A quick guide to the “Emergency Economic Stabilization Act of 2008″

There are only four things of significance about the Emergency Economic Stabilization Act of 2008 (EESA), in my opinion (although we do not yet have the final version):

  1. Drafted in haste, it will have many and serious unintended consequences.
  2. Its provisions are largely irrelevant to our economic problems, intended to treat the symptoms.
  3. The economic impact will be minor, or even less than minor.
  4. The next program (EESA-2009?), taken by the new Administration after another 4+ months of weakening, will be the first important response to this crisis.

The government’s responses so far to this crisis are like beads on a string; each larger than the one before it — but all broadly similar.

  1. Government approval for fraudulent accounting, to hide the extent of the problem (Section 128, suspending market pricing of assets).
  2. Happy talk — do you remember the Treasury’s Hope Now alliance, in October 2007?
  3. Cheap financing and bailouts for injured financial institutions.

The goal of this plan — assuming that there is in fact a plan behind this, and not just ad hoc grasping at straws — is probably to buy time for the economy’s natural mechanisms to work.  Unfortunately this misunderstands the key aspects of our situation:

  1. The scale of the problem, the post-WWII debt supercycle, and
  2. Time is our enemy, as the global economy slows and the US economy slides into what looks like a severe recession.
  3. A sufficiently large solution requires an agreement with our foreign creditors.

The last is the key to understanding our government’s actions.  They do not want to open such negotiations, hence can take only small actions buttressed by “Rube Goldberg” financial machinations.  We cannot pay our current debts and need sums far larger than our currently massive borrowing.  This requires an agreement with our creditors to do the following:

  1. extend the maturity of our current loans, rather than just rolling them over and over,
  2. provide large loans to fund both our current account deficit (running at 4-5% of GDP) and the needed restructuring costs (this and the next EESA, plus large fiscal deficit during the recession),
  3. provided at low interest rates (or eventual payment becomes impossible),
  4. with the first payments due in 3 – 5 years.

This will end our pretensions to be a global hegemon.  Plus, our creditors will want concessions.  For example, China will want a sphere of influence that includes Taiwan.

Precedents in US History

America has had four major financial events.  The government successful responded twice, and failed twice.

(1)  Alexander Hamilton convinced the Founders to honor the revolutionary war debts, and successful arranged the means to do so.

(2)  FDR’s New Deal mitigated the effects of the Great Depression, but failed to end it.  His solution was to end gold convertibility for US citizens, and greatly expand both government spending and regulation.   After a bounce, the economy slid back down in 1938.  The Depression was ended by WWII.

(3)  Johnson’s “guns and butter” over-spending resulted in collapse of the Bretton Woods system.  Nixon’s solution was to end gold convertibility for other nations, and increase government regulation and spending.  Some examples:  price controls, affirmative action (the Philadelphia Plan), the Environmental Protection Agency (EPA) and Occupational Safety and Health Administration (OSHA).  He proposed, but the Democratic Congress refused to approve, national health care and a national minimum income (the Family Assistance Plan).  These measures stabilized the economy for a few years, although at the cost of rising inflation — leading to the next crisis.

(4)  Fed Chairman Volcker plus Presidents Carter and Reagan responded to the accelerating decline of the US economy by forced restructuring (high rates, the 1980-82 recession) plus far-reaching deregulation.  This resulted in a quarter-century of economic growth with decreasing inflation.

The fifth crisis

This forms a break with previous US history, as we cannot solve it alone.  Years of insane financial management have left us

  • addicted to foreign borrowing, which we cannot suddenly stop without severe withdrawal pains, and
  • over-indebted, unable to resolve our problems without foreign assistance.

Leaders with steady hands and clear minds can steer us out of this storm.  Our job is to elect the right people and support their actions (including criticism where deserved).  Prayer might also help.


For a brief analysis of this bill, see “The Bailout Compromise“, David Zaring, The Conglomerate, 28 September 2008

What should we do?

That is a complex question.  For a simple answer see A solution to our financial crisis.

Originally published on September 29, 2008 at Fabius Maximus and reproduced here with the author’s permission.

4 Responses to "A quick guide to the “Emergency Economic Stabilization Act of 2008″"

  1. Guest   October 2, 2008 at 7:58 am

    The FRB is largely responsible for this mess.The FRB is supposed to monitor the health of the banksThe FRB owner families take in 1 trillion dollars TAX FREE a year.The FRB families should pay for the mess that they are responsible for and helped to create.THE PEOPLE DO NOT WANT SOCIALISM AND /OR DICTATORSHIPS

  2. DB Workman Sr.Guest   October 2, 2008 at 1:04 pm

    Emergency Economic Stabilization Act of 2008Our Senators have taken a vacation of their minds! The Democrats ran last in 2006, saying we will end the war in Iraq, and stop the Billions of our hard earn dollars from going into that country. Well, they lied. They did not stand up to the President or the rest of the Congress. They funded the war. Now, they are asked to vote on a bill, that will SAVE the country. Save the Country? They are not saving the country, they are buying bad debt. If they wanted to save the country, and put more money into the credit system, they should have passed a bill, that would grant Banks money, with the sole purpose it would be used for the credit market, not buying old debt, so they can reinvest the money you and I have coughed up in more speculative investments. NOWHERE, NO WHERE, does any part of this bill say, you must put this money into the credit markets. What it does say:……..Some of those additions have been assailed by spending watchdogs as “pork,” like the $6 million for the makers of kids’ wooden arrows, according to a summary of the bill released by the Senate Finance Committee. ……..Other goodies intended to attract the votes of individual members of Congress include $192 million for the rum producers of Puerto Rico and Virgin Islands, $128 million for car racing tracks, $33 million for corporations operating in American Samoa, and $10 million for small film and television productions. …….Where are the minds of these people we have elected to represent you and I! I am hopping mad! Obama you should be ashamed of yourself, McCain you should be ashamed. The rest of you who I have supported Dodd Graham and you know who you are 74 others, stink! If you were going to do something, you should have done it. You are a poor representative for the people who elected you. A good representative to the new meaning of Bi-Partisan, Stupidity!!!!!!!NO WONDER PEOPLE DON’T VOTE!

  3. Lester Ingber   October 2, 2008 at 1:35 pm

    Jeeeez! Get Gov’t out of this crisis! Even in this circumstance, the Senate cannot help itself except to load even this proposed bill with PORK PORK! It is truly amazing. They are so so bad, it is no wonder we can’t get anyone decent to run since they would have to join them as colleagues (finger to back of throat …).This BAIL OUT must be defeated — it is now up to the House to be responsible and get Gov’t out this mess before they make it even worse. This bill does not address the core problems of solvency. It just gives lots of money to banks and Wall Street firms who will simply hoard their new riches, and after this blows over they will return to their bad ways that precipitated this crisis.The problem is that Main Street will be suffering another 1 or 2 years until this blows over, and most people and businesses will be hurt badly while these badly run institutions simply bank their money. Of course during this process, we will have a few more bailouts, falling dollars, and other hidden taxes!Let the marketplace find its true bottom, not the artificial one the Gov’t (and its lobbyists) have supported just to get egg off their face since the dot-com bust.

  4. Guest   October 3, 2008 at 1:51 am

    We need to vote out of office all incumbents in both the house and senate. They obviously are no longer serving the people of this country and do not deserve to be re-elected. As I wrote my congressman, TPTB will either get what they want with this bill, or they will follow their plan B by allowing our markets and economy to collapse in order to buy whatever they want on the cheap. They have enacted plan B and may benefit from both plans A & B if this ill conceived bill passes the house tomorrow.Too bad congress couldn’t come up with a plan B. There are plenty other good plans and actions out there they could have considered and taken. This government is a disgrace to the both the taxpayer and the world.If anyone says again that the taxpayer will make money on this deal I think I will scream since the sub prime and downside put was conveniently left off of all these sliced and diced securities. This is criminal, and what our country is doing is protecting fraud. My only consolation is that God will judge all involved from the top to the bottom as well as our legislators who are no longer able to legislate effectively.To all Europeans who bought this trash, I am so very sorry even though I did not vote for Bush or have anything to do with these securities. This is my country and we have really screwed up the world. Don’t expect an apology from those in our government or these investment firms who sold them or the companies that rated them. They have no conscience.