Will Rescue Package But Be Enough To Fix Broken Banking System?
A new version of the $700 billion bailout package was passed by the Senate and most political experts believe it will be palatable enough for the House to agree to it this time around.
The legislation allows the government to buy troubled assets from financial institutions rocked by record home foreclosures. It contains provisions favored by House Republicans, including $149 billion in tax breaks, a higher limit on federal bank- deposit insurance and securities law changes.
It also reiterates securities regulators’ authority to suspend asset-valuing rules that corporate executives blame for fueling the crisis. The Senate last night approved the $700 billion bill, 74-25.
“The bill is becoming a much better bill,” Republican Representative Jim Gerlach said yesterday at a town-hall meeting of employees of Weston Solutions Inc., a West Chester, Pennsylvania-based environment and redevelopment company.
The banking system is pretty much crippled at the moment, banks are weary of lending to each other let alone anyone else. While the tax breaks in the new version will likely get the bill passed, it is somewhat troubling at the same time because the government is having to spend so much money during the current financial crisis.
The deficit is going to skyrocket this year and it will be quite some time before anyone knows how much taxpayers will end up losing before it’s all said and done. Cutting taxes at this time seems a bit shortsighted but the government has placed it’s priority on stimulating economic growth to the detriment of all other factors.
This bailout is merely a band aid to stop the bleeding in the banking system but it will end up opening a new can of worms. The government will have to sell more Treasury Securities to cover all the money that is being spent to patching all the leaks in the sinking ship that has become the financial system.
The long term repercussions of adding so much debt are numerous as it will impact the value of the dollar, interest rates and inflation. You would also be foolish to think that the government won’t be spending another dime before a recovery happens.
The mortgage market is estimated to be valued at $6 trillion dollars and the amount of illiquid mortgage securities the government is considering purchasing is a mere pittance compared to that. However some adding some liquidity to the system is better than nothing.
In order for the housing market to recover, prospective home buyers need access to credit, something which they don’t currently have. This rescue package may not be enough in the long run to repair the banking system but it is a start.
