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Bailout Breakdown

Markets were in a free fall after the House rejected the controversial $700 billion bailout plan. Though both President Bush and Treasury Secretary Hank Paulson strongly backed the plan as crucial to preventing even more widespread economic problems, the vote was 228-205 against the comprehensive package.

So what made the Emergency Economic Stabilization Act of 2008 so controversial? Here are the basics of the arguments on each side.

Pros

• Prevent Recession: Clearly, the financial industry is in big trouble. Bush and congressional leaders have warned that, if the government doesn’t step in to shore up these financial institutions, the economy could slide into a serious recession.
• Curb Unemployment: If we don’t help out the banks, these problems can easily spread beyond the financial industry. When credit markets seize up, it will have a direct impact on everyone. All businesses depend on credit but, when banks and investors get skittish about buying this debt, there’s not enough credit to go around. Payrolls can’t be met, people are laid off, and everyone suffers. Already, job markets across all industries are weak. In August, unemployment was at 6.1% - the highest we’ve seen in the past 5 years. Credit markets need to be reassured.
• Help for Homeowners: Homeowners need relief just like the banks (plus, we’re the ones footing the bill for bailing out the banks!). Sections 109 and 110 of the proposed bailout plan promised federal cooperation with servicers of mortgages to encourage loan modifications and minimize foreclosures.

Cons

• Cost to Taxpayers: There’s much debate about what (if anything) the bailout would cost taxpayers. One figure being thrown around by multiple sources is $2,300 per taxpayer. Others estimate $5,000, or even $6,000 per taxpayer. Some argue that there’s no way to translate the plan into a direct cost to taxpayers. But whatever calculation you use, the $700 billion of government spending has to come from taxpayers eventually. Of course, it’s technically possible that the government could buy debt at a discount and actually turn a profit. But I’m not holding my breath. Some say the ultimate cost will depend on how long it will take for housing prices to stabilize.
• Tax Hikes: One thing that’s clear is that this plan would impact your taxes. Bush’s tax cuts expire next year and, with this estimated $700 billion of additional government spending, there’s no way even a Republican president could justify extending such massive tax cuts.
• Budget Deficit: If taxes were kept at their current rate, the bailout plan would create an annual budget deficit well over $1 trillion. With that much debt, the US would have to pay a hefty price when it borrows. And those interest rates would be just another burden on the economy.

Even though the Democratic and Republican congressional leadership and the president back the bailout plan, many Republicans in Congress hesitate to hand over so much power to the government. It’s true that the plan would’ve authorized the most governmental interference in the markets since the New Deal, and certainly $700 billion is a big chunk of change.

But, as Bush so eloquently pointed out, “We put forward a plan that was big because we got a big problem.”

– Vanessa Durante

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