Markets at Midyear 2008 - Uncle Sam to the Rescue
Friday, July 04, 2008SUSIE GHARIB: Getting back to the economy, the half of the year may or may not be remembered as the time when a recession began, but what may prove far more significant are the quick actions the Federal government took to head off a collapse of the financial sector and a general economic meltdown. As Stephanie Dhue reports from Washington, even Capitol Hill did its part to rev up the economy.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Usually, Congress leaves it to the Federal Reserve to manage the economy. But when the economy continued to weaken despite interest rate cuts, Fed Chairman Ben Bernanke suggested Congress step in.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: A fiscal stimulus package could be helpful in the current circumstances. It would provide a broader base of support to the economy than just that afforded by monetary policy.
DHUE: Lawmakers quickly delivered a $150 billion stimulus bill to the president's desk sending rebate checks to millions of Americans.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: The bill I'm signing today is large enough to have an impact amounting to more than $152 billion this year or about 1 percent of GDP.
DHUE: But soon another major crisis was brewing, this time involving Bear Stearns. In one day, on March 13th, the investment bank lost $10 billion in assets. Fearing a domino effect if Bear went under, the Fed stepped in. It arranged a fire sale of Bear to JPMorgan put up a $29 billion loan against losses on risky Bear Stearns assets. Later, Bear Stearns CEO Alan Schwartz claimed rumors the bank would run out of money were unfounded.
ALAN SCHWARTZ, PRESIDENT & CEO BEAR STEARNS: If the market couldn't see that we had someplace to go and borrow against that collateral, then the fears could start. I just never frankly understood or dreamed that it could happen as rapidly as it did.
DHUE: Still, there was no question that the real estate boom-gone- bust lead to Bear Stearns downfall. When home prices were soaring and the economy was sound, financial firms dove into the mortgage market. Lending standards were loosened to the point where people with poor credit had no trouble getting mortgages with no money down. Firms like Bear Stearns then packaged those loans as mortgage-backed securities which somehow received high ratings. George Washington University real estate Professor Richard Green said the rating service's mistake was assuming that home prices would never fall.
RICHARD GREEN, REAL ESTATE PROF., GEORGE WASHINGTON UNIVERSITY: It was as if we were in a brave new world sort of like the late '90's when people thought companies wouldn't have to make any money for the price of their stocks to go up.
DHUE: Lawmakers also crafted a bill to help homeowners avoid foreclosure. It would create a $300 billion fund for the Federal Housing Administration to buy troubled mortgages. Lenders would have to agree to take a loss on existing loans to participate in the program. Senate Banking Committee Chairman Chris Dodd played a lead role in writing the proposal.
CHRIS DODD, CHAIRMAN, SENATE BANKING COMMITTEE: We think we've recommended some specific ideas that can very well begin to treat the problem of growing foreclosures, declining values in our homes and the spread and contagion effect this is having.
DHUE: The bill's proponents say it will act to stabilize home prices, but analyst Andy Laperriere says by the time the legislation can take effect, home prices may already have reached bottom.
ANDY LAPERRIERE, MANAGING DIRECTOR, ISI GROUP: We're basically already through it by the end of the year. Only if things are going to get really rough and home prices are going to fall a lot in 2009 -- only under that scenario would the bill help.
DHUE: Congress left town for the July 4th recess without passing the bill, but is expected to take it up again next week. With an election looming and the economy struggling, neither party wants to be blamed for doing nothing. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
