Bailouts
The current recession was precipitated in large part by Wall Street, which fuelled an asset bubble in the housing market and repackaged bad loans as good ones. One of the initial consequences of the bursting of that bubble was that the banking system became unstable. This situation led to the first Wall Street bailout in September, 2008. This bailout was priced at $700 billion and was intended to stabilize the financial system, in effect stabilizing the economy (Stout, 2008). While the bailout has ultimately proven to cost less than $700 billion as the result of strong returns (Onaran & Leondis, 2010; Faler, 2010), the plan did not have the desired impact on the American economy at large. While the banking system was more or less stabilized, the GDP shrank and unemployment soared. These are the primary impacts on Main Street and they were not impacted by the Wall Street bailout. Today, we see the lingering effects of the bailout. On Wall Street, profits have been restored and bankers are once again earning handsome paychecks on the back of rising stock markets, but on Main Street the recession remains (Smith, 2010).
This paper will analyze the impact of both the Wall Street bailout and the ongoing recession on Main Street. The failure of the banking system to apply its bailout funds to support economic recovery on Main Street has resulted in some devastating effects to the American economy, and these will be explored from both an economic and sociological perspective.
The Wall Street Bailout
When the financial crisis broke, the Wall Street bailout was deemed a necessity by the Bush administration. In order to stabilize the financial system, $700 billion of bad debt was purchased by the federal government from the banks. The underlying theory was that by removing bad debt from banks' balance sheets, those banks would be able to continue lending and a credit crunch would be averted. The concept of the credit crunch is critical to understanding failure of the banks to help small town America. When it appeared that the banking system was in crisis, it was reasonable that banks, saddled with bad debts, needed to essentially horde money so that they could pay those debts. This situation would have resulted in a credit crunch, where troubled banks would simply be unwilling to lend their money. This would have had devastating consequences for the American economy, in particular as firms would then be unable to expand their businesses and many would not be able to secure ongoing financing for their operations. The federal government recognized the risk that a credit crunch would cause for the economy and took the drastic step of bailing out the banks in order to prevent it (Stout, 2008).
The problem is that the bailout, along with easy money from the Federal Reserve, did not result in avoiding a credit crunch. There are indications that the money the banks took from the government in exchange for their bad debts was not used to invest in the American economy. There is evidence that Wall Street was speculating in oil futures (Wallace, 2009), and it was also noted that the credit crunch persisted even though the banks no longer held their "toxic assets." Banks, free to lend knowing that their debts were covered by the federal government and having easy access to money, did not lend. The Treasury and Federal Reserve added another $800 billion to the effort, but again this did not spur lending (Goldman, 2008). Thus, economic contraction continued and unemployment continued to rise.
By the first quarter of 2009, the recovery in the banking system had already begun, with prominent investment banks recording record first quarter profits. The profit recovery masked underlying economic weakness, however, as millions of consumers were still defaulting on their mortgages and the commercial real estate market followed the residential housing market into recession (Dash, 2009).
The Recession
That recession that was not supposed to happen did, despite hundreds of billions of dollars being poured into the banking system. The GDP declined from the third quarter of 2008 to the second quarter of 2009, and growth spurts have been intermittent since (BEA.gov, 2010). Unemployment has continued to increase, with the latest increase taking the figure to 9.8% in November 2010 (BLS.gov, 2010). These results point to a disconnect between the banking system as small town America. The banking system failed to restore credit market conditions following the Wall Street bailouts, and it has prospered since, while the recession in middle class America continues unabated.
This will continue to have profound economic impacts. Many of...
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