Washington Plans Further Aid for Financial Institutions

Treasury Department Secretary, Henry Paulson, and Federal Reserve Chairman, Ben Bernanke, addressed leaders from the House and the Senate on Thursday evening, putting forward a proposal to create a fund that would buy up mortgage-related assets of struggling financial institutions. Bernanke and Paulson, along with other officials are set to work through the weekend to finalize the plan, with the possibility of legislation being acted on early in the coming week.

This announcement follows a week that many agree has been like no other in the history of Wall Street, with a series of events rocking the financial world, not only in the U.S., but on a global scale. The bankruptcy of Lehman Brothers and the sell-out of Merrill Lynch to Bank of America came as a shock to many. This was followed by an $85 billion loan to AIG by the Federal Reserve, a path which the Fed had been reluctant to go down, but one which had to be taken to prevent the drastic consequences that would surely have followed had AIG collapsed. Another unprecedented move is the Treasury Department’s plan to sell bonds for the Federal Reserve in an effort to support the central bank in dealing with the sudden borrowing pressure it is being put under.

Unlike other actions taken recently by the Federal Reserve and the Treasury Department, a precedent has been set for the Federal Government taking on the troubled assets of the private sector. Under President Franklin D. Roosevelt, the Home Owners’ Loan Corporation was established in 1933 with the purpose of refinancing homes to prevent foreclosure. Also, during the savings and loans crises (S&L Crisis) of the 1980s and 1990s, which saw the failure of 747 U.S. savings and loan associations, Congress set up the Resolution Trust Corporation to resolve the situation with an estimated $124 billion being paid for by the U.S. taxpayer, either directly or indirectly.

There are a number of routes that the U.S. government could take to reach their goal, but it is generally agreed that whatever program is decided on it would have to be short term, as with elections coming up, a long term plan would restrict what the next administration could do to get the economy back on track. Both presidential nominees are expected to present detailed plans on Friday 19 September as to how they would address the crisis. Decisions taken this weekend will most likely include assistance for struggling American homeowners, and will undoubtedly have far-reaching consequences.