Economic Recovery for All 3: A Bailout for the Few that Did Not Trickle Down

I should mention, with thanks, the assistance of Stephen Boyd of Wake Forest University and Winston-Salem CHANGE. Steve carefully examined the earlier drafts of this document and suggested a reorganization of the material to make it more user-friendly for study.

THEOLOGICAL REFLECTION ON THE ECONOMY
A Working Paper for North Carolina United Power
from an Interchange Among Theological Educators
July 2009

II. The Initial Government Solution

A. Top-Down Bailout for Institutions "Too Big to Fail"
When the economic situation became too severe to ignore, government officials recommended a massive bailout of major financial institutions. With only a bare sketch of a plan, the engines of government shifted into high gear to authorize transferring hundreds of billions of dollars directly to banks and other financial institutions to prop up their endangered portfolios of assets. "Too big to fail" became a motto for saving the financial institutions that helped to create the collapse, as a way of assuring average citizens that their own economic future was bound up intimately with the success of these mega-banks.

B. Problems Remaining After the Bailout
The purpose of the bailout plan was to stabilize the financial system so that banks would be willing to lend money. Banks and other financial institutions were unwilling to lend money because they could not get a clear idea of the value of the ubiquitous securities intertwined with delinquent and "troubled" loans ("toxic assets"). By lending money, more people and businesses could buy goods and services and fuel economic recovery. However, the banks and financial institutions took the money and held it or used the money for self-aggrandizing purposes. Consequently, the bailout did not have the intended ripple effect on the economy, and it did not pump up the economy.

1. Foreclosures have increased unabated regardless of claims that programs would help people keep their homes.

2. A crisis in credit markets has led financial institutions to rewrite overnight the terms and conditions of credit cards, to the disadvantage and dismay of their customers.

3. Many have found themselves now holding more debt than they can possibly repay.

4. Bankruptcies have continued to increase resulting from credit card debt, mortgage debt, and debt arising from skyrocketing costs of health care and growing numbers of people without insurance.