Political Science Paper

Congress and its Slow Response to the 2007/2008 Financial Crisis

This crisis was caused by a myriad of factors such as too much appetite for risk by financial institutions, an unsustainable housing boom supported by the readily available mortgages, and poor regulations for the rapidly growing nation’s financial system. The concerned regulatory bodies such as the Federal Reserve Bank began working on measures to address the deteriorating situation and the negative effects it had on the economy. The proposals by the Federal Reserve Bank required support and approval from Congress. However, the response by Congress was poor due to its partisanship nature. For decades, Republicans and Democrats have differed ideologically. As a result, politics has become more competitive and bills harder to pass (Baer). The Troubled Asset Relief Program Bill also took longer to pass as it failed to get full bipartisanship support from Congress.

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Bernanke and Paulson, the then Federal Reserve Chair and Treasury Secretary respectively, presented a proposal to Congress, by the government, to commit $700 billion to buy the toxic assets. These proponents argued that the purchase of the troubled assets from the banks would renew confidence in the operations of the global financial system and ultimately end the crisis by strengthening the overall market stability and supporting foreclosure prevention programs (Amadeo). If adopted by Congress, this proposal would become the Troubled Asset Relief Program (TARP) law. Although the idea received support from Congress, its eligibility faced criticism from both Democrat and Republican members.

Sen. Dodd, a Democrat and the Senate Banking Committee Chair, challenged the program arguing that it lacked details such as how the $700 billion amount had been arrived at. Sen. Reed, also a Democrat, opposed the plan arguing that it had become a custom for Wall Street institutions to assume risks simply because they would be bailed out. He, therefore, called for the involved firms to pay a premium. Democrat Sen. Bayh and Republican Sen. Bennett questioned the asset valuation approach under the reverse auction plan. They argued that, instead of using the public monies, the willing private capital should instead be used. Alternatively, equity stakes should be bought as they would enable taxpayers to share in potential gains (Marshall 33). Republican Sen. Shelby also opposed the mortgage purchase plans and suggested a mortgage insurance program be established.

On the contrary, Sen. Crapo, a Republican, supported capital injections as a more effective use of the proposed $700 billion. Sen. Dodd opposed this proposal by Crapo noting that the move would set a bad precedence where Treasury Secretaries would be acting with absolute impunity without oversights by any agency. Democrat Sen. Schumer suggested that the monies be disbursed in smaller amounts, and upon Congressional approval.  Other senators questioned the use of the funds noting that institutions might use it for parachute payments and executive compensations. Some supported the involvement of bankruptcy judges to assist in mortgage refinancing and prevent foreclosure.

After weeks of Congressional deliberations and negotiations, a verbal consensus was reached on the TARP plan on 28th September, 2008. However, during the voting day, the Bill was shot down by 228 to 205 votes (Marshall 34). Marshall added that 75% of Republicans rejected it. Consequently, economic condition deteriorated further with Dow registering a loss of $1 trillion. The bill was reintroduced as Emergency Economic Stabilization Act. To ensure its adoption, requisite agreements were sealed and political support was sought. So, the Bill was supported on 1st October and on 3rd October, President Bush signed it into law.

Works Cited

Amadeo, Kimberly. What was the bank bailout bill? Cost, impact, how it passed. 5 November 2018. https://www.thebalance.com/what-was-the-bank-bailout-bill-3305675. 20 November 2018.

Baer, Kenneth S. There’s a reason Congress leaves everything to the last minute. 20 December 2017. https://www.theatlantic.com/politics/archive/2017/12/how-balanced-politics-leads-to-broken-policymaking/548870/. 20 November 2018.

Marshall, John. The financial crisis in the US: Key events, causes and responses. Research paper. London: House of Commons Library, 2009. http://www.voltairenet.org/IMG/pdf/US_Financial_Crisis.pdf.

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