But DOES IT Work? 1

But DOES IT Work?

The chairman of the Federal Reserve and the treasury secretary give Congress a gloomy prognosis for the economy, and propose a drastic treatment. 700 billion in mortgage-related possessions. With the right time The Economist went to press, Congress and Mr Paulson seemed to have agreed on the wide outlines of what is being called the Troubled Asset Relief Program, or TARP.

However, the passage was not assured as rank-and-file congressmen, specifically Republicans balked. Both the turmoil and the authorities’ response have been called the most sweeping since the Depression. The differences from that period are more notable than the similarities to it. In responding with such vigor and swiftness, they run several risks.

  • 234 Views 6 Replies 0 points Latest by UCBUSCalum June 13Business Major
  • 9 April 2009Edit
  • 46$591,973 $10,000 5%
  • Include the conditions of the scheme
  • Profit from a trade or business
  • 4 years ago from Oakley, CA

One is that they overdo it, paying far too much for possessions, sending the deficit into the stratosphere, and triggering a operate on the dollar. The risk of undergoing it could be even greater. Politicians, determined not to be observed as doing favors for Wall Street, might blunt the program’s impact in the real name of protecting the taxpayer. Then there’s the logistical nightmare of fixing a market whose very complexity is central to the crisis. Experience, at home and abroad, is an unhealthy guide.

In past shows government bodies have typically not dedicated public money to their financial systems until bank or investment company failures and insolvency have become wide-spread. One risk with such a pre-emptive bail-out is that to congressmen the huge benefits are hypothetical whereas the fiscal and politics costs, five weeks before an election, are all real too.

In polls voters waver between opposition and support depending about how the question is asked. In spite of these risks, the odds appear to be in favor of both political success and passage. America has owned up to its mistakes with exceptional speed and pulled out the stops to correct them. Following the turmoil first broke in August last year, the Fed pursued a two-pronged strategy.

The first component was to lower interest rates to cushion the economy. The second was to use its balance sheet to help commercial and investment banking institutions financing their holdings of hard-to-value securities and steer clear of fire-sales of possessions. Behind the perception be laid by this approach that the overall economy and the financial system were basically solid.

Yes, way too many houses had been built, and prices were too high, but a return to more normal levels would be controllable if stretched over a couple of years. And banking institutions in aggregate experienced entered the crisis in good shape, with much more capital this June than in 1990. The Fed saw their problem essentially as illiquidity, not insolvency.