The governments Wall Street bailout was totally justified. There is a law that was put to act in the US commonly referred to as the emergency economic stabilization act of 2008. It is also known as the bailout of the US financial system. The law was enacted as an immediate response to the subprime mortgage crisis which allowed the Secretary of the Treasury in the United States to spend 700 billion dollars in purchasing distressed assets. The cash would be supplied directly to the banks. The main aim of the assets purchase was to inject capital directly to the banks as well as other distressed financial institutions. Even though the government had no immediate disposal of the purchased assets it stated that it intended to consider selling the assets to investors. According to (www.treasury.gov/press-centre/press-release/pages/hp1153.aspx), the treasury secretary Henry Paulson clearly stated the importance of the bailout. The secretary clearly stated that the bailout was supposed to stabilize the economy, remove dangers facing American families financial well being as well as unfreezing credit markets. The secretary also stated that the bailout would also bring to a stop the frequent failures of financial institutions. Liquidity of the assets was also to be improved through bailout.
A subprime mortgage crisis set was experienced in the US in the US in the year 2008. The mortgage crisis was a combination of several situations that resulted to a financial crisis and eventually led to a recession. Mortgage backed securities were initially seen to be very profitable due to their initial high rates of return low interest rates. Unfortunately, lower credit policies resulted into a great number of defaults, resulting into massive financial losses. The crisis had been forthcoming since the year 2007. Various finance advisers, experts in the finance world as well as economists had seen the signs of a financial crisis. By the end of the year 2008, many of the financial institutions came down collapsing. Most of the institutional collapse was witnessed in the month of September during the same year. This collapse of financial institutions resulted in a cut of flow of credit to consumers and business organizations (Mark 2010). Several reasons were given for the cause of the financial crisis. Others assigned blames to the financial institutions, government housing policies, credit agencies, American consumers and the regulators. However the ultimate cause was discovered to be the fast rising in the habit of subprime lending. From the year 2004 to 2006, the percentage of low quality subprime mortgages was seen to have increased tremendously. The figures were 8% in the year 2004, but, they went up by 12% in the year 2006. A big percentage of around 90% of the subprime mortgages were seen to have been the adjustable rate mortgages. Adjustable rate mortgages are those that have an initial low interest rate during the first year but the rates are paramount to rise with the passage of years. Most of the US households became under so much debt due to the financial crisis. The ratios of debt to the disposable personal income increased. Within a span of seventeen years, the ratio of debt to disposable income went up from 77% in the year 1990 to a percentage of 127% in the year 2007.
The prices of the U.S homes declined at an alarming rate especially after peaking in mid-2006. It, therefore, became so difficult for borrowers to be able to refinance their loans. The adjustable-rate mortgages started to reset at higher interest rates which eventually resulted into higher monthly payments. Various mortgage delinquencies also soared. Securities that were backed with mortgages, including the lucrative subprime mortgages that were widely held by financial firms had to lose most of their value. Investors all over the world also reduced their purchases of mortgage-backed debt as well as other securities. This was a part of a decrease in the whole capacity and willingness of the private sector within the financial sector to offer support towards lending. There were several concerns about the soundness of the U.S. credit and financial markets. This led to tightening of credit policies all over around the world and thus resulting to slow economic growth in the U.S. The crisis had several catastrophic and long-lasting consequences in the U.S. The effect also spread to the European economies. The U.S. economy plunged into a deep recession, with almost 9 million jobs lost during the years 2008 and 2009. The figure represents a 6% of the workforce. One estimate of the lost output resulting from the crisis approximates to a rough figure of 40% of 2007 gross domestic product. Housing prices went down by nearly 30% on average. The U.S. stock market also went down tremendously by approximately 50% by early 2009. By the beginning of the year 2013, stock market in the United States of America had recovered fully and went back to where it was initially, before the crisis. However, the housing prices remained almost at stagnant level near their lowest point. Unemployment levels remained elevated after that period of the financial crisis. Economic growth after the distress period remained so low below the pre-crisis levels. Many countries in the European continent also continued to struggle with their specific economic crisis. Between the year 2008 and 2011, rates of unemployment as well as severe banking impairments were estimated to be around 940 billion dollars.
In the year 2008, the real gross domestic product of the United States started going down. The trend continued until the first quarter of the year 2011(roger 2008). He further states that the real GDP of the United States was estimated during the year 2013 in the month of February and was found to be at a level of 5.5 %. This was much lower than its potential level of about 850 million. During the previous years before the crisis, unemployment rates were at 5 %. This however, went up during the period post recession to a level of 10% by late 2009. By March this year, 2013, the levels declined once again to a level of 7.6%. Using empirical figures, the levels of unemployment were at a level of seven million in 2008. This was during the pre- crisis period. The number went up to fifteen million by the end of the year 2009. The figure later decreased to about twelve million by the beginning of the year 2013(roger 2008).
The housing correction plan resulted into illiquid mortgage related assets. These assets definitely ended up choking the flow of credit within the economy, which is very detrimental to the growth of the economy. The problem was eliminated by the bailout. The financial institutions were able to be back in operations once again. A lot of confidence was restored back in the financial institutions and financial markets which continue with their mission of supporting growth and prosperity of the American economy. The bailout program was very beneficial to the American tax payers especially to home owners. Since house rates had started going down, home owners were in for a period of massive financial losses. Though through the bailout, the house rates would go up and investors would start earning profits on their investments. This is expected to have an impact on the stimulation of the American economy. According to the federal chairman, Ben Bernanke, big firms in America such as the American International Group and Fannie Mae were under so much pressure. This was because several investors had lost faith and confidence in them. This had a spiraling effect on their stock prices which dropped drastically. These firms access to the capital and the liquidity markets became so impaired to the extent that their operations were nearly coming to a halt. Through the bailout, these firms would be able to get out of the financial crisis and eventually get back to business. The financial crisis resulted into a situation where equity prices went down with a big margin while the cost of short term credit went up. This caused the liquidity to dry up in many markets. The chairman also pointed a scenario where one of the largest money market mutual funds experienced losses. These losses made investors make a decision to withdraw their dealings in such kind of risky markets and started investing in safe markets. These actions impacted negatively on the prices of the treasury bills which experienced tremendous fall in their yield. These actions had a total effect of reducing the value of assets within the whole nation and thereby resulting in a restrictive flow of credit to households. The restriction of flow of credit to the households is very detrimental to the growth of the American economy.
In conclusion, the government bailout was very essential in preventing the American economy from collapsing. Others were opposed to the idea of the great wall bailout arguing that it was a waste of tax payers’ money. They believe that the government ought to have ignored the firms because of their bad financial decisions (matt 1). These arguments were obviously misplaced. This is because if the government did not take appropriate action to save the financial institutions, the economy would have come down crumbling. Several citizens would have lost their jobs and investors would have moved away from the US. Most probably, the US would have also lost its strength as the super power nation.
Matt, Taibbi, Secrets and lies of the Wall Street bail out. Common Dreams, 2013. Print
Roger, C. A. A Geopolitical Setback for the West. The Great Crash, 2008. 7.3(2009). Print
Zandi, Mark (2010). Financial Shock. FT Press.