Almost all the day’s news is focused on the economic turmoil and Washington’s reaction to President Bush’s proposed economic rescue package. You may have noticed that I am referring to the plan as a “rescue package” and not a bailout. I happen to agree with former General Electric CEO Jack Welch who said this morning that this is not a bailout, but a rescue plan – not for Wall Street – but for Main Street. Let me explain.
What the government is really doing is buying assets, not debts. Many of the “debt obligations” on Wall Street are mortgages in default. But there are real homes, physical assets attached to these mortgages or “debt obligations.” As the president said, the government can buy them now and sell them later, quite likely at a profit. Here are some excerpts of his remarks:
“…as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages.
“The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.”
Right now there are many Americans who are worried about their home values. In some cases, their mortgages are more than the current value of their homes. They look at this plan and don’t see how this helps them. (It is worth repeating here that the government passed a $300 billion housing relief bill in July.) Many people think all the money is going to fat cats on Wall Street. But the fact is a good bit of the American economy runs on what is called commercial paper.
Virtually any large enterprise – from the companies that make tractors used on farms and trucking companies to big grocery store chains – occasionally has a need for short term loans, often just overnight, to meet cash flow needs. Because of the toxic mortgages currently owned by banks and investment institutions, our credit system is locking up. It is being exacerbated by obscure accounting rules that force banks to devalue mortgage assets, thereby limiting their ability to loan money, as their ability to loan money is linked to the value of their assets. This has turned into a vicious cycle that is threatening to spiral out of control without immediate intervention.
Last week, experts in business and government that I talked to told me we were at one point less than an hour away from a total freeze of our entire credit system. If that happens, a tremendous amount of commerce in our country will grind to a halt. And that will impact you no matter what you do. If you are engaged in any kind of economic activity, you will be affected.
Let me repeat – this plan is not a bailout for Wall Street. It is a rescue plan for Main Street.
My friends, I am a capitalist. I despise Big Government. There is plenty of blame to go around and government deserves a lot of it. But every nation, like every family, occasionally has emergencies, and this is an emergency. We need solutions now. It is right for Congress to try to improve the president’s rescue package. It is right to demand transparency in the administration of this tremendous effort. But if partisanship ends up preventing this rescue from passing, the consequences will cost all of us far more than the current price tag.