Economy & Trade, Financial Crisis, Headlines, North America

ECONOMY-US: Bailing Out a Boat Full of Holes

Adrianne Appel

BOSTON, Oct 7 2008 (IPS) - The U.S. Treasury's bonanza from Congress to hand out 700 billion dollars to Wall Street is not what the country needs to right its shaky economy, many independent experts say.

"Despite the bailout, it's clear the economy is going into a deep recession," Robert E. Scott, senior international economist at the Economic Policy Institute, told IPS.

U.S. Federal Reserve Chairman Ben Bernanke warned Tuesday that the U.S. economy is headed downward, hours after The Fed unveiled a programme to buy short-term debt in an effort to stimulate lending among businesses.

The Fed's action followed a drop in the Dow Jones industrial average on Monday to below 10,000 for the first time since 2004, and reports of plunging markets around the world, with markets in Brazil and Russia especially hard hit. Developing nations are bracing for harder times to come.

Banks around the world invested in the same troubled U.S. mortgage products that are deemed largely responsible for the downturn in the U.S. economy.

In Europe, European Union finance ministers on Tuesday urged European nations to coordinate their economic stimulus efforts but did not propose an EU bailout. Ireland and Germany went it alone, and drew up their own stimulus plans.

"This bailout of the financial sector is not doing enough to help the real economy," Scott said.

On Oct. 3, the U.S. Congress approved 700 billion dollars for U.S. Treasury Secretary Henry Paulson to spend as he sees fit, mostly on Wall Street firms reeling from their bad mortgage deals.

After initial failure in the U.S. House, Paulson, who crafted the controversial bailout plan, eventually convinced the U.S. Congress to approve it. U.S. citizens from coast to coast expressed opposition to the plan, and swamped lawmakers with phone calls.

In the end, Congress, nervous about the economy and cowed by swarms of lobbyists from the nation's banks businesses and financial institutions, ignored their constituents and passed the plan. The final House vote was 263 to 171.

About 150 billion dollars in extra spending was added to the bill to woo more lawmakers to vote for it, mostly in the form of tax breaks and programmes for lawmakers' home districts.

According to reports from lawmakers, many citizens had expressed concern about the size of the bailout, the fact that it is directed at Wall Street firms, and that Paulson, a former CEO of Goldman Sachs, a company with a financial stake in the bailout, would oversee the programme.

On Monday, Paulson announced that he had picked Neel Kashkari to run the bailout programme. Kashkari is a 35-year-old assistant treasury secretary and former Goldman Sachs colleague, with about six years of total work experience since graduating from the Wharton School of Economics.

Lead lawmakers said last week that taxpayers needn't worry about mishandling of the funds, which will be doled out in 350-billion-dollar chunks, with some oversight by Congress and agencies.

"The bright light of accountability will protect the taxpayers. We are addressing the real pain experienced by Mr. and Mrs. Jones on Main Street," Speaker of the House Nancy Pelosi said just moments before the final vote.

Lawmakers also vowed tougher regulation of the financial and banking industry to prevent future abuses similar to those in the mortgage and trading industry, widely believed responsible for the current global and U.S. economic crisis.

"It would be a betrayal if we were to stop here. We have to perform serious reform, comparable to the New Deal, with a new set of regulations for all of the financial industry," said Barney Frank, the chairman of the powerful House Financial Services Committee.

Rep. Dennis Kucinich warned that the plan is a mistake, as he cast his vote against it.

"This bill represents an utter failure of the democratic process," Kucinich said. "It represents the triumph of special interest over the triumph of the public interest," he said.

"We could have recognised the power of government to prime the pump of the economy to get money flowing through out society by creating jobs, health care and major investments in green energy," he said.

Many economists continue to sound warnings that the bailout was misguided and that the U.S. government needs to take more action.

Timothy Canova, professor of international economic law at Chapman University School of Law, said nationwide there are 10,000 foreclosures a week. More can be expected without additional help from the government.

"The bailout is directed at the top of the pyramid, it doesn't do much to help the foreclosure waves at the bottom. It keeps pulling down the financial structure," he warned.

The nation needs a moratorium on further foreclosures and new bankruptcy rules that will protect homeowners," Canova said.

"This is an imperfect solution," Scott added. "Most effective would be to inject capital into commercial banks, as they did during the Great Depression."

Overall, the government needs to invest up to 900 billion dollars to stimulate the economy. If it spent the money on shoring up the country's crumbling infrastructure and schools, that would create jobs. States, like Massachusetts and California that are reeling from the economic slowdown, need help from the federal government, too, he said.

"We also must help homeowners, and help them refinance their mortgages," Scott said. The government could create something similar to the homeowner's loan corporation that saved many homes from foreclosure during the depression. The programme would allow homeowners to obtain low-interest loans.

"This would keep people in their homes and cut down on foreclosures," he said.

That would be good news to Emily Rosenbaum, executive director of Coalition for a Better Acre, a non-profit that aims to improve neighbourhoods in Lowell and Lawrence, Massachusetts, poorer communities that are often the first stop for new immigrants.

The organisation aids people facing foreclosure, presently running at 40-50 per month for the region.

"The number of foreclosures jumped last year three-fold. In 2006, there were 93 foreclosures, and in 2007, there were 293. This year we don't know the numbers yet but we are expecting another doubling," she said.

Foreclosures can send a neighbourhood into a "downward spiral", she added.

"Having boarded-up houses on a street, and vacated buildings attracts crime and vagrancy," Rosenbaum said. "We don't know what the effect of the actions in Washington will be. For some time, this has been a challenging environment."