The mortgage-rescue plan
Will the bail-out work?
Oct 3rd 2008 | NEW YORK, WASHINGTON, DC
The bail-out becomes law after the House reverses its rejection. Money markets call for urgent attention
“CRISES have the power to unite us in strange ways.” So said Steny Hoyer, the Democratic majority leader in the House of Representatives, in an article on Friday morning that pleaded for passage of the $700 billion bail-out plan. United they were. The House voted by a huge 263-171 margin for the bail-out, a dramatic reversal of the 228-205 rejection on Monday. On Friday October 3rd 172 Democrats backed the bill, up from 140; 91 Republicans did so, up from 65. As the Senate had already approved the bill, it was immediately signed by George Bush.
The rejection on Monday was caused by conservative Republicans who said it was socialism, by Liberal Democrats who said it did not do enough for poor people, and fears by many that voters would fire them for bailing out Wall Street. The rejection triggered a plunge in stocks and a scramble to sweeten the bill. In the end numerous, mostly unrelated, items have been grafted on, from higher federal deposit-insurance limits to a tax exemption for wooden children’s arrows. The tide was turned because of that, nausea over market turmoil, news that non-farm employment sank by 159,000 in September (the steepest in five years) and because of furious business lobbying.
Now the real test comes: will it help? The Treasury is expected to take a week to set up the auctions for the first mortgage purchases, and the first purchases could therefore take place within weeks. Henry Paulson, the treasury secretary, could act sooner: he has the authority to buy mortgages from individual institutions or inject capital into them if they are nearing failure.
Speed is of the essence. Banks are loth to lend to each other, except at record punitive rates and for the shortest of periods. Most want their money back within a day. Massive liquidity injections by the Federal Reserve and other central banks have done little to unclog the pipes.