Changes

Both parties have expressed anger at the crisis, and have promised extensive new regulations of the financial industry. However the Republicans have blocked additional bailout aid to General Motors, which is on the verge of bankruptcy.<ref> Treasury Secretary Paulson told Congress on Nov. 18 that the Bush administration remains "firmly opposed" to using any of the $700 billion financial bailout fund to help rescue Detroit's Big Three, "no matter how badly they need the help." [http://www.foxnews.com/politics/2008/11/18/paulson-rejects-bailout-money-automakers-senate-considers-legislation/ Fox news report] </ref> Democratic Congressional leaders and President-elect [[Barack Obama]] have pushed for a bailout of the auto industry and are expected to move it forward in January, 2009.

Both parties have expressed anger at the crisis, and have promised extensive new regulations of the financial industry. However the Republicans have blocked additional bailout aid to General Motors, which is on the verge of bankruptcy.<ref> Treasury Secretary Paulson told Congress on Nov. 18 that the Bush administration remains "firmly opposed" to using any of the $700 billion financial bailout fund to help rescue Detroit's Big Three, "no matter how badly they need the help." [http://www.foxnews.com/politics/2008/11/18/paulson-rejects-bailout-money-automakers-senate-considers-legislation/ Fox news report] </ref> Democratic Congressional leaders and President-elect [[Barack Obama]] have pushed for a bailout of the auto industry and are expected to move it forward in January, 2009.

The Bush administration undertook a "bailout" program in which it took control of several of the largest financial institutions (Fannie Mae, Freddie Mac, and AIG insurance), forced the mergers of others, purchased $125 billion of ownership in the 9 largest banks in the U.S., and bailed out the largest bank, Citigroup.

The Bush administration undertook a program in which it took control of several of the largest financial institutions (Fannie Mae, Freddie Mac, and AIG insurance), forced the mergers of others, purchased $125 billion of ownership in the 9 largest banks in the U.S., and provided relief to the largest bank, Citigroup.

Until October the crisis had little impact on the non-financial sectors of the world economy, but then negative impacts started appearing.  Companies could not borrow money for expansion or in some cases for routine operations, and had to cut back. Consumer spending fell and unemployment started to rise sharply.  By November pessimistic reports were coming in daily from practically every sector of the  American economy. There were no bright spots, and with tax revenues down, state governments began large-scale cutbacks, especially in New York and California.

Until October the crisis had little impact on the non-financial sectors of the world economy, but then negative impacts started appearing.  Companies could not borrow money for expansion or in some cases for routine operations, and had to cut back. Consumer spending fell and unemployment started to rise sharply.  By November pessimistic reports were coming in daily from practically every sector of the  American economy. There were no bright spots, and with tax revenues down, state governments began large-scale cutbacks, especially in New York and California.

The crisis swept across the Middle East and Asia as well, with South Korea especially hard hit.  China, which had been the world's major growth machine in recent years, seemed to slow down. In November China's government announced it would spend 4 trillion yuan ($586 billion) through the end of 2010 to stimulate its economy. It specifically targeted people's livelihood in an effort to offset the impact of slowing global demand for its exports and unlock the spending power of its vast population.

The crisis swept across the Middle East and Asia as well, with South Korea especially hard hit.  China, which had been the world's major growth machine in recent years, seemed to slow down. In November China's government announced it would spend 4 trillion yuan ($586 billion) through the end of 2010 to stimulate its economy. It specifically targeted people's livelihood in an effort to offset the impact of slowing global demand for its exports and unlock the spending power of its vast population.

==$700 billion bailout ==

==Troubled Asset Relief Program (TARP) ==

"We're in the midst of a serious financial crisis," [[George W. Bush|President Bush]] warned the nation on Sept. 25, 2008.:

"We're in the midst of a serious financial crisis," [[George W. Bush|President Bush]] warned the nation on Sept. 25, 2008.:

{{QuoteBox|Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money....without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold: More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.<ref>see [http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html Bush speech online]</ref>}}

{{QuoteBox|Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money....without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold: More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.<ref>see [http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html Bush speech online]</ref>}}

On September 19, 2008, the Treasury and Federal Reserve proposed a major rescue plan--the largest government intervention in the economy since [[World War II]]. The plan was for the Treasury to purchase $700 billion of the CDOs. The bailout was needed, Bush said, to avert a major disaster for the economy.  Most (but not all) Democrats signed on to the bailout plan, adding provisions for Congressional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House Republicans said no, and GOP presidential nominee [[John McCain]] held off endorsement.   

On September 19, 2008, the Treasury and Federal Reserve proposed a major rescue plan--the largest government intervention in the economy since [[World War II]]. The plan was for the Treasury to purchase $700 billion of the CDOs. The buyout was needed, Bush said, to avert a major disaster for the economy.  Most (but not all) Democrats signed on to the plan, adding provisions for Congressional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House Republicans said no, and GOP presidential nominee [[John McCain]] held off endorsement.   

Conservatives were split on what to do.  Many agreed with Bush that the bailout proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the bailout.  The [[American Bankers Association]] and the [[Mortgage Bankers Association]] are fighting against any amendment that would reduce mortgage obligations for people in bankruptcy, while directing all the government funds to the banking industry.The U.S. Chamber of Commerce, normally an outspoken advocate of big corporate interests, instead stressed the crisis's impact on small and midsize businesses. "We're looking at an economy that was slipping toward recession even before this crisis culminated in a market lockup last week," said Chamber economist Martin Regalia. The debate in Congress, he said, "is costing every American taxpayer money, directly."<ref>Elizabeth Williamson, "Big Business Wants Deal, Setbacks and All," [http://online.wsj.com/article/SB122238988380577457.html ''Wall Street Journal'' Sept. 26, 2008]</ref>  Democratic nominee Senator [[Barack Obama]] endorsed the plan, as amended by Congressional Democrats. On the other hand, ordinary taxpayers and "Main Street", that is businessmen who operated at the local level, were highly suspicious of [[Wall Street]]. McCain, blaming the crisis on "the corruption and manipulation of our home mortgage system", rejected the bailout as a favor for Wall Street and little help to Main Street. Believers in the market economy insisted that the market should run its course, and opposed the bailout.<ref> See comments from a range of economists at [http://www.nytimes.com/2008/09/26/business/26assess.html?ref=business Peter S. Goodman, "Credit Enters a Lockdown," ''New York Times'' Sept. 25, 2008]</ref>

Conservatives were split on what to do.  Many agreed with Bush that the program proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the it.  The [[American Bankers Association]] and the [[Mortgage Bankers Association]] are fighting against any amendment that would reduce mortgage obligations for people in bankruptcy, while directing all the government funds to the banking industry.The U.S. Chamber of Commerce, normally an outspoken advocate of big corporate interests, instead stressed the crisis's impact on small and midsize businesses. "We're looking at an economy that was slipping toward recession even before this crisis culminated in a market lockup last week," said Chamber economist Martin Regalia. The debate in Congress, he said, "is costing every American taxpayer money, directly."<ref>Elizabeth Williamson, "Big Business Wants Deal, Setbacks and All," [http://online.wsj.com/article/SB122238988380577457.html ''Wall Street Journal'' Sept. 26, 2008]</ref>  Democratic nominee Senator [[Barack Obama]] endorsed the plan, as amended by Congressional Democrats. On the other hand, ordinary taxpayers and "Main Street", that is businessmen who operated at the local level, were highly suspicious of [[Wall Street]]. McCain, blaming the crisis on "the corruption and manipulation of our home mortgage system", rejected the bailout as a favor for Wall Street and little help to Main Street. Advocates of the market economy insisted that the market should run its course, and opposed the government intervention.<ref> See comments from a range of economists at [http://www.nytimes.com/2008/09/26/business/26assess.html?ref=business Peter S. Goodman, "Credit Enters a Lockdown," ''New York Times'' Sept. 25, 2008]</ref>

A compromise bailout was agreed to by leaders of both parties but the "Emergency Economic Stabilization Act of 2008" (EESA)  was voted down in the House on Sept. 29.  Democrats favored the Bush bill 60%-40%, but Republicans voted no by  65-35%. The stock market lost a trillion dollars in value in one day as uncertainty reigned.  Finally a large majority passed an expanded bailout bill, that added $100 billion in new subsidies to the original $700 billion, plus tax breaks and a rise in FDIC insurance to $250,000 from $100,000, designed to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill.  

A compromise was agreed to by leaders of both parties but the "Emergency Economic Stabilization Act of 2008" (EESA)  was voted down in the House on Sept. 29.  Democrats favored the Bush bill 60%-40%, but Republicans voted no by  65-35%. The stock market lost a trillion dollars in value in one day as uncertainty reigned.  Finally a large majority passed a more expensive bill, that added $100 billion in new subsidies to the original $700 billion, plus tax breaks and a rise in FDIC insurance to $250,000 from $100,000, intended to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill.  

The Treasury TARP program proved erratic and had to be radically modified several times. The Treasury dropped the original plan to buy toxic securities and instead has used $250 billion to prop up major banks. In October Paulson and Bernanke used their new powers to take an ownership stake in the nine largest U.S. banks, of $7 to $25 billion each. These banks are now partly owned and controlled by the government. However those banks are keeping the money and not lending it out. The price of bank stocks has fallen sharply since the bailout passed. The world's largest bank, Citigroup, was on the verge of collapse in late November and received a second bailout of $20 billion (in addition to $25 billion in October), and a federal guarantee to cover most of its toxic investments.

The Treasury TARP program proved erratic and had to be radically modified several times. The Treasury dropped the original plan to buy toxic securities and instead has used $250 billion to prop up major banks. In October Paulson and Bernanke used their new powers to take an ownership stake in the nine largest U.S. banks, of $7 to $25 billion each. These banks are now partly owned and controlled by the government. However those banks are keeping the money and not lending it out. The price of bank stocks has fallen sharply since the relief program was passed. The world's largest bank, Citigroup, was on the verge of collapse in late November and received a second loan of $20 billion (in addition to $25 billion in October), and a federal guarantee to cover most of its toxic investments.

In mid-December Bush announced that $17.4 billion of TARP funds would be given to the automobile industry in the form of bridge loans<ref name=bushremarksautobailout>http://blogs.wsj.com/autoshow/2008/12/19/bushs-remarks-on-the-auto-rescue-plan/ Wall Street Journal, "Bush’s Remarks on the Auto Rescue Plan", December 19, 2008</ref>, just enough to prevent the companies from going bankrupt for a few weeks<ref>http://online.wsj.com/article/SB122969367595121563.html Wall Street Journal, "U.S. Throws Lifeline to Detroit", December 20, 2008</ref>. Bush defended the move by saying "if we were to allow the [[free market]] to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers."<ref name=bushremarksautobailout />

In mid-December Bush announced that $17.4 billion of TARP funds would be given to the automobile industry in the form of bridge loans<ref name=bushremarksautobailout>http://blogs.wsj.com/autoshow/2008/12/19/bushs-remarks-on-the-auto-rescue-plan/ Wall Street Journal, "Bush’s Remarks on the Auto Rescue Plan", December 19, 2008</ref>, just enough to prevent the companies from going bankrupt for a few weeks<ref>http://online.wsj.com/article/SB122969367595121563.html Wall Street Journal, "U.S. Throws Lifeline to Detroit", December 20, 2008</ref>. Bush defended the move by saying "if we were to allow the [[free market]] to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers."<ref name=bushremarksautobailout />

Hedge funds are private investment companies with a combined $1.7 trillion in assets. They have lost $180 billion since July and some are near collapse. Investors are demanding their money back, and Wall Street in late October is bracing for a shake-out in the industry.<ref> Louise Story, "Citadel Chief denies rumors of trouble"  [http://www.nytimes.com/2008/10/25/business/25hedge.html?ref=business ''New York Times,'' Oct 24, 2008]</ref>

Hedge funds are private investment companies with a combined $1.7 trillion in assets. They have lost $180 billion since July and some are near collapse. Investors are demanding their money back, and Wall Street in late October is bracing for a shake-out in the industry.<ref> Louise Story, "Citadel Chief denies rumors of trouble"  [http://www.nytimes.com/2008/10/25/business/25hedge.html?ref=business ''New York Times,'' Oct 24, 2008]</ref>

In late November the government announced an $800 billion plan to boost consumer credit and the market for mortgage-related securities. Plans call for the Federal Reserve in early 2009 to extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by highly-rated consumer and small business loans.<ref> "Non-recourse" loans means that if they are not paid back the borrowers cannot be sued for their other assets. Mortgages fall in this category, so that if people default they just walk away from the debt and never have to repay it. However it damages their credit rating.</ref> Treasury will contribute $20 billion in funds through its Troubled Asset Relief Program (TARP). The Federal Reserve also announced it will purchase up to $100 billion in GSE (government-sponsored enterprises, especially Fannie Mae and Freddy Mac) debt through a series of competitive auctions starting in December, 2008. The Federal Reserve starting in December will purchase up to $500 billion in mortgage-backed securities backed by GSEs such as Fannie Mae and Freddie Mac. Federal Reserve Chairman Ben Bernanke said the Fed is preparing to launch new liquidity programs to support the economy in addition to further slashing interests rates.  The total commitments by the government in bailouts and loan guarantees exceeded $7 trillion dollars, but the economy nevertheless continued to slip downward.<ref>Maya Jackson Randall, "Paulson Says Treasury Actively Mulling New Rescue Programs," [http://online.wsj.com/article/SB122816189458369851.html?mod=rss_Politics_And_Policy ''Wall Street Journal'' Dec. 1, 2008]</ref>

In late November the government announced an $800 billion plan to boost consumer credit and the market for mortgage-related securities. Plans call for the Federal Reserve in early 2009 to extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by highly-rated consumer and small business loans.<ref> "Non-recourse" loans means that if they are not paid back the borrowers cannot be sued for their other assets. Mortgages fall in this category, so that if people default they just walk away from the debt and never have to repay it. However it damages their credit rating.</ref> Treasury will contribute $20 billion in funds through its Troubled Asset Relief Program (TARP). The Federal Reserve also announced it will purchase up to $100 billion in GSE (government-sponsored enterprises, especially Fannie Mae and Freddy Mac) debt through a series of competitive auctions starting in December, 2008. The Federal Reserve starting in December will purchase up to $500 billion in mortgage-backed securities backed by GSEs such as Fannie Mae and Freddie Mac. Federal Reserve Chairman Ben Bernanke said the Fed is preparing to launch new liquidity programs to support the economy in addition to further slashing interests rates.  The total commitments by the government in relief and loan guarantees exceeded $7 trillion dollars, but the economy nevertheless continued to slip downward.<ref>Maya Jackson Randall, "Paulson Says Treasury Actively Mulling New Rescue Programs," [http://online.wsj.com/article/SB122816189458369851.html?mod=rss_Politics_And_Policy ''Wall Street Journal'' Dec. 1, 2008]</ref>

===Deepening recession===

===Deepening recession===

By early December the entire economy was heading downward with no bright spots. The recession that began in Dec. 2007 intensified, as retail sales plunged. In November 2008 Americans, their confidence shaken, saved their money and sharply reduced their credit card purchases. Auto sales were down 37% in November (compared to Nov. 2007) to the lowest rate in 26 years. GM sales fell 41% Ford fell 31% and the foreign cars were down just as much, with Toyota down 34%, Nissan down 42% and Honda down 32%.<ref> Stephanie Rosenbloom, "In November, Shoppers Cut Spending Even More," [http://www.nytimes.com/2008/12/03/business/economy/03shop.html?ref=business ''New York Times'' Dec. 2, 2008]; Nick Bunkley, "Another Month of Miserable Auto Sales," [http://www.nytimes.com/2008/12/03/business/03sales.html?ref=business ''New York Times'' Dec. 2, 2008].</ref> Retailers rang up the lowest November sales in more than 30 years, as holiday shopping not only failed to lift the economy but showed that the crisis is further distressing everyday consumers. Thirty major companies -- including Macy's, Sears, Abercrombie & Fitch and Target -- posted sales declines; Wal-Mart, anchoring the bottom of the price chain, sawincreased sales.  Retail sales in November fell 2.7 percent compared with the same month last year.<ref> Ylan Q. Mui, "Retailers Report a Crisis in All Aisles: November Sales Slump as Shoppers Stow Credit Cards," [http://www.washingtonpost.com/wp-dyn/content/article/2008/12/04/AR2008120404347.html?hpid=topnews ''Washington Post'' Dec. 5, 2008]</ref>

By early December the entire economy was heading downward with no bright spots. The recession that began in Dec. 2007 intensified, as retail sales plunged. In November 2008 Americans, their confidence shaken, saved their money and sharply reduced their credit card purchases. Auto sales were down 37% in November (compared to Nov. 2007) to the lowest rate in 26 years. GM sales fell 41% Ford fell 31% and the foreign cars were down just as much, with Toyota down 34%, Nissan down 42% and Honda down 32%.<ref> Stephanie Rosenbloom, "In November, Shoppers Cut Spending Even More," [http://www.nytimes.com/2008/12/03/business/economy/03shop.html?ref=business ''New York Times'' Dec. 2, 2008]; Nick Bunkley, "Another Month of Miserable Auto Sales," [http://www.nytimes.com/2008/12/03/business/03sales.html?ref=business ''New York Times'' Dec. 2, 2008].</ref> Retailers rang up the lowest November sales in more than 30 years, as holiday shopping not only failed to lift the economy but showed that the crisis is further distressing everyday consumers. Thirty major companies -- including Macy's, Sears, Abercrombie & Fitch and Target -- posted sales declines; Wal-Mart, anchoring the bottom of the price chain, sawincreased sales.  Retail sales in November fell 2.7 percent compared with the same month last year.<ref> Ylan Q. Mui, "Retailers Report a Crisis in All Aisles: November Sales Slump as Shoppers Stow Credit Cards," [http://www.washingtonpost.com/wp-dyn/content/article/2008/12/04/AR2008120404347.html?hpid=topnews ''Washington Post'' Dec. 5, 2008]</ref>

<ref> Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [http://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

<ref> Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [http://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

===Largest bank rescued===

===Largest bank rescued===

Citigroup, the world's largest bank was tottering in late November despite its receipt of $25 billion in TARP bailout money. Its value on the stock market plunged to $21 billion, down from $244 billion two years ago.  Round after round of layoffs have ended 75,000 jobs in 2008 out of 375,000 employees a year ago.  Very heavy exposure to toxic mortgages is the main culprit.  The government stepped in with the largest bailout yet, including $20 billion in new cash, and guarantees of toxic assets by the Treasury, FDIC and Federal Reserve.

Citigroup, the world's largest bank was tottering in late November despite its receipt of $25 billion in TARP funding. Its value on the stock market plunged to $21 billion, down from $244 billion two years ago.  Round after round of layoffs have ended 75,000 jobs in 2008 out of 375,000 employees a year ago.  Very heavy exposure to toxic mortgages is the main culprit.  The government stepped in with the largest relief effort yet, including $20 billion in new cash, and guarantees of toxic assets by the Treasury, FDIC and Federal Reserve.

At all times Citigroup used elaborate mathematical risk models that looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. The prevailing approach at Citigroup and the other big banks was to make money as fast as possible (generating annual bonuses of $10 to $30 million for senior executives), which assigning zero to the risk of a system-wide downturn. Such a downturn came with disastrous consequences for Citigroup and its rivals on Wall Street.  Even after Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.   

At all times Citigroup used elaborate mathematical risk models that looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. The prevailing approach at Citigroup and the other big banks was to make money as fast as possible (generating annual bonuses of $10 to $30 million for senior executives), which assigning zero to the risk of a system-wide downturn. Such a downturn came with disastrous consequences for Citigroup and its rivals on Wall Street.  Even after Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.   

Despite two federal bailouts Citigroup is still wobbly. It holds $20 billion of mortgage-linked securities that have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans of dubious value. And it also faces a potential massive losses on auto, mortgage and credit card loans as the economy worsens.<ref>Eric Dash and Julie Creswell, "Citigroup Pays for a Rush to Risk," [http://www.nytimes.com/2008/11/23/business/23citi.html?ref=business&pagewanted=all ''New York'' Times,’’ Nov. 22, 2008]</ref>

Despite two federal efforts Citigroup is still wobbly. It holds $20 billion of mortgage-linked securities that have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans of dubious value. And it also faces a potential massive losses on auto, mortgage and credit card loans as the economy worsens.<ref>Eric Dash and Julie Creswell, "Citigroup Pays for a Rush to Risk," [http://www.nytimes.com/2008/11/23/business/23citi.html?ref=business&pagewanted=all ''New York'' Times,’’ Nov. 22, 2008]</ref>

By the end of 2009 most big banks were in much better shape and the Treasury expects to recover all but $42 billion of the $370 billion it lent to ailing companies, with the portion lent to banks actually showing a slight profit.  Meanwhile over 120 small and medium banks have been shut as insolvent; in most cases the FDIC picks up the losses and another bank takes over the operations and branches.<ref>Jackie Calmes, [http://www.nytimes.com/2009/12/07/business/07tarp.html?_r=1&hp=&adxnnl=1&adxnnlx=1260187849-MV96Nnjzom3OwAchzjIqrg "U.S. Forecasts Smaller Loss From Bailout of Banks," ''New York Times'' Dec. 6, 2009]  </ref>

By the end of 2009 most big banks were in much better shape and the Treasury expects to recover all but $42 billion of the $370 billion it lent to ailing companies, with the portion lent to banks actually showing a slight profit.  Meanwhile over 120 small and medium banks have been shut as insolvent; in most cases the FDIC picks up the losses and another bank takes over the operations and branches.<ref>Jackie Calmes, [http://www.nytimes.com/2009/12/07/business/07tarp.html?_r=1&hp=&adxnnl=1&adxnnlx=1260187849-MV96Nnjzom3OwAchzjIqrg "U.S. Forecasts Smaller Loss From Bailout of Banks," ''New York Times'' Dec. 6, 2009]  </ref>

==Crisis in Auto industry==

==Crisis in Auto industry==

In 2008 a series of damaging blows drove the "Big Three" (GM, Ford and Chrysler) to the verge of bankruptcy. Part of the cause was very high labor costs (much higher than the foreign plants in the U.S.), which prevents lower prices. The Big Three had in recent years stressed expensive, fuel-guzzling SUVs and large pickups. They were much more profitable than smaller, fuel-efficient cars. When gasoline prices shot past $4 in 2008, Americans stopped buying the big cars, and the Big Three saw their sales plummet.  The Financial Crisis played a role as no one was willing to loan GM the money to buy Chrysler. Consumer credit has tightened and it became much harder for people with average or poor credit to obtain a bank loan to buy a car, so sales fell further.  Stock prices plummeted as shareholders worried about bankruptcy; GM's shares fell to 1946 levels. Intense debate is underway about a massive bailout, that would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency. President Bush has proposed changing the terms of that loan so it could be used to cover daily operating expenses, but Congress rejected that. Republicans in Congress in mid-November blocked Democratic proposals to underwrite a new bailout of the auto industry, as industry leaders made an unconvincing case before Congress.  President elect Obama and Democrats in Congress have demanded the Big Three come up with a highly specific plan with some chance of long-term viability, with the expectation that Congress will address the issue again in January 2009.

In 2008 a series of damaging blows drove the "Big Three" (GM, Ford and Chrysler) to the verge of bankruptcy. Part of the cause was very high labor costs (much higher than the foreign plants in the U.S.), which prevents lower prices. The Big Three had in recent years stressed expensive, fuel-guzzling SUVs and large pickups. They were much more profitable than smaller, fuel-efficient cars. When gasoline prices shot past $4 in 2008, Americans stopped buying the big cars, and the Big Three saw their sales plummet.  The Financial Crisis played a role as no one was willing to loan GM the money to buy Chrysler. Consumer credit has tightened and it became much harder for people with average or poor credit to obtain a bank loan to buy a car, so sales fell further.  Stock prices plummeted as shareholders worried about bankruptcy; GM's shares fell to 1946 levels. Intense debate ensued about a massive bailout, that would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency. President Bush proposed changing the terms of that loan so it could be used to cover daily operating expenses, but Congress rejected that. Republicans in Congress in mid-November blocked Democratic proposals to underwrite a new bailout of the auto industry, as industry leaders made an unconvincing case before Congress.  President elect Obama and Democrats in Congress have demanded the Big Three come up with a highly specific plan with some chance of long-term viability, with the expectation that Congress will address the issue again in January 2009.

In addition to the Big Three hundreds of large suppliers of parts are in financial crisis as well; most would go under if the Big Three go bankrupt.

In addition to the Big Three hundreds of large suppliers of parts are in financial crisis as well; most would go under if the Big Three go bankrupt.

Intense debate in December 2008 focused on allowing bankruptcy or injecting billions more of federal aid in a massive bailout; it would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency.  The Democrats in Congress supported president Bush's proposal to use the fuel-efficiency loans to help with the immediate problem. It passed the House but Senate Republicans brioke with Bush and it failed.  The opponents called for a bankruptcy that would allow GM to get out of its contracts to pay union members high wages, as well as generous pensions and medical benefits to retired workers.  Bush then acted unilaterally and decided to use [[TARP money]] to bail out GM and Chrysler, on December 19. GM and Chrysler will get $13.4 billions in loans they can use to pay their suppliers.<ref> GM and Chrysler will receive $4 billion each when they sign the loan agreements with the Treasury. GM will have access to an addition $5.4 billion on Jan. 16 and another $4 billion on Feb. 17 provided that Congress has released the remaining $350 billion for the Treasury’s TARP rescue program. </ref> GM can receive another $4 billion in February, but by then the Obama administration will be in charge, and it is emphasizing the need for a long-range solution.<ref>David E. Sanger, David M. Herszenhorn and Bill Vlasic, “Bush Aids Detroit, but Hard Choices Wait for Obama,” [http://www.nytimes.com/2008/12/20/business/20auto.html?hp ''NewYork Times'' Dec. 19, 2008]</ref>  

Intense debate in December 2008 focused on allowing bankruptcy or injecting billions more of federal aid; it would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency.  The Democrats in Congress supported president Bush's proposal to use the fuel-efficiency loans to help with the immediate problem. It passed the House but Senate Republicans brioke with Bush and it failed.  The opponents called for a bankruptcy that would allow GM to get out of its contracts to pay union members high wages, as well as generous pensions and medical benefits to retired workers.  Bush then acted unilaterally and decided to lend  [[TARP money]] to GM and Chrysler, on December 19. GM and Chrysler will get $13.4 billions in loans they can use to pay their suppliers.<ref> GM and Chrysler will receive $4 billion each when they sign the loan agreements with the Treasury. GM will have access to an addition $5.4 billion on Jan. 16 and another $4 billion on Feb. 17 provided that Congress has released the remaining $350 billion for the Treasury’s TARP rescue program. </ref> GM can receive another $4 billion in February, but by then the Obama administration will be in charge, and it is emphasizing the need for a long-range solution.<ref>David E. Sanger, David M. Herszenhorn and Bill Vlasic, “Bush Aids Detroit, but Hard Choices Wait for Obama,” [http://www.nytimes.com/2008/12/20/business/20auto.html?hp ''NewYork Times'' Dec. 19, 2008]</ref>  

===Bankruptcy scenario===

===Bankruptcy scenario===

The [[Obama Administration]], taking office on Jan. 20, 2009,  moved to handle the crisis on two fronts.  Working with Democrats in Congress (and three moderate Republican Senators), it passed the "[[American Recovery and Reinvestment Act of 2009]]", calling for $500 billion of new spending and nearly $300 billion in new tax cuts. The new law began operations in mid-February, 2009, and supporters hoped it would slow and turn around the nosediving economy.  Conservative critics feared it would be ineffective in the short run and add to the national debt and tax burdens in the long run. As of late March no results are visible.

The [[Obama Administration]], taking office on Jan. 20, 2009,  moved to handle the crisis on two fronts.  Working with Democrats in Congress (and three moderate Republican Senators), it passed the "[[American Recovery and Reinvestment Act of 2009]]", calling for $500 billion of new spending and nearly $300 billion in new tax cuts. The new law began operations in mid-February, 2009, and supporters hoped it would slow and turn around the nosediving economy.  Conservative critics feared it would be ineffective in the short run and add to the national debt and tax burdens in the long run. As of late March no results are visible.

With major banks on the verge of failure, Treasury Secretary [[Timothy Geithner]] unveiled yet another massive bailout program in mid-February. Trillions would be spent to move toxic assets out of the banks, but few details were provided. The widespread reaction was very negative, and Geithner lost more of his credibility as a problem solver.  Geither finally came back with a plan on March 23 that will not need additional funding or approval by Congress.  The Treasury will use $100 billion from the Troubled Asset Relief Program (TARP), as well as new capital from private investors, in order to generate $500 billion in purchasing power to buy toxic loans and assets. The program could potentially expand to $1 trillion over time.

With major banks on the verge of failure, Treasury Secretary [[Timothy Geithner]] unveiled yet another massive [[bailout]] program in mid-February. Trillions would be spent to move toxic assets out of the banks, but few details were provided. The widespread reaction was very negative, and Geithner lost more of his credibility as a problem solver.  Geither finally came back with a plan on March 23 that will not need additional funding or approval by Congress.  The Treasury will use $100 billion from the Troubled Asset Relief Program (TARP), as well as new capital from private investors, in order to generate $500 billion in purchasing power to buy toxic loans and assets. The program could potentially expand to $1 trillion over time.

===Criticisms===

===Criticisms===