Published: 4 March, 2009 by the VI Standpoint Newspaper
Amidst the dismal economic crisis, the United States (US) government is offering various plans of action to combat their under-performing economy. The Emergency Economic Stabilization Act of 2008, commonly referred to as the Bailout Plan, was enacted under the old Bush Administration, to respond to the global financial crisis of 2008, but with a new Obama Administration now at the helm, more immediate action is being sought through the American Recovery and Reinvestment Act.
To recall, on 13 February 2008, the Economic Stimulus Act of 2008 was enacted under the Bush Administration, providing several kinds of economic stimuli intended to boost the US economy in 2008 and to avert a recession. This law provided for tax rebates to low and middle-income US taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by government-sponsored enterprises (Fannie Mae and Freddie Mac). The total cost of the bill was projected at $152 billion dollars.
Despite these efforts to stimulate the economy, the subprime mortgage crisis reached a critical stage, characterized by severely contracted liquidity in the global credit markets and insolvency threats to investment banks and other institutions during September 2008. To respond to the developing situation, the US government announced a few, preliminary steps to combat these problems, including: the $85 billion dollars liquidity facility for American International Group on 16 September, and the federal takeover of Fannie Mae and Freddie Mac. Not all institutions were this fortunate however; as the Lehman Brothers were forced to declare bankruptcy.
As more banks and financial institutions declared failure, further steps were proposed in the form of a Bailout Plan. This drafted Bailout Plan authorized the then Secretary of the Treasury, Henry Paulson, to spend $700 billion dollars to purchase distressed assets, especially mortgage-backed securities, and make capital injections into the bank. The original proposal was only three pages in length, when it was first submitted to the House of Representatives, but was rejected based on the magnitude of the problems it was seeking to address. The proposed law was then expanded to 110 pages and was put forward as an amendment. The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets and restore confidence in the credit markets. The second submission was rejected again on 29 September, 2008 by the House of Representatives.
On 1 October, 2008, the Senate debated and voted on another amendment to the Bailout Plan. The Senate accepted the amendment and passed the amended bill with additions of unrelated provisions totaling $150 billion dollars. These additions increased the cost of the overall package to $700 billion dollars and increased the size of the bill to 451 pages. The amended version was then sent to the House of Representatives on 3 October for consideration and after a successful vote it was enacted into law. The law was signed by President Bush within hours, creating a $700 billion dollars Troubled Assets Relief Program (TARP) to purchase failing bank assets.
As reported by CNN News (2008) the first half of the Treasury's TARP, amounting to $350 billion dollars was distributed as follows: (a) checks totaling one hundred and sixty-eight ($168) billion in varying amounts were sent to 116 banks; (b) another $82 billion dollars were committed to capitalize more banks; (c) $40 billion dollars were bought in preferred shares of American International Group (AIG, Fortune 500) so the troubled insurer could pay off an earlier loan from the Federal Reserve; (d) $20 billion dollars were committed to back any losses that the Federal Reserve Bank of New York might incur in a new program to lend money to owners of securities backed by credit card debt, student loans, auto loans and small business loans; (e) $20 billion dollars were committed for investment in Citigroup on top of $25 billion dollars the bank had already received; (f) $5 billion dollars were committed as a loan loss backstop to Citigroup; and (g) a loan of $13.4 billion dollars was agreed to be given to GM and Chrysler to get them through the next few months. This $350 billion dollars give-away was met with numerous criticisms at various levels. How the second half of the TARP will be handled under the new Obama Administration is the latest debate.
On 3 January, 2009, the then, President-Elect Obama introduced his American Recovery and Reinvestment Plan. At the time, he explained that the plan would have five main goals; namely: (i) double renewable energy production and make public buildings more energy efficient; (ii) rebuild crumbling roads, bridges and schools; (iii) computerize the health care system; (iv) modernize classrooms, labs and libraries; (v) and provide tax breaks to American workers. The main goal of the plan was to create 3 million new jobs.
Shortly after Timothy Geithner was confirmed the new Secretary of the Treasury, efforts of revamping the Bank Bailout Plan were presented on 10 February, 2009. It was explained by Secretary Geithner that this financial rescue plan would cleanse $500 billion dollars in spoiled assets from banks' books and support $1 trillion dollars in new lending through an expanded Federal Reserve Program. Secretary Geithner also indicated that they intend to devote $50 billion dollars in federal rescue funds to try to control home disclosures and soften the impact of the deep housing crisis now affecting the economy. This financial rescue plan serves as one component of the Obama American Recovery and Reinvestment Plan.
According to the Associated Press (2009), this revamped approach to the government‚ financial rescue plan would use $100 billion to cover risks the Fed would take in expanding a $200 billion dollars program supporting consumer and small business lending to a $1 trillion dollars program that also supports an array of mortgage-related assets. However, President Obama and Secretary Geithner are not confirming whether they would need additional money or how much they would need in addition to the $700 billion dollars Congress already approved to get the marketplace restored. After the revamped financial rescue plan was unveiled by the Obama Administration, on 11 February, 2009 the Dow fell by 400 points to its lowest level since November 2008.
On another note, President Obama campaigned persistently, to push the legislative process for the economic stimulus plan along faster, but was met with severe criticism from many political analysts, who claimed that the President was using politics of fear. Never-the-less, the President constantly reiterated that the stimulus plan would save and create more than 3.5 million jobs and get the economy back on track. The bill was passed in the House and Senate on 13 February, 2009 for a $787 billion dollars price tag and has handed a handsome victory to President Obama. President Obama signed the stimulus bill into law on 17 February, 2009 in Denver.
The economic stimulus plan is the heart of Obama's recovery plan for 2009. President Obama and his team are very optimistic that this plan will stimulate the economy, just as President Bush was optimistic approximately one year ago that his stimulus package would do the same. The only difference here is that Obama's recovery plan comes with a much larger price tag.
The American Recovery and Reinvestment Act contains approximately: (a) $288 billion dollars allocated to tax relief, (b) $144 billion dollars allocated to state and local fiscal relief, (c) $111 billion dollars allocated to infrastructure and science, (d) $81 billion dollars allocated to protecting the vulnerable, (e) $59 billion dollars allocated to health care, (f) $53 billion dollars allocated to education and training, (g) $43 billion dollars allocated to energy and (h) $8 billion dollars allocated to other projects. It has been predicted that after this the stimulus plan will jolt the US economy in successive waves: relief to cash-strapped consumers, businesses and states, then a job-creating lift from spending on roads, utilities and public transit. Additionally, Ben Bernanke, Federal Reserve Chairman, on 24 February, 2009, predicted that for the first six months of 2009 the economy is likely to continue contracting but is optimistic that by the end of 2009, the recession would be subside.
On 18 February, 2009, yet another plan was unveiled by President Obama. This time the proposed price tag was $75 billion dollars, specifically geared towards mortgage relief for 9 million people. Again, the stocks did not respond favorably after this plan was announced. Never-the-less, on 23 February, 2009, President Obama pledged to cut the budget deficit in half by the end of his first term.
The question, we all may be asking ourselves is how many plans will it take to get the US economy out of this recession? As this mystery unfolds, the Virgin Islands will definitely be taking note of the outcome; as the territory‚ economic performance will be influenced by it.
For more information on the American Recovery and Reinvestment Act, please visit www.whitehouse.gov or www.recovery.gov