The US government has a long history of leading economic aid. The first major intervention occurred during the panic of 1792, when Treasury Secretary Alexander Hamilton authorized the purchase to prevent the collapse of the securities market. When private companies need bailout, the government is often ready to prevent them from going bankrupt. In this article, we study six instances of government intervention in the past century:
- The panic of 1792 was the first time the federal government intervened to support the market. During that crisis, Treasury Secretary Alexander Hamilton authorized purchases to prevent the collapse of the securities market.
- During the Great Depression, a government program to purchase and refinance default mortgages kept 1 million families at home.
- The savings and loan crisis cost the government 160 billion U.S. dollars (in 1990 U.S. dollars) to clean up.
- In response to the COVID-19 pandemic, the US government approved more than US$2 trillion in aid, including three stimulus checks: in April 2020, US$1,200 per eligible adult, US$500 per child, and December , Each eligible adult and dependent child is 600 US dollars in 2020, and with the passage of the American Rescue Plan Act in March 2021, a third check for 1,400 US dollars is provided for eligible adults and each of their dependents.
The Great Depression is the name of a long-term economic recession and stagnation caused by the stock market crash of 1929. After the presidential election of Franklin Roosevelt in 1933, the government promulgated a number of pre-set rescue plans aimed at providing relief to the people and businesses of the country.
When Roosevelt took office, the unemployment rate was close to 25%. Countless Americans who lost their jobs also lost their homes. The homeless population is growing, especially in urban areas. To keep people in their homes, the government established a homeowner’s loan company, which purchases default mortgage loans from banks and refinances them at a lower interest rate. The plan helped 1 million households benefit from lower interest rates on refinancing mortgages. Since there is no secondary market, the government keeps holding mortgage loans until they are paid off.
The government made many other plans to help the country weather the Great Depression. Although these measures are not rescues, strictly speaking, they provide funding and support to create tens of thousands of new jobs, mainly in the field of public works. Some of these projects include:
- Build the Hoover Dam
- Repair roads and bridges and build new ones where needed
- Construction of new post office buildings across the country
- Hire an artist to paint a mural at the new post office
- Hire a writer to write a state guide
- Provide price support and subsidies to farmers
With a stable income, millions of re-employed workers began to purchase again, and the economy slowly recovered. By 1939, with the outbreak of World War II in Europe, the Great Depression began to loosen control of the economy. After the Pearl Harbor incident in 1941, when the United States entered the war, the economic recovery was already in progress and reached its peak during the postwar boom in the 1950s.
Savings and loan relief in 1989
The Savings and Loan Agency (S&L) was originally created to provide homeowners with mortgage loans and to help stimulate the real estate boom after the end of World War II. S&L usually pays higher interest rates for deposits than commercial banks, and provides premiums and gifts to attract depositors.
With abundant funds, many S&L ventured into risky and unwise commercial real estate companies. In addition, rising interest rates mean that the deposit interest paid by deposit and lending institutions is higher than that of fixed-rate loans. Many people were already insolvent in the early 1980s, but customers still kept banking because they knew their deposits were insured. In addition, regulators allow zombie banks to continue operations, hoping that they will eventually return to profitability.
By 1986, there were approximately 1,000 still operating S&Ls that were insolvent or nearly insolvent. Loan defaults reached billions, and billions were used to pay federal insurance deposits. Congress has taken a number of measures to deal with the crisis, such as the passage of the Financial Institution Reform, Recovery and Enforcement Act of 1989, and the establishment of a resolution trust company to sell assets. Between 1986 and 1995, the government estimated that it spent 160 billion U.S. dollars (in 1990 U.S. dollars) to clean up the mess of savings and loans.
The bank rescue in 2008, or the Great Depression
The 2007-08 financial crisis led to unprecedented federal intervention to rescue banks and restore confidence in the financial industry. The chief culprit of this crisis is the implosion of mortgage-backed securities (MBS) and the collapse of the real estate market, which threatens many companies to go bankrupt.
In the early stages of the crisis, no one knew which companies held toxic assets and which companies would falter. Without the spread of trust, market participants are unwilling to assume counterparty risks. As a result, the company cannot obtain credit to meet its liquidity needs.
To resolve the crisis, Congress passed the Emergency Economic Stability Act of 2008. The bill created the Troubled Asset Relief Program (TARP), authorizing the U.S. Treasury Department to purchase up to $700 billion in toxic assets from companies and then supplement their balance sheets with safer assets.
The Treasury Department is also authorized to purchase up to $250 billion in bank shares, which will provide much-needed funds for financial institutions. It bought $20 billion in stocks from Bank of America (BAC) and Citigroup (C) each. The Treasury Department later sold these stocks back for profit. The government provided a total of 245.1 billion U.S. dollars in TARP assistance to banks, and recovered 275.6 billion U.S. dollars, with an investment income of 30.5 billion U.S. dollars.
Fannie Mae and Freddie Mac
The implosion of the real estate market has also caused trouble to Fannie Mae and Freddie Mac, two government-funded companies that are responsible for promoting home ownership by providing liquidity to the real estate market. Fannie Mae and Freddie Mac play a vital role in the real estate market by purchasing mortgages from lenders and providing guarantees for loans. Congress authorized the creation of Fannie Mae during the Great Depression, and Freddie Mae was created in 1970.
In 2008, at the height of the financial crisis, Fannie Mae and Freddie Mac held US$1.2 trillion in bonds and US$3.7 trillion in mortgage-backed securities. The deterioration of their financial situation means that none of them can fulfill their obligations. This forced the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie Mac, to put both under supervision.
In order to maintain the solvency of the two, the Treasury provided 119.8 billion U.S. dollars to Fannie Mae and 71.7 billion U.S. dollars to Freddie Mac in exchange for senior preferred shares. This requires Fannie Mae and Freddie Mac to pay dividends to the government before all other shareholders. As of 2018, Fannie Mae has paid $176 billion in dividends to the Treasury Department, while Freddie Mac has paid $117 billion in dividends.
The extended lifeline of the Ministry of Finance gave the two people time to clean up their finances. The two reported losses between 2007 and 2011 and returned to profitability in 2012. In 2018, Fannie Mae reported revenue of $16 billion, while Freddie Mac reported revenue of $9.2 billion.
Mortgage-related losses brought losses to Bear Stearns, prompting the Fed to prevent its bankruptcy in 2008. Bear Stearns—such as Bank of America, Citigroup, and AIG—is considered too large to fail. People worry that its collapse will bring systemic risks to the market. The Federal Reserve facilitated the merger of Bear Stearns and JPMorgan Chase. To facilitate the transaction, the first Federal Reserve provided a bridge loan of $12.9 billion, which was repaid with interest.
The Fed subsequently provided a loan of $28.82 billion to a Delaware company that aimed to purchase financial assets from Bear Stearns. The company called Maiden Lane I then used the proceeds from the sale of these assets to repay the Fed’s interest and principal. By November 2012, Maiden Lane I had repaid the Fed the principal and $765 million in accrued interest. As of December 2014, Maiden Lane I still held US$1.7 billion in assets. Once these assets are sold or mature, this will bring benefits to the Federal Reserve.
American International Group (AIG)
During the financial crisis, the government controlled American International Group (AIG) to prevent the world’s fifth largest insurance company from going bankrupt. AIG is facing huge losses in derivatives, and the Fed is worried that its failure will severely disrupt financial markets. The Federal Reserve and the Treasury Department provided US$141.8 billion in assistance in exchange for 92% of the company’s ownership.
The government made 23.1 billion U.S. dollars in profits through bailouts. AIG paid $18.1 billion in interest, dividends and capital gains to the Federal Reserve. In addition, the Ministry of Finance also received capital gains of USD 17.55 billion. However, the approximately US$12.5 billion aid provided by TARP was not recovered, resulting in a net government income of US$23.1 billion.
Perhaps the most shocking example of government assistance is the response to the COVID-19 pandemic, which has led to a severe contraction in economic activity and employment, as people all over the world stay at home to curb the spread of the disease. On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing more than $2 trillion in aid. This includes stimulus check payments of US$1,200 per adult and US$500 per dependent child. At the end of 2020, another round of stimulus payments for each eligible adult and each dependent child will be allocated as additional aid funds to $600.
Even less than a year later, on March 11, 2021, President Joe Biden signed the American Rescue Plan Act, which provided a third $1,400 bill for eligible adults and each family member. Incentive checks. The US$1.9 trillion US rescue plan extends and/or modifies many provisions of the CARES Act, including a suspension of federal student loan interest and a weekly supplementary unemployment benefit of US$300. The plan will expire on September 6, 2021. Expect.
Other measures include the Salary Protection Program, which provides companies with more than $500 billion in funding through the Small Business Administration to ensure that workers remain on the payroll. At the same time, the Fed expanded its balance sheet by $3 trillion to provide liquidity to the financial market.
Can the US government continue to rescue troubled companies such as Bear Stearns and American International Group, as well as government-backed institutions such as Freddie Mac and Fannie Mae? Many economists say no. The United States has already shouldered trillions of dollars in debt and may not have sufficient resources to fund large-scale rescues in the future.
The economy is unpredictable. In a constantly changing world, the economies of emerging countries—especially China and India—can have a significant impact on the United States, but with new regulatory legislation and more vigilant oversight, the future will bring No one knows what to come. The large-scale rescue that was unique to the rescue in 2008 may not be necessary, unless of course an external shock like a pandemic occurs again.