When the closing bell rang at the New York Stock Exchange Monday, brokers were faced with the task of sifting through the pieces of the markets’ worst loss since the terrorist attacks of Sept. 11. Influential investment firms like Merrill Lynch and Lehman Brothers were bought out and bankrupt, respectively.
In response, the federal government weighed in with the promise of a $50 billion economic stimulus plan. The nation saw this plan before, and now its result: Simply feeding cash into an economy already in the midst of a recession that hasn’t reached its bottom will do little more than to add to an already massive national debt.
The subprime mortgage crisis began in early 2007, with rising reports of defaulted loans and the failure of New Century Financial, a lender who specialized in “high-risk” lending. After several months of escalation, including the government-brokered takeover of Bear Stearns, the Federal Reserve decided to cut interest rates in October 2007, hoping to curb the crisis. In January 2008, the federal government tried to bail out taxpayers with a $168 billion stimulus package.
In short, the major lenders are now dealing with the results of years of risky lending. Borrowers are now falling behind on what was an ill-conceived loan, and the lenders are unable to close the gap on thousands of foreclosures and defaulting loans. Some lenders were accused of predatory practices by seeking out borrowers who did not understand the risks of their loans, but as it turned out, the lenders were equally ignorant of the risks of gambling on the housing market.
Now, it is eight months since January’s stimulus plan, and the federal checks are mostly a memory for many American families, who are still struggling to stay afloat in the recession. The stimulus plan, described as “a big win for the American people” by Republican House minority leader John Boehner, has failed to solve the problems in the markets.
This new plan, which is under congressional consideration, is estimated to be nearing $50 billion in total — well short of the previous $160 billion that delivered such lackluster results. According to a Sept. 15 Associated Press article, the goal of the plan is to create new jobs and address rising health care costs. These goals sound great to any American, but are nothing more than fluff designed to take taxpayers’ minds off a troubled economy while failing to address the root problems in the economy.
Congress needs to focus its efforts on discouraging the kind of reckless investments that opened this wound instead of patching it up with expensive giveaways that only add to an already gaping budget deficit. The housing market is still riding a downward spiral, with some mortgage interest rates jumping so high that an intentional foreclosure is a better option for some than paying more than a house’s worth. Without a real solution to subprime lending and inter-bank debt trading, an extra $400 or so in every taxpayer’s mailbox will only delay the inevitable crunch of a financial collapse.
Unfortunately, this is a situation that may require things to hit rock-bottom in order to be truly fixed. The damage is done for both homeowners and financial institutions – but another economic stimulus package won’t fix the system.
