Understanding the Bailout Rescue Plan

The Emergency Economic Stabilization Act of 2008-better known as the rescue plan-finally passed after causing widespread controversy in Congress and an extreme backlash from the general public. It won't cure our economic problems, but should revive paralyzed credit markets.

While lawmakers argued over the passage of a $700 billion package of economic protections for a beleaguered Wall Street, taxpayers on Main Street objected strenuously. Meanwhile, the nation lost trillions of dollars in assets, as the credit markets remained stagnant due to a lack of cash liquidity.  Last week was one of the most expensive in recent history, but ended with the successful passage of a slightly amended version of the original bill first proposed by Treasury Secretary Paulson.
    

Highlights of the bailout

Here's a summary of some of the most important provisions in the rescue plan that passed:

• The Treasury will begin a massive purchase of troubled mortgage assets from financial institutions. This will immediately relieve lenders of their biggest burden by having the United States government shoulder their massive mortgage debt.

• Over time, the Treasury can sell the assets it buys in a much more orderly fashion. Today, as everyone tries to dump them at once, those assets don't sell, but weigh down the economy. By taking this problem off the books, a healthier and more stable economic environment is created.

• Once housing prices and mortgage markets stabilize and begin to recoup lost value, the Treasury can start selling the rescue plan assets. If things go well, the income from those sales will offset most of the taxpayer cost of this big bailout. Provisions also call for the financial industry to reimburse taxpayers for any net losses from the program after five years.

• The bill also place curbs on executive pay for companies selling assets or buying insurance from Uncle Sam.  It creates two powerful watchdog and regulatory committees, a Financial Stability Board, and a Congressional oversight panel. Their mandate is to ensure that the funded rescue is executed carefully, wisely, and without abuses or favoritism.

• Tax breaks were added, including incentives for alternative energy investment, and a provision to raise from $100,000 to $250,000 the amount of coverage provided to bank depositors through FDIC insurance.

Stopping the financial bleeding

The Stabilization Act is primarily meant to stop the paralysis of our financial system. It won't prevent economic recession, or quickly turn around the housing market. But if it works-which it must if the U.S. is to avoid economic depression-it will stop banks from collapsing, and will free up fresh investment capital so that we can still borrow money to buy cars, pay tuition, and finance mortgages and business ventures. While doing so, it will also shorten the inevitable recession, and pave the way for a much stronger and more sustainable economy in the future-as soon as the current mess has time to play itself out in the markets and get resolved.