plan's effects would be neither stellar nor disastrous. "I think the economy grows as much as it's supposed to grow; it depends on underlying fundamentals," he said.
After reviewing the bill, McHugh said the plan is too unspecific and unfocused to ensure that the government will use the funds effectively. "I don't quibble with any of the details, but it's still a mystery what they're going to do," McHugh said.
"I don't see how they can take $700 billion out of one set of books and put it toward another set of books," he added. "I don't think the government is going to work magic."
The current economic crisis has arisen after the housing market -- which saw real estate prices steadily increase for over a decade -- crashed. This hurt Americans who had bought expensive loans on the premise that they would be able to sell off their houses for more than they had bought them for. Now mortgage companies and banks have to deal with many borrowers who cannot pay back loans.
Though there are billions of dollars in "crummy" debt that will need to be accounted for, the bailout plan does not clearly indicate how the government will go about buying securities and where it will invest, McHugh said.
He said the last few days' bipartisan negotiations were "remarkable," given the "two gargantuan schools of thought." But he remained pessimistic about the ability of a government agency to sort through and purchase securities.
Still, McHugh said the bailout bill may have a positive psychological effect on the economic situation.
Despite support from the White House, the two major presidential candidates and leading lawmakers in Congress, prevalent opposition from the American public and the imminent congressional elections may hinder the finalized bill.
Stipulations that lawmakers injected into Paulson's original plan include pay limits for some of the business executives for the struggling firms, a congressional panel to oversee the program and the provision forcing companies to pay for losses that taxpayers experience as a result of the bailout. The plan leaves the next president with the task of devising a plan to make companies pay such restitution, however.
Republicans in the House have yet to line up resolutely behind the spending bill, jeopardizing the chances of overriding a potential veto from the president. The plan gives Congress more authority over the bailout than the Bush administration.
The new bill calls for a phased injection of the funds. The first $250 billion would be available immediately. After that point, Congress has the power to block further spending if it feels that the plan is not successful.
Urgent negotiations took place Saturday evening in an effort to come up with a "reassuring message" prior to the opening of the markets in Asian countries, according to the New York Times.
McHugh said much still hangs in the balance, and external factors will dictate whether paying off bad debt will coincide with economic stabilization. "If the economy's strong this thing'll probably look like a success; if the economy is weak it'll probably look like a joke," he said. MCT reports contributed to this article.
