As the economic meltdown takes more casualties, The Bailout is still being revised and revised.
"...Recent news has been dreadful, with the government reporting that there were a half-million new applications for unemployment benefits last week, news that came on top of a report last week that the jobless rate shot up to a 14-year high of 6.5 percent in October.
A survey of the nation's big chain retail stores found that retailers suffered through the weakest October in at least 39 years even though they tried to gin up more sales by a frenzied round of price cutting.
But with many economists convinced the financial turmoil of the past two months has pushed the country into a severe recession, possibly as bad as the 1981-82 downturn, retailers are braced for what could be a dismal Christmas sales season.
The outgoing Bush administration, however, is trying to bolster confidence as much as possible.
Bush on Friday defended his administration's response to the financial crisis, which has included massive amounts of government assistance to banks and outright government takeovers of the country's biggest mortgage finance companies.
"I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown," Bush said in a speech in New York.
He put forward a list of modest reform proposals including making accounting rules more transparent but stopped well short of the global market regulator being sought by some European nations.
Paulson on Wednesday announced that the administration was abandoning what had once been the centerpiece of the $700 billion rescue program _ the purchase of troubled assets held by banks. Instead, the program will focus $250 billion in purchase of bank stock, with Paulson arguing that this was a quicker way to get money into the banking system to encourage banks to resume more normal lending.
Paulson said the administration was examining new uses of the bailout money that would try to relieve pressures that have developed in the financial market that supports consumer loans such as credit card debt, auto loans and student loans. These loans are packaged together as securities and sold to investors, but after the huge losses for mortgage-backed securities, investors have grown leery of buying other types of consumer debt.
In a series of interviews on Thursday, Paulson provided new details of how the new program might work. He said that Treasury was exploring a joint program with the Federal Reserve that would seek to make financing of these types of loans more available. The new lending facility might buy securities backed by credit cards, auto loans or student loans in an effort to get this market back to more normal operations.
Paulson said that while the $700 billion rescue program is continuing to undergo modifications, it is proving to be a successful at its overall objective of stabilizing the financial system.
In addition to news that jobless claims jumped sharply last week, the Treasury Department reported that the budget deficit for October soared to a record $237.2 billion, putting it on track to reach the once-unfathomable sum of $1 trillion for the year.
The flood of red ink was blamed on the initial costs of the bailout effort which spent $115 billion buying stock in the country's largest banks.
"And as bad as these numbers are, they may look good a year from now because things are going to get much worse," said Sung Won Sohn, an economist at the Smith School of Business at California State University, Channel Islands.
He predicted that the recession would drive unemployment higher, cutting into government tax revenue, and boosting payments for such programs as unemployment benefits and food stamps."
Locally, Professor Campbell Harvey of Duke’s Fuqua School of Business criticizes recent decisions. “American Express decides to become a bank," he said. “Today, Hartford Financial group has a great scheme; they'll buy a bank for $10-million dollars and now they're eligible for between $1 and $3 billion dollars.He has been studying the bailout bill and has posted his opinions further here.
"I advocated a two-pronged approach.
In the first prong, troubled assets would be purchased from viable financial institutions at a price that reflected a recovery in credit markets. This price would be above fire sale prices but well below “hold to maturity” prices. Financial institutions would be pleased to sell at these prices and the prices are sufficiently low that taxpayers would have a good shot at earning a positive return.
In the second prong, equity capital is injected into viable financial institutions. This capital serves to jump start the credit system.
Notice that I carefully chose my words. In the first prong, we purchase assets from viable financial institutions. In the second prong, capital is injected into viable financial institutions. There is no sense throwing good taxpayer money at bad. For those institutions that are below the margin, relegate them to an RTC-II and dispose of the assets.
You need both prongs. If you cancel the first prong (as it seems was done today), the equity injection will simply be used to reduce risk. That is, the banks get the capital and they hold it in a liquidity reserve. They do not lend it out (or they lend out a trivial amount). It fails to jump start the system.
In cancelling or delaying the first prong, the Treasury has blunted the effectiveness of this policy initiative."
