The Treasury's Bailout Plan

(9/25/2008)

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Summary: After the failure of Lehman Brothers and Merrill Lynch and the bailouts of AIG, Fannie, and Freddie, many called for Congress and the Federal Reserve to step in and "bailout" the United States financial system. This "bailout" is known as the Emergency Economic Stabilization Act of 2008, and is a law authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks. The original proposal was three pages, as submitted to the United States House of Representatives. The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets. Supporters of the bailout plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets. However, opponents objected to the massive cost of the sudden plan, and claimed that better alternatives were not considered.

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