For an overview of the financial crisis of 2007-2009, please read An American Financial Collapse: What Happened on Wall Street?

Since it became clear that the U.S. was in the midst of an economic recession in 2008, the federal government has invested trillions to promote economic stability and, eventually, growth. These investments can be classified into two primary categories: bank bailouts and broader economic stimulus. While the bailout package was exclusively designed to purchase “distressed assets” from financial institutions, the stimulus acts have a far wider reach and offer tax relief and provide for investments in existing government service and infrastructure programs.  Whether the bailout and stimulus packages have been successful remains to be seen.

However, what is for sure is that the government has done a remarkably poor job of educating the public about what the massive appropriations actually cover and how they work. No one will read thousands of pages in legislation in hopes of learning where their dollars are going. Because of this, no one really understands exactly where our tax dollars have gone. Maybe that’s why so many people are against high taxes. They barely understand what they do. So, in just over 2,000 fewer pages than the bailout and stimulus acts, I offer you a summary of The Bailout and Stimulus of the American Economy.

The Bank Bailout

The current recession has seen the collapse or near-failure of virtually every major Wall Street institution. Minus a few exceptions, most of the major Wall Street investment banks like Goldman Sachs as well as investment and savings banks like Bank of America accepted billions from the federal government’s Troubled Asset Relief Program (TARP).

Goals

The primary goal of the bailout plan was for the federal government to acquire mortgage-backed securities and other troubled assets. This acquisition was intended to stabilize the economy and boost investor confidence, according to former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. In a broad sense, how was the influx of government capital going to achieve these things? Increased liquidity.

Liquidity

As investors began to learn of the failing Wall Street banks, they increasingly began to pull their money out the hedge funds and brokerage accounts and place it in what are essentially risk-free investments: treasury bills. As CNBC financial commentator Jim Cramer described it, there was an “an invisible run on the banks.” Unlike the 1929 bank runs during the Great Depression, you couldn’t find depositors demanding their life savings from tellers. But banks were losing their depositors, and suddenly did not have enough liquid assets (assets which can be easily sold) to make new loans or in some cases even to carry on with day to day activities. It was the hope of the proponents of bailing out Wall Street that converting the illiquid assets like bad mortgages to liquid assets through cash buyouts would stabilize the banks and allow them to once again resume lending.

Recipients

The Emergency Economic Stabilization Act of 2008 allows the United States Secretary of the Treasury to use up to $700 billion either to purchase troubled assets or to directly provide banks with capital.

A.I.G.

The American International Group, the largest underwriter of commercial and industrial insurance in the U.S., has received the most bailout money of any individual firm. They have received $69.8 billion spread over two separate awards of $40 billion and $29.8 billion. A.I.G. has also received approximately $100 billion from the Federal Reserve, with their total taxpayer investment standing at approximately $170 billion.

Bank of America and Citigroup

Bank of America received $45 billion while Citigroup received $50 billion. Not only do both companies have large investment banking divisions: they are also some of the nation’s largest savings banks (Bank of America is the largest bank in the U.S., while Citibank is number five). Both firms have begun to repay TARP’s loans.

The Automakers

Roughly 85.3 billion dollars, or just over 10% of the bailout funds, was given to General Motors and Chrysler as well as their respective financial services arms, GMAC and Chrysler Financial. Opponents of giving money to G.M. and Chrysler argued that filing for bankruptcy was a viable route, a route which the airline industry had demonstrated could allow companies to emerge from bankruptcy without an interruption in service or being forced to lay off any employees. The car manufacturers cited the car warranties as one of the main justifications for their need of a bailout. They felt consumers would not buy from a company entering bankruptcy for fear its warranties would not be honored and the car’s value would decrease substantially. Bailout money, according to some of the major American car manufacturers, would allow them to maintain the same buyer confidence that the banks sought to regain. Nevertheless, the American car industry has been historically plagued by inefficient and incompetent management and critics feared that bailout money would be wasted.

General Motors

General Motors accepted approximately $50.7 billion in bailout funds spread over numerous dates under the condition that it produce some sort of plan to become profitable again. While President Bush provided the initial loans to G.M., President Obama declined to give it additional aid and recommended Chapter 11 bankruptcy. The U.S. Treasury agreed to back the warranties of G.M. up to $360.6 million. G.M. also announced that it planned to either sell or discontinue its Hummer, Saturn, and Saab brands. After filing for Chapter 11 bankruptcy, G.M. sold its assets to a holding company which renamed itself “General Motors Company LLC”. The new company is planning to issue an IPO (initial public offering) of its stock in 2010.

GMAC is no longer owned by General Motors. Formerly known as the General Motors Acceptance Corporation, it is now a separate entity known as GMAC LLC. The U.S. government became the majority shareholder in GMAC in December 2008, granting it special privileges in order to help it remain solvent and make new loans.

Chrysler

Chrysler received over $10 billion in bailout money. Fiat, the Italian automaker, agreed to purchase 20% of Chrysler and helped prevent its liquidation. Chrysler, similar to G.M., filed for Chapter 11 bankruptcy and sold its assets to “New Chrysler”, changing its name from Chrysler LLC to Chrysler Group LLC. Chrysler Financial is also no longer part of Chrysler. Chrysler’s vehicle are now financed by GMAC.

Criticisms

It’s a Conflict of Interest

Henry Paulson, the Treasury Secretary under President Bush, was a former CEO of Goldman Sachs (a major recipient of bailout funds). Several Goldman executives acted as advisers to Paulson. Critics argued that Paulson was, as a former Wall Street exec, too biased to administer a program which would supply Wall Street with hundreds of billions in government money. Paulson’s original proposal would have made him immune to judicial review, but that part of the plan was later removed in response to concerns about illegal or corrupt practices being hidden.

They Don’t Deserve It

The general consensus at the time, even when some of the details of the collapse were fuzzy, was that imprudent trading on Wall Street had largely caused the financial collapse. The American people, in turn, felt that Wall Street firms didn’t deserve a bailout. They caused it, and so they should suffer the consequences, many Americans reasoned. Although public opinion was that the financial burdens of Wall Street should not be carried by the government, punishing the banks by letting them collapse was hardly a legitimate option.

We Overpaid

Economists strongly in favor of stimulus and even bailouts generally rejected Henry Paulson’s plan to buy up bad mortgages. The only way it would truly aid Wall Street is if the Treasury vastly overpaid for them, which economists such as Joseph Stiglitz argue it did. In an article published in The Nation, the Nobel Prize winning economist cautions that Paulson’s plan only shifts the toxic assets from Wall Street’s balance sheets to the American taxpayers. Stiglitz is strongly in favor of a bailout, but as he says, it must be the “right bailout”.

Wall Street will be Wall Street

Americans protest AIG in front of its D.C. offices

In what was probably the only legitimate criticism of the bailout made by the American public, Americans cried out that Wall Street firms would misuse the billions the federal government gave them. Joseph Stiglitz agrees with them. “We the taxpayers lose, and Wall Street gains,” he said. It took a few months for the banks to realize that they had to shelve the risk-taking and extravagance they were so accustomed to when operating on the American taxpayer’s dime. A few less than judicious decisions incensed Americans, most notably A.I.G.’s decision to pay $165 million in bonuses to the executives in its derivatives trading division, the unit which had accumulated some of the firm’s largest debts. The $440,000 employee retreat it offered top executives was not exactly appreciated either. While most of the bailout money has been used properly, Wall Street certainly has not abandoned its tradition of self-indulgence just because of the recession.

Results

It’s difficult to tell whether the bailout package  has truly helped to right the American economy. Although economic indicators are pointing up for the first time in a long time, this revival cannot necessarily be ascribed to the federal assistance offered to banks. Federal aid has certainly helped ailing manufacturing companies like General Motors remain afloat. But could we have allowed the banks to fail, or at least fall near the brink of failure without consequence? Lehman Brothers’ bankruptcy was relatively smooth and Bear Sterns was purchased by JP Morgan Chase for the bargain-basement price of $2/share. Could the government have left Goldman Sachs, A.I.G., or Bank of America to sell off pieces of themselves or even collapse rather than offer bailouts? Could the 2008 financial crisis have been known by future generations as the crisis which revolutionized the financial industry and re-stabilized the U.S. economy? Maybe. In the end, it was probably not worth the risk to allow some of the largest financial institutions in America to collapse. The bailout might not have been especially well designed, but it was reasonably effective in ensuring the short-term stability of the American economy

Stimulus

President Obama signs the American Recovery and Reinvestment Act

Unlike the bailout, the two main stimulus packages passed under the Bush and Obama administrations offered far more tangible benefits to the public. The Economic Stimulus Act of 2008, passed under President Bush, offered tax incentives to both consumers and businesses in hopes of increasing spending, stimulating the economy, and averting a recession. The American Recovery and Reinvestment Act of 2009, largely based on President Obama’s proposals, offered a more diverse range of economic stimuli, at just over five times the cost.

Economic Stimulus Act of 2008

While the stimulus passed in 2008 is not nearly as often discussed as Obama’s, it was very successful and cannot be ignored. Passed in early 2008, the Economic Stimulus Act of 2008 offered a series of new tax rebates for both consumers and businesses in an effort to increase spending. The bill, projected to cost $152 billion in 2008, increased spending by 3.5% according to an August 2008 study published in Voxeu. This increase in spending reduced the impact the recession had on businesses and therefore did accomplish its goal of ameliorating the recession.

American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009, at a nominal value of $787 billion, broadened the federal government’s stimulus program. It was a more controversial bill; of the 177 Republicans in the House of Representatives at the time, none voted for it. Only two Republican Senators voted for it. The new stimulus package contains funding for things like infrastructure, cleaner energy, and scientific research in addition to more traditional methods of stimulus like tax breaks.

Provisions

Taxes

While part of the Obama administration’s stimulus package differs greatly from President Bush’s, much of it seeks economic relief in the same way Bush’s did: tax relief. Over a third of the nearly $800 billion investment called for by the bill was to be used to offer tax credits. For individuals, the recipients of more than 80% of the funding, the stimulus act will allow families with children, college students, low income, or a host of other lowered qualifications to collect higher tax bonuses than before. Businesses, who received the remaining 20%, were allowed greater tax refunds and several other tax benefits. Congress hoped that by reducing both individual and business taxes, it could free up income, increase spending, and stimulate the economy.

Healthcare

The stimulus bill offers $150 billion for investment in existing government healthcare agencies and also provides billions for research. The primary recipient of the healthcare funding, Medicaid, was awarded $86.6 billion, just over 10% of the total stimulus spending. Medicaid, the state run but federally administered healthcare program, has had serious budget deficits which can hopefully be resolved with the extra federal funding it has received. Major federal investments were also made into COBRA insurance policies, information technology, research, preventative care, and care for military service members, their families, and veterans.

Education

Education, the third largest recipient of stimulus funding, has received $90.9 billion in government aid from the stimulus act. Half of that has gone to local school districts to help meet budgets and prevents layoffs and cutbacks. The schools are also allowed to use the federal aid for building repairs and improvements. Roughly $30 billion has been provided for low-income students. Other sections of the bill provide for higher teacher salaries, subsidies for special education, and investments in educational technology.

Aid for Low-Income Individuals and Families

The stimulus act has invested $82.5 billion into benefits for low-income households. It has extended unemployment benefits, increased funding for food stamps, augmented Social Security and welfare payments, and offered job training.

Infrastructure

A highway funded by the ARRA

Over $80 billion has been invested into public infrastructure and government infrastructure programs. Nearly $30 billion has been set aide for bridge and highway construction. Over $10 billion has been set aside for public transportation improvements. In addition to transportation improvements, tens of billions have been provisioned for water treatment, as well as making public and government buildings more energy efficient. Other infrastructure investments include broadband and wireless Internet access and land and wildlife conservation.

Energy

The stimulus act includes funding for alternative energy sources

The stimulus package has provided for numerous energy improvements, mostly relating to the reduction of costs and the introduction of environmentally friendly energy sources. $11 billion in funding for an electric smart grid which would save energy, reduce costs, and increase reliability was created. In addition to both direct investments in improving the energy efficiency of homes, tax credits offered by the stimulus bill also encourage homeowners to install energy efficient lights, windows, and other “green” products. The federal government has also invested billions in electric automotive technology and has set aside hundreds of millions of dollars for the purchase of electric or plug-in hybrid vehicles as they become available.

Housing

Over $12 billion of the $787 billion in stimulus funds was put into housing improvements. In addition to tax credits, government subsidies have improved both urban and rural housing and have offered assistance in purchasing or renting a home.

Scientific Research

Close to $10 billion in stimulus dollars has been given to a variety of government agencies involved in scientific research or authorized to fund it, including the National Science Foundation, the U.S. Department of Energy, and NASA. The bill also funds science programs at several university research centers.

Miscellaneous Spending

An additional $18 billion which does not fall into any category above is included in the bill. The most significant uncategorized funding is offered to states ($8.8 billion) in order to help meet state budgets or reduce budget cuts. An additional $4 billion was invested in law enforcement, on top of which $1.1 billion was set aside to improve airport security. Other miscellaneous spending includes census funding, the digital television (DTV) transition, as well as various security improvements.

Response

From Economists

Unlike the bailout, which received little support from economists, the stimulus act was largely supported by such prominent economists as Joseph Stiglitz and Paul Krugman. However, other economists criticized the bill’s lack of focus on the direct causes of spending and unemployment. An advertisement paid for by the Cato Institute was placed in the January 28, 2009 editions of the New York Times and the Wall Street Journal criticizing the bill. Another petition was created in response praising the stimulus bill, also signed by nearly 200 economists. Economists were generally divided over Obama’s bill. As compared to the bailout, however, the stimulus plan was very well received.

From the Public

The public response to the stimulus act was unsurprisingly more positive than it had been to the bailout. The stimulus offered direct benefits to the majority of Americans, unlike the bailout, which only prevented a collapse government officials could only promise them would devastate the country. Still, conservatives largely rejected much of the spending on healthcare, infrastructure, and other less tangible needs. Right-wing magazine The National Review cited a Rasmussen poll claiming that public support for the bill was at 42%. Much of the country still demands tax reductions and refuses to approve any government spending.

The multi-million dollar Recovery.gov website

Critics of the stimulus package were quick to lambast the new government website designed to detail stimulus spending when several news agencies reported on “phantom” congressional districts—districts which Recovery.gov claimed that stimulus spending had created or saved jobs in, but did not actually exist. Communication Director of the Recovery Board Ed Pound attributed the inaccuracies to human error. Rep. David Obey (D-WI) issued a statement saying, “The inaccuracies on recovery.gov that have come to light are outrageous and the Administration owes itself, the Congress, and every American a commitment to work night and day to correct the ludicrous mistakes.” While its unfair to claim, as Glenn Beck insinuated on his TV show, that the mistakes were some sort of conspiracy to improve the public opinion of the stimulus act, it is unacceptable to have such unnecessary mistakes continue to occur. The stimulus package faces enough of an uphill battle. The government should not be offering easy ammunition to its critics. If the American Recovery and Reinvestment Act is to succeed, President Obama needs to ensure that his administration operates with the same transparency and honesty which he promised before the passage of the bill.

The Future of the American Economy

The S&P 500 average has steadily risen since March 2009

Economic indicators are finally pointing up. In November, unemployment rates fell for the first time since April 2008, dropping from 10.2% to 10.0%. The S&P 500 index has been steadily climbing since it bottomed out in March of this year. According to a Bureau of Labor report, underemployment (workers who would prefer a full-time job but can only find a part-time one) has fallen as well. We’re far from returning to where we were when the bubble burst in September 2008. The return to that level will be slow, and at least for a while, painful. We were living on an economic bubble and reaching that artificial level in a matter of months or even years would only mean another unsustainable bubble would be created. Full economic recovery could take at least a decade, maybe more.

Like in previous recessions, the only thing we can do is take this opportunity to reform the flaws that led to collapse. Regulate the banks so that they can’t construct elaborate financial webs which collapse when one piece falls apart. Put laws in place setting higher requirements for getting loans. Establish energy efficiency mandates so that, economically, we’ll have no choice but to replace our Hummers with Cheverolet’s upcoming electric-powered, 230 mile-per-gallon Volt. A recession offers a country the opportunity to rebuild its economy. We can either demand lower taxes and less government intervention, or we can take this opportunity to effect change and in a decade emerge a stronger and more durable economic power.

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