Bailout bust drives plunge in Stock Market
September 30, 2008 1:18 PM
The House of Representatives rejected a $700 billion bailout plan Monday as the Dow Jones dropped 777 points, marking the latest in the nation’s economic crisis.
In the midst of the worst single-day stock market close in history, the majority of House members turned down a rescue plan for the U.S. financial system, the Associated Press reported. Republicans and Democrats alike turned down the legislation, despite pleas from the Bush administration, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
“Our Federal Reserve must be the lender of last resort,” SF State economics Professor Betty Blecha said of reaching a financial solution. “Any approach that does not isolate or quarantine the suspect securities causing the problem is going to be of limited success in calming markets.”
This recent plunge in the New York Stock Exchange began to take shape on Sept. 15 after investment banks Lehman Brothers and Merril Lynch collapsed. Lehman Brothers filed for bankruptcy, while Bank of America bought Merril Lynch in a $50 billion deal.
Blecha said that the original cause of the crash was “transparency in the market value of securities related to mortgages,” referring to troubles with big mortgage companies such as Fannie Mae and Freddie Mac.
“Financial institutions made loans that they shouldn’t have,” said Economics Professor Don Mar. “And in the end, investment banks found themselves short of money.”
The bailout that the Bush administration proposed would have allowed the government to take bad mortgages from failing banks. The idea was that taking those debts away would encourage those banks to lend money and help lift the economy.
Bush told the Associated Press on Tuesday that the $700 billion bailout proposal was “huge, but was dwarfed by the $1 trillion in lost wealth that resulted from Monday’s stock market plunge.”
Blecha believes that “the real concern is the credit markets,” which are refusing to lend money, or are frozen all together. “If credit doesn’t loosen very soon, we are looking at the worst recession since the early 1980s,” she said.
The stock market’s 777-point drop is the largest in the country’s history. The previous record low was 684 points from when the first day that the NYSE reopened after the terrorist attacks on Sept. 11.
“When things aren’t good in the world, people don’t invest in stocks,” Mar said. “They want their money to be in the safest, most secure places possible.”
Markets all over the world are affected by the NYSE crash since “financial markets are inter-related,” Mar said. Malaysian shares, for example, were set to fall Tuesday morning after the 777-point loss in the U.S. market.
All sides agree, however, that legislation for boosting the plummeting economy will not be abandoned. The Associated Press reported that Democratic leaders said they would be reconvening Thursday, Oct. 2, leaving hope that another bailout plan could be put back together.
Mar said that there will have to be a bailout. “The truth is, whether you are Conservative or Left Wing, everyone loses if there’s no bailout.”
Connie Marie Gaglio
James B Klein
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