US Financial Crisis: Would the Bailout Work?



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Code : ECC0014

Year :
2008

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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How the Bailout Plan Came into Being? The Paulson plan received immediate nod from President George W. Bush and quick conferences were held with the Congressional leaders as well as the presidential candidates of both the Democratic and Republican parties, who broadly agreed to it despite some reservations. However, disregarding the warnings from President George W. Bush and the Congressional leaders, the Congress defeated the bailout plan by a vote of 228–205 on September 29th 2008 and on that single day, the Dow Jones industrial Index plunged by 778 points.

The Cause of the Crisis The root cause of the US financial crisis is alleged to be the too-easy credit through zero-down payment in the early 1990s. This was topped with pressure, by the Clinton administration in the late 1990s on Fannie Mae ( the nation's biggest underwriter of home mortgages) to find a way to grant more loans to "borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans" ...

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The Price and Provisions of the Bailout The bailout package of $700 billion, also known as the Troubled Asset Relief Programme (TARP), is argued to be too gasping an amount by some economists. While the counter argument goes that it is only 5.8% of the US GDP, which compares well with the bailouts of other countries albeit at a higher side with reference to its own such rescue programme in 1988...

Pros & Cons of the Bailout While Paulson asserts that the bailout plan will "promote market stability, and help protect American families and the US economy" , the critics argue that the bailout plan indeed bestows on Paulson the discretionary power to hand out $700 billion of taxpayer money to private industries without anybody having the right to challenge his decisions. It is ironic and obviously wrong, argue the critics, to reward the people who are responsible for the crisis. It will engender the moral hazard of more collapses in future "by boosting the incentives for future reckless lending," , as opined by William Buitner, a financial historian at the London School of Economics. Unless the erring parties are "made to pay a painful penalty for investing in excessively risky if not outright dodgy ventures, we are laying the foundations of the next systemic crisis, even as we are struggling to escape from the current one"...


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