"Let me have the best solution worked out. Don't argue the matter. The difficulties will argue for themselves."
So wrote the wartime British Prime Minister Churchill in his note to Lord Mountbatten on the Mulberry floating harbours. That was in 1942. On September 29, 2008, President Bush sent his "best solution" to the lower house of the US Congress. It was the costliest $US700 billion rescue scheme known as, Troubled Assets Relief Program (TARP) for saving the US financial institutions from collapse. Under TARP, the government would purchase all bad debts and unwanted mortgage-backed securities for improving the balance sheets of failed credit institutions. The recapitalisation of insolvent banks would make them more liquid so credit would start flowing again. The US Treasury hopes that once the value of the purchased financial assets rises, they could be sold back and government would make profits.
The two-term President Bush leaves office in January 2009. The US Constitution does not allow a third term. So he does not have to worry about re-election.
Bush assumed that his own Republican Party members in the House of Representatives would vote for the bill, before sending it to Senate.
A stunning blow
As Churchill said, difficulties of the "best solution" argued for themselves. The House resoundingly rejected Bush's solution by 228 votes to 205.
Benjamin Disraeli drew the fine distinction between misfortune and calamity, when he spoke about his archrival.
"If Gladstone fell into the Thames that would be misfortune; and if anybody pulled him out, that I suppose would be a calamity." The US legislators felt just the same way. If the financial crisis was a misfortune, the bailout plan with implications of a huge tax burden on the electorate is indeed a calamity. The US Congressmen are seeking re-election in November! The bailout proposal was designed to benefit Wall Street fat cats and the greedy, badly managed credit institutions rather than help loan defaulters who had to lose their homes.
There was nothing in the plan to attract the electorate.
The "sweeteners" The US and the world were shocked. The American credit crisis contagion was spreading fast across the globe. Since European and Asian financial institutions have purchased mortgage-backed securities from the US investment banks, they were anxiously awaiting a quick reversal of the misfortune. Simplistic as the bailout plan looked, critics raised questions whether the "cash for trash" plan would work out. Most of the mortgage loans were of doubtful quality, as the lenders pushed sub-prime loans to borrowers with poor credit histories.
Realising the concerns of the members of the House, the Senate added a few "sweeteners" so that the House could favourably consider it again.
These included increased protection for saving deposits, increased child tax credits, more aid for hurricane victims, tax breaks for renewable energy and higher starting limits to alternative minimum tax.
The notable revision relates to provision of solid support for depositors in terms of bank deposit insurance. The current limit of $US100,000 has been raised to $US250,000.
During uncertainties, savers hesitate to buy any financial assets. They put their savings in banks as deposits. Indeed the raising of deposit insurance limit is a right step so that banks would get more liquidity from would-be savers.
The Senate passed the revised bill and sent it to the House.
When it came to the House, there were a few more add-ons. These lollipops have nothing to do with credit institutions. They included an excise tax exemption for a very specific type of arrow used by child archers, a $478 million tax incentive scheme to encourage movie companies to continue producing films in US, and measures to allow employers to provide benefits to employees who commute to work by bike. The cost of the bill rose to $US800 billion. Much to the relief of Bush, it was approved on October 3 with 263 in favour as against 171.
Will the bailout work?
The attention now shifts to the US Treasury.
It has to set up one of the world's largest asset management firms and put a dollar value on assets that no one wants.
As the complicated process of buying bad debts would begin with due caution, it would take several months for any effects to be felt.
The latest US employment figures reveal there were 159,000 job losses in September.
It was the ninth consecutive monthly reduction, amounting to a cumulative loss of 760,000 jobs since January.
It is expected that the US central bank would further reduce the short term interest rate from 2%, for reviving the economy.
The Bush administration has done all that it could. It is now left to the next President to make a sweeping overhaul of financial regulation. The outlook is grim. So, we return to Churchill's robust optimism: "The United States invariably does the right thing, after having exhausted every other alternative."
Associate Professor Jayaraman teaches economics at the University of the South Pacific.
