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Treasury Secretary Henry Paulson acknowledged the significant
change of plans on Wednesday.
"Over these past weeks, we have continued to examine
the relative benefits of purchasing illiquid mortgage-related
assets," Paulson said. "Our assessment at this time
is that this is not the most effective way to use [government
bailout] funds."
The original plan was to buy up "troubled assets"
from banks and financial institutions holding debt from bad
mortgages.
When people can't make the monthly mortgage payment on their
homes, they "default" on their loans. Lenders then
take ownership of, or "foreclose" on, the house. Banks
and lenders have lost money this way and been stuck with lots
of debt and devalued homes since the housing crisis began.
Injecting capital
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When President Bush signed the rescue program into law,
the government plan was to buy bad assets from banks,
but instead the government is directly investing in banks. |
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Instead of buying those
devalued homes, the U.S. Treasury is buying shares in the banks
instead -- giving the government partial ownership. By injecting
money, or "capital," into these institutions, the
Treasury hopes they will make more loans, helping to relieve
tight credit conditions.
The lack of credit available to consumers has contributed to
a slowdown of the economy. Credit feeds the economy by enabling
people and companies to borrow money to make purchases or payments
until they have the cash to pay it back. Governments also borrow
money, and banks borrow money from each other.
When banks are unable or unwilling to lend money, the normal
flow of business slows down.
The scramble for money
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The U.S. government has already spent billions of dollars
investing in AIG, an important insurance company that
almost went bankrupt. |
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Of the $700 billion originally approved by Congress in early
October, Paulson was allowed to use $350 billion immediately.
About $290 billion has already been committed as capital for
banks and other financial institutions, leaving $60 billion
more to spend.
Nov. 14 is the Treasury's deadline for companies to apply
for investments.
Banks and companies struggling in the harsh economic climate
are lobbying the government heavily for money. Lobbyists are
people who are paid to promote a company or interest group,
such as the oil industry, to lawmakers and the government.
They try to influence decisions in a way that is favorable
for their employers.
Banks were the original target for the rescue plan money,
but other types of companies are lobbying to receive aid as
well, which has some smaller banks concerned.
"By the time they get to the community banks, there may
not be enough money left," Edward L. Yingling, the president
of the American Bankers Association, told the New York Times.
American Express, the credit card company, is even changing
itself into a bank holding company to make itself eligible
for rescue funds. Other companies are also trying to be reclassified
so they can apply for funds.
The auto-industry dilemma
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U.S. automakers want some of the rescue money to save
their failing businesses, a move President-elect Obama
supports. |
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The U.S. auto-making industry
has been pushing for rescue money, too, even though they do
not fall under the original intent of the rescue money.
Ford Motor Co. and Chrysler LLC are both in danger of bankruptcy.
General Motors could go bankrupt before the end of the year
without assistance. President-elect Barack Obama asked Congress
Thursday to approve as much as $50 billion to rescue the auto
industry.
"The auto industry is too big to fail,'' Nariman Behravesh,
chief economist at IHS Global Insight Inc. told Bloomberg News.
"While the Obama administration can wait until Jan. 20
to address other matters, on this one they need to move quickly.''
A GM bankruptcy could send the U.S. jobless rate as high as
9.5 percent, up from a 14-year high of 6.5 percent in October,
reported Bloomberg.
It has not been determined if the any money for auto companies
would be pulled from the $700 billion rescue plan, but Paulson
argued Wednesday that the money was intended to help the financial
industry and is not for the auto industry, despite its economic
importance.
China's plan
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China announced it is going to fund infrastructure projects
like railways, airports and freeways in order to improve
its economy. |
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Economic powerhouse China
revealed its own plan to stimulate its economy on Sunday, taking
a different direction than the United States. China's $586 billion
package includes specific plans for tax cuts and a program of
spending on infrastructure for the country and on social programs
like education and health care.
The money will help finance the development of low-income housing,
technological innovation and rebuilding areas damaged by natural
disasters.
The hope is that government spending will keep money flowing
to workers and consumers to help grow the country's economy.
In the United States, Mr. Obama is supporting a similar proposal.
He is pushing for an additional $50 billion stimulus package
for infrastructure projects such as roads and bridges to help
create jobs.
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