21 Oct. 2012
Henry Paulson’s Proposal:
A Recent Stumble in the Fall of Modern Moral Capitalism
In 2008, the federal government of the United States of America handed over $1.2 trillion to a number of banking institutions in response to the subprime mortgage crisis (Wiles). The housing crisis had been growing and multiplying like a viral infection for years and left a strain so large on so many of the largest banking institutions in this country that they faced utter collapse and bankruptcy. Our delicate economic system of checks and balances would most likely not have survived such a tragedy. It may have created a chain reaction of economic collapse unrivaled since the stock market crash of 1929. This money was committed to rescue these institutions and save our economy. However, a bailout from the federal government does not seem to be the best solution to some of the direst of economic disasters. It is more of a Band-Aid, a temporary fix which tends to obscure a more elusive and much more intrinsic underlying problem.
The practice of the federal government paying out large sums of money to companies, corporations and other organizations in the form of a bailout is nothing new. In fact, we can trace it back nearly to the birth of the United States of America (Hunnicutt 18). But why does it seem to be, especially in the light of more recent economic dilemmas, a necessary evil? Why does our system tend to bottleneck now and again into a dead-end with no other foreseeable solution? This paper begs these questions and attempts, through a study of the history of bailouts in the U. S., a reflection on the practices of a capitalist society and an examination of some personal accounts, to answer these troubling questions. Questions which undoubtedly must be faced if we wish to avoid another stumble or an outright slip and fall situation from which our delicate economy may not recover. How can we prepare for and handle catastrophes such as the housing crisis in a more effective way? Questions such as these linger in our current economic climate and need to be dealt with. Characteristically, a government bailout is considered to be an event involving the federal government handing out a considerable amount of capital to a private company, a corporation, or rarely, another government entity, such as a city (Hunnicutt 10). In response to drastic fallout of that entity’s own profits, which may threaten the well being of the nation that the stated government represents, a payment is made to “bail” said entity out of financial ruin. This has happened time and again in the United States harkening back to 1792 when the federal government transferred money to each of the thirteen state governments to make up for debts accumulated during the Revolutionary War (Hunnicutt 19). This is widely considered to be the first American bailout even though it essentially helped to create our modern economic system. More recent and more infamous bailouts include, but are not limited to, Penn Central Railroad in 1970 and Savings and Loan in 1989 (Nankin and Schmidt). There are many more examples, but by far, the largest bailout in American history took place in 2008 in the form of the Troubled Asset Relief Program and the Emergency Economic Stabilization Act of 2008, proposed by Henry Paulson, the Treasury Secretary at the time (Sternberg). Both were explicitly designed to cover massive debts incurred by banking and lending institutions by approving mortgage loans for tens of thousands of borrowers who could not conceivably maintain a payment schedule and whose homes were ultimately foreclosed upon. Thus, the lenders and banking institutions were stuck holding the bills on an astronomically high amount of loans with no one to pay them back. This has come to be known as the Subprime Mortgage Crisis, or simply