The Economic Bailout Plan: A Work in Progress?

Treasury Secretary Henry Paulson gave an update on the financial crisis on Wednesday, saying that the economic bailout plan is working. “I believe we have taken the necessary steps to prevent a broad systemic event. Both at home and around the world, we have already seen signs of improvement,” he said about the $700 plan. However, he also announced some major changes in the way that the funds will be allocated to aid the economy. Paulson also seemed to reject a new proposal made by Speaker of the House Nancy Pelosi to use some of the $700 billion to bailout certain major car companies.

Instead of using the funding to buy up troubled bank assets, the money will be used to purchase stocks in banks in order to help the banks revive their normal lending practices. This idea is more likely to help banks and less complicated than trying to buy up bad stocks. In spite of Paulson’s attempt at reassuring remarks, the Dow Jones ended 411 points down on Wednesday, a drop of 4.73%. Most stocks had been falling all day, with General Motors, which rose 5.5%, as one notable exception.

General Motors owes this rise in stocks to Speaker of the House Nancy Pelosi who asked Congress to allow three major car companies - General Motors, Ford, and Chrysler - to share $25 million out of the $700 billion bailout package. These companies have suffered severe losses during the financial crisis, especially General Motors which reported a third-quarter loss of $4.2 billion. The success of these companies is vital to the U.S economy because of the millions of employees and retirees that depend on it. Nariman Behravesh, the chief economist at HIS Global Insight Inc., projected that if General Motors went bankrupt, it could put the U.S. jobless rate at 9.5%. “It's truly one of those companies that's too big to fail, and everybody understands that,” he said.

Unfortunately, the fate of these major companies is still uncertain because Paulson has opposed the idea of giving funds allocated to financial institutions to private corporations in trouble. But as these vital companies see their stocks whither, it may become necessary for the federal government to step in.