Treasury Bailout
Should End Real Estate Freefall

Next, a predicted rise in home prices
and purchasing

By Ken Mayor

The bailout plan has finally been agreed to after a two week rollercoaster ride.

The goals of the bailout are simple:

• Stop the freefall of house prices
• Make credit available again for homebuyers
• And thus increase house sales and solvency for commercial banks [and solvency for holders of mortgage backed securities]
• Then this return to health in the real estate sphere will stop dragging down the stock market and the whole economy
• Banks free of their worst mortgages can breathe easier and release credit for general consumer buying and for business loans

The plan agreed to by the Senate and House and signed into law on Friday by President Bush is an amended version of Treasury Secretary Paulson’s original proposal. It is called the “Emergency Economic Stabilization Act”.

The financial rescue plan includes these key elements:

• $700 billion at the Treasury’s disposal to buy mortgages and mortgage backed securities. The first stage would amount to $250 billion.
• An increase in federal deposit insurance from $100,000 per person to $250,000.
• An increase in FDIC access to Treasury monies to cover any shortfall in paying out deposit insurance
• Federal taking of stock in aided firms to be sold at a later date to pay back taxpayers
• If in 5 years taxpayers have not recovered the full $700 billion, then the government can impose a tax on financial firms
• A “Financial Stability Board” will be set up that includes major agencies and will report to a Congressional oversight committee

Other things were attached to the bill to make it more attractive to opposing legislators. These included items such as executives who lie in financial reports to the Treasury will have their bonuses taken away. It also included extension of tax breaks for renewable energy and research/development spending, and another year of relief from the “alternative minimum tax” or “wealth tax” was supported. Also, there were changes in regard to “market to market” accounting rules to allow asset value to actually reflect real market conditions.

The Senate bill was copied from the House bill, though it added various elements to attract detractors from both sides. The bill though is essentially Paulson’s original proposal.

Next›  Mechanics of the bailout