Bailout Tops $2 Trillion

Editors Note: Housing Predictor originally published this article in October 2008.

Bear on Wall StreetWhen it got dark on Wall Street, really, really dark the Bush Administration knew it had to act. But the attempts to save the U.S. economy by the Bush Administration were quickly seen for what they were, failures to rescue the ailing economy.

Amid the mania on Wall Street there were a handful of big bankers who saw the nation’s economy nearly come to a screeching halt.

The meltdown on Wall Street with their new inventions to sell more securities to back up a record number of home mortgages exploded the financial system, and millions of Americans are clearly going to pay the bill. As protests mount outside of Wall Street, nine of these bankers met with Treasury Secretary Henry Paulson, and signed agreements to sell their institutions stock to the government.

The Bush administration’s prescription for the ailing economy clears the way for the government to buy $250 billion in equity of the nation’s banks. Paulson was given broad authority by Congress to put the $700 billion bailout plan into affect, and it still has little transparency. However, mathematical computations indicate the plan has clearly outgrown its initial $700 billion and now surpasses Housing Predictor’s forecast $2 trillion bailout.

History Repeats Itself

The only other time that the Treasury waded into the banking system like this was in the 1930’s during the height of the Great Depression. President Franklin D. Roosevelt set up the Reconstruction Finance Corporation, making mortgages to those under foreclosure to save their homes. The Treasury also bought ownership interests in distressed banks. But the country was much smaller then and things were not nearly as pricey. The cost was only $1.3 billion.

Treasury eventually sold the stock they owned back to the banks and investors, which is planned this time too.

The New York Stock Exchange is at the center of the entire furor. Four major investment banks have either gone bust or been sold to competitors as a result of the financial crisis. The only two that remain have been converted into commercial banks by the government.

The new Paulson program is intended to beef up banking reserves so the institutions will begin lending again. Many have been running on nearly empty as a result of record foreclosures. But the Paulson program has not yet provided any real concrete evidence that it will aid homeowners under going foreclosure. More than 3 million homes have been foreclosed nationwide, and another 3.4 million are forecast to be foreclosed through 2011 unless meaningful government intervention takes place further damaging the nation’s economy.

Topping S&L Crisis

As it presently stands the mortgage crisis has topped the U.S. Savings and Loan Crisis of the late 1980’s. There have already been more foreclosures. The dollar damage sustained by Americans in the S&L Crisis accounted for $10,000 for every man, woman and child in the country. The price tag on this economic disaster will be much higher.

Fearing repercussions to their company stock on Wall Street by investors, the banks which were nearly forced to agree to the stock buy out by Paulson were not officially named. But executives from these banks were seen leaving the Treasury from talking to Paulson: Bank of America, Merrill Lynch, Citigroup, Goldman Sachs, Wells Fargo, JP Morgan Chase and Morgan Stanley.