Question

Evaluate the actions of the U.S. Congress during the financial crisis. Two of the most significant pieces of legislation enacted by Congress were the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. Research the major provisions of these acts and explain the underlying economic theories. Did these acts have the expected result? Explain why or why not.

Answer 1

1. The Emergency Economic Stabilization Act of 2008 : It is commonly referred to as a bailout of the U.S. financial system, is a law enacted subsequently to the subprime mortgage crisis authorizing the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, and supply cash directly to banks.

The funds for purchase of distressed assets were mostly redirected to inject capital into banks and other financial institutions while the Treasury continued to examine the usefulness of targeted asset purchases. Both foreign and domestic banks are included in the program. The Act was proposed by Treasury Secretary Henry Paulson during the global financial crisis of 2008 and signed into law by President George W. Bush on October 3, 2008.

The Bailout Bill Helped More Than Just Banks

Congress attached other much-needed oversights. As a result, the bill included help for homeowners facing foreclosure. It required the Treasury Department to both guarantee home loans and assist homeowners in adjusting mortgage terms through HOPE NOW.

It increased Federal Deposit Insurance Corporation limit for bank deposits to $250,000 per account. It allowed FDIC to tap federal funds as needed through 2009. That allayed any fears that the agency itself might go bankrupt.

The bill allowed the Securities and Exchange Commission to suspend the mark-to-market rule.

This law forced banks to keep their mortgages valued at present-day levels. This meant that bad loans had to be valued at less than their probable true worth. These loans could not have been resold in the panic-stricken climate of 2008.

The bill contained an additional $150 billion in tax breaks to be phased in over 10 years. These included an extension of the Alternative Minimum Tax “patch,” tax credits for research and development and relief for hurricane survivors. A senate vote gave the bailout plan new life with these tax breaks.

EESA kept six of the provisions:

1. An oversight committee to review Treasury's purchase and sale of mortgages. The committee was comprised of Federal Reserve Chair Ben Bernanke, and the leaders of the SEC, the Federal Home Finance Agency and HUD.
2. Bailout installments, starting with $250 billion.
3. The ability for Treasury to negotiate a government equity stake in companies that received bailout assistance.
4. Limits on executive compensation of rescued firms. Specifically, companies couldn't deduct the expense of executive compensation above $500,000.
5. Government-sponsored insurance of assets in troubled firms.
6. A requirement that the president propose legislation to recoup losses from the financial industry if any still existed after five years.

2. The American Recovery and Reinvestment Act of 2009:

The American Recovery and Reinvestment Act of 2009 (ARRA), nicknamed the Recovery Act, was a stimulus package enacted by the 111th U.S. Congress and signed into law by President Barack Obama in February 2009. Developed in response to the Great Recession, the ARRA's primary objective was to save existing jobs and create new ones as soon as possible. Other objectives were to provide temporary relief programs for those most affected by the recession and invest in infrastructure, education, health, and renewable energy.

The approximate cost of the economic stimulus package was estimated to be $787 billion at the time of passage, later revised to $831 billion between 2009 and 2019. The ARRA's rationale was based on the Keynesian economic theory that, during recessions, the government should offset the decrease in private spending with an increase in public spending in order to save jobs and stop further economic deterioration.

Provisions of the Act:

1. To preserve and create jobs and promote economic recovery.
2. To assist those most impacted by the recession.
3. To provide investments needed to increase economic efficiency by spurring technological advances in science and health.
4. To invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits.
5. To stabilize State and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases

With the recession apparently over, the White House is eager to credit the American Recovery and Reinvestment Act of 2009 that it pushed through Congress in February with putting the economy on the road to a full turnaround.

The White House says stimulus programs directly created or "saved" more than 640,000 jobs. But with unemployment at 9.8 percent and expected to go higher, critics take issue with those numbers.