The U.S. Senate late last night passed a massive Wall Street bailout bill supplemented with $110 billion in specifically designated tax breaks, turning the nation's focus back to the House of Representatives, which vetoed an earlier version of the bill on Monday.
Hoping to stem a potentially devastating recession, national leaders spent the past two days tailoring the bill to senators' desires. In the end, 74 voted for the bill and 25 opposed it. Insiders expect a House vote to follow on Friday.
The bill's current incarnation, like the version that the House spurned, will inject $700 billion into the country's financial markets; a great deal of this money will be devoted to bailing out large, struggling financial companies.
But Professor of Economics John Straub said the bill deviates significantly from its felled predecessor. "Many of the new provisions in the Senate bill are only tangentially related to the original proposal, if at all," Straub said in an e-mail.
Straub added that in several cases, lawmakers agreed to vote for the revised bill only if they could add pet tax breaks. "This kind of ‘I'll vote for yours if you vote for mine' bargain is very common," he said. Some of the bill's obscurer parts extend tax breaks for motor-sports racing tracks and makers of wooden arrows for children.
Treasury Secretary Henry M. Paulson worked with President George W. Bush, House Speaker Nancy Pelosi (D-Calif.), Senate Majority Leader Harry Reid (D-Nev.), Federal Reserve Chairman Ben Bernanke and other leaders to fashion appealing legislation. "Inaction is not an option," Reid said. "This is, I repeat, a crisis … We've got to get this done."
Straub explained that the bill serves both economic and political purposes. "Economically, the goal is to stabilize the financial markets," he said. "Many financial institutions currently stand to lose a lot of money due to old loans that will not be repaid. [Allowing this to happen] seems almost certain to send the economy into a very severe recession."
If the bill becomes law, the government will take responsibility for many of the prior, bad loans, Straub explained.
"The intention is to induce the private firms to get back to the business of financing new projects in the private economy," he said.
The financial crisis originated with the recent crash in the housing market, disrupting a culture of loans built around the assumption that people could buy houses with high mortgages and then sell them off for more than they paid for them. This would let them pay off the loans they took out to purchase the houses in the first place. But when housing prices began to decline after over a decade of steady increases, many consumers —and as a result, lenders — were left with nowhere to turn.
"Politically," Straub said, "passage of the Senate bill will increase pressure on House members who did not vote for the original version on Monday." Adding to this pressure is the fact that as the House rejected the bill on Monday, Wall Street's Dow Jones Industrial Average dropped by 777.68 points, the most ever in a single day.
In an interview yesterday afternoon, Economics Professor Yannis Ioannides said that senators were more likely than House members to support this bill, which the majority of Americans dislike.
"Senators are not as vulnerable to what the electorate feels like now," he said,noting that all House seats are up for grabs in November's elections, compared to one third of Senate seats.
The new bill addresses some of the concerns expressed by the original bill's opponents, Straub said.
Ioannides added that the economic crisis concerns countries other than the United States.
"This is not jut an American problem, but a problem that has had an effect internationally," Ioannides said. "Everyone's in it, and that's why I think that it needs to be a coordinated action."
In France, President Nicolas Sarkozy announced that he would propose that the European Union allocate 300 hundred billion euros to help European banks.
In a similar effort, the International Monetary Fund has also urged European Union leaders to come up with a credit crisis strategy.
"This is an incredible international crisis that we haven't seen before," Ioannides said. "I really think that it reflects poorly on the U.S. government. It seems to me that there has been a lot of denial and a gross irresponsibility of high-standing officials."
Despite party differences, Sens. Barack Obama (D-Ill.) and John McCain (R-Ariz.) both voted for the bailout bill.
"I think it's fair to say that both candidates seem to support the bill ‘out of necessity,'" Straub said. "But I've seen nothing to indicate that either of these candidates would rather pursue a significantly different policy under current circumstances."
Ioannides, meanwhile, said the bill did not fit the ideological views of McCain, a staunch fiscal conservative. "While I know that Obama's advisors are in favor of the bill, I would not be surprised if some of McCain's advisors were actually against the bill," he said. More Republican senators than Democrats voted against the bill, and it was some Republican House members' opposition that brought down Monday's bill.
MCT reports contributed to this article.
