Analysis of Economic Bailout - Article Example

Analysis of Economic Bailout Introduction In the wake of the recession, the whole economy was engulfed in a series of credit crunch. In this situation, it became imperative for the Government to follow the rules of the economics and provide fro a financial bailout package for the industry. In the case of the USA too, the Government came out with a bailout plan, which looked to ease the pressure on the economy. The paper will look into the area of the bailout packages of the Government and their economic effects. Economic bailout After the recession of 2008, the Government of the USA thought it apt for the financial stimulus in the economy. The erstwhile Bush administration devised a $700 billion bailout package for the economy and the banks. The House of the representatives voted in favour of the package by a huge margin. Various bodies like the Chamber of Commerce welcomed the step taken by the Government by stating that "With the American economy on life support, Congress took the necessary step to stop the bleeding." (Clark) The bailout will be used mainly for the purchase of the mortgage loans of the banks. The Government would use the financial package to provide insurance for the money of the investors and it would put a ban on the speculators in the market. The cost of the package for the Government will be huge but according to the Government it is necessary to restore parity in the market. The market with tremendous euphoria greeted the news of the financial package by the Government. The market soared upwards. The financial package provided relief for the banks and financial institutions. (Clark; Clark) After the initial bailout package, the Government raised about $9.7 trillion, which would decrease the mortgage loans of the banks. The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have given $3 trillion in the last couple of years and have pledged to provide $5.7 trillion. The Troubled Asset Relief Program (TARP) of $700 billion and tax cuts of $168 million has been enacted. However, the beneficiaries of the program have not been disclosed so far. The Government has backed the securities of the Citigroup Inc and the Bank of America. However, the guarantees have not been paid yet. The 9.7 trillion worth package is enough for the people all around the world to receive $1,430. (Pittman & Ivry) In the wake of the programs came the budget of the US, which stated a record $3.6 trillion. According to Obama, the Government would continue the spending procedures to help the other sectors of the economy like health and education. This is in addition to the fiscal measures provided to the economy of the country. He stated, “We will continue to do whatever is necessary in the weeks ahead to ensure the banks Americans depend on have the money they need to lend, even if the economy gets worse”. (Goldman & Chipman) According to Obama, the spending will secure a good future of the American economy, though the conditions may be tough at present. However, there were views from the other parties in the Government that the economy of the country will be in danger with the widespread spending of the Government. The spending of the Government means that the budget of the country will be in a great deficit. The deficit in the year 2009 was $1.85 trillion, which was more than the expected $1.75 trillion. Much of the deficit in the budget was due to the spending plans of the Government. The deficit means that there will be pressure on the other sectors of the economy. The companies from the other countries will outwit the manufacturing and the service companies. The economy of the country will be in deep trouble with the loss of the jobs. There was widespread furor over the functions of the financial sector of the country. AIG gave out $165 million in bonuses after receiving a package of $182.5 billions. The financial stimulus package has been paid by the funds from the taxpayers. It understates the condition that the taxpayer’s money is not being put into good use. The President is contemplating the fact for a change in the rule of the income taxes of the country. In 2010, he is expected to give consent to the new rules, which state a higher amount of taxes from the wealthy citizens of the country. This is expected to fetch the Government $1 trillion. (Javers) The financial packages for the Government so far have included a host of programs. The programs consist of the bailout packages, the health related programs, education facilities etc. It has been estimated that the sum of all the packages would cost the Government $23 trillion. Among the various programs, spending of $2 trillion has been made. The $23 trillion is a huge sum of money and if the Government spends it, the amount will be the largest spending in the history of the country. In the case of the World War II, the Government spends $4.1 trillion. One of the biggest achievements of the USA- the landing on the moon cost the Government $237 billion. The programs of the depression era of Roosevelt amounted to $500 billion. The gross domestic product (GDP) in the USA is $14 trillion. The sum of money has led fears creeping into the minds of the industry experts. The money of the taxpayers is used in the funding of the programs and the huge spending of the Government means that the economy will run into a huge deficit. The Government at the start of the recession in 2007 initiated various programs and most of the money went to the buying of the bad securities in the financial sector. This exposes the Government to more threats as the value of the securities may deteriorate in the market value. The Federal Housing Finance Agency has so far contributed $6 trillion and the Treasury has contributed a further $4 trillion. The values stem from the fact that many of the assets in the economy have been guaranteed by the Government. Huge money of the taxpayers are going in the wake of the financial stimulus and if the President is to be believed then the spending will increase in the years to come. (Javers) Conclusions The bailout package in the economy of the US was necessary for stabilization. The economy was in deep turmoil and it needed the Government to step in. The US Government provided a massive support to the economy and bought back much of the mortgage debts in the banks. The spending of the Government has been primarily fixed in the financial sector. The other parts of the society also benefited with the package of the Government stimulus. The financial stimulus was huge and it is expected to increase even further making it the biggest spending from the US Government. The stimulus used the money from the taxpayer’s pocket and huge investments meant that the budget of the Government would run into deficits. Therefore, the President’s claim to cut back the deficits will not hold true and there will be increasing deficits in the years to come. References: 1. Clark, Andrew. “Bush signs $700bn economic bail-out plan approved by Congress.”Guardian.co.uk.3rd October, 2008. Available at: http://www.guardian.co.uk/business/2008/oct/03/creditcrunch.useconomy2 (Accessed on 11th May, 2010) 2. Clark, Andrew. “Markets rocket on US bailout package for struggling banks.” Guardianco.uk. 19th September, 2008. Available at: http://www.guardian.co.uk/business/2008/sep/19/wallstreet.banking (Accessed on 11th May, 2010) 3. Pittman, Mark and Ivry, Bob. U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs. Bloomberg.com. 9th February, 2009. Available at: http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok (Accessed on 11th May, 2010) 4. Goldman, Juliana and Chipmaqn, Kim. Obama Defends Spending Plan, Tempers Criticism of Wall Street. Bloomberg.com. 25th March, 2009. Available at: http://www.bloomberg.com/apps/news?pid=20601087&sid=anpInrs7n0.Y (Accessed on 11th May, 2010) 5. Javers, Eamon. Bailouts could cost U.S. $23 trillion. Politico. 2oth July, 2009. Available at: http://www.politico.com/news/stories/0709/25164.html (Accessed on 11th May, 2010) Read More